How to attract the limited sources of capital
available
"With fewer people as a result of
downsizing in the recession, developers will be relying even more
on their consultants and partners to deliver certainty and control.
This will demand different delivery models based on partnership and
collaboration with their consultants."
Once bitten, twice shy is a maxim lenders are clearly taking to
heart. Reeling from the effects on the financial markets of
under-regulated and, many would say, unwise lending, they are not
going to make the same mistakes again. The result is a huge
shortage of available debt and many more hoops to jump through to
get it in future.
The capital that is available at the moment is in the form of
equity, largely from private investors and Sovereign Wealth Funds.
Quite rightly, they’re taking an opportunistic stance - looking for
great deals and driving some very hard bargains. Debt will
eventually become available again. But, when it does, we expect it
to be from different sources, on different terms, with very
different investment criteria.
So what can you do now to make sure your business is best placed
to attract capital when it does start to become available again?
And how can you secure it on the best terms for you?
Certainty and control
One of the things we’re advising our clients is that lenders are
going to need more certainty in the future - which means that
developers are going to have to demonstrate more control.
We’re already finding that lenders are shifting the emphasis of
their due diligence process. Previously, they’ve concentrated
mostly on the quality and value of the asset they were lending
against. From now on, they’ll be placing just as much emphasis on
the organisation they’re lending to. That means property developers
and investors are going to have to focus much more on how they
operate as businesses, and how they manage and deliver assets.
Their ability to do this will have a huge impact on whether
they’ll be able to attract funding and what the cost of that
funding will be. Those organisations that can demonstrate they have
very robust internal risk management and development controls, a
clear view on how they’re going to deliver value from their
investments, and are firmly in control of their supply chain, are
going to have a huge competitive advantage when liquidity eases
up.
Whereas the due diligence on the asset will only be done once
you make the decision to invest, the due diligence on your business
is something you should be doing now. Those businesses that put
their houses in order before debt comes back on the market will be
able to move fastest and secure the best deals.
But what has become very evident to us over the last cycle of
development is that very few people are really in control. Rising
values have been hiding a whole range of inefficiencies and poor
practice down through the supply chain - both in delivery and
operation. No one can afford to ignore such things now.
With fewer people as a result of downsizing in the recession,
developers will be relying even more on their consultants’ and
partners’ to deliver certainty and control. This will demand
different delivery models based on partnership and collaboration
with their consultants.
Competitive edge
Another thing we’re finding is that, in a slowing market, there
is a danger of confusing falling costs with greater certainty. If
the market rate is coming down, everyone is experiencing the same
price drops. To keep your competitive advantage, you’ve got to beat
the market. For instance, if the UK market falls by 5% a year, the
winners will be those who can achieve 15% savings out of their
operational expenditure to accommodate the higher cost of borrowing
and more stagnant values.
Introducing stricter controls will help you achieve those sorts
of savings, as will reviewing the way you’re engaging with the
supply chain. You need to look at everything from your procurement
strategy, your contracts and how you incentivise your suppliers to
how you’re driving out waste and improving efficiency. We’ve been
able to help our clients achieve savings in excess of 15% by taking
a new approach to procurement. Quintain achieved 10% savings in
this way. In our view, the next 12-18 months present a fantastic
opportunity to secure a supply chain that can be quickly mobilised
when the time is right to deliver at the lowest cost in the
market.
Expertise is essential. Organisations will need to be very clear
about what markets and assets to invest in, and will need to apply
expert product knowledge to drive those extra percentage points out
of the margins. That means not only having internal expertise but
making sure that the supply chain and advisors also share expert
product knowledge.
However, organisations need to ensure they don’t fall into the
trap of ‘Buy now - pay later’.
Anyone active in the current market will need to have a far more
rigorous approach to the delivery of their projects. Standard forms
of contract and traditional management techniques may fail to
provide the necessary degree of protection.
We have found that clients who include an independent audit as
part of their pre-contract strategy will increase the likelihood of
securing funding on projects, as well as potentially improving the
commercial terms for that funding.
In addition to securing funding, the reasons for undertaking
such an audit are many. Contractors will invest heavily in their
commercial teams as they look to maximise commercial outcomes. If
tender documents contain errors or discrepancies, or if the project
design requires development or value engineering, problems are
likely to occur and so issues may well be brought to the attention
of project teams too late and the opportunity to mitigate and avoid
additional costs is often lost.
Over the last year, we have advised on over £12 billion of
investment deals and have increasingly found that corporate
governance and cost control are becoming as important as the asset
itself in the due diligence process. Investors want to know that
there is the right level of control and the right calibre of
international advisors, that risk is being managed and that there
is more focus on certainty of outcome.
When the market does come back, we expect it to move very
quickly. So you need to be brave enough to make the investment now
in strengthening your position so that you’re best placed to
benefit from a rising market in the future
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Limited sources of capital [213kb]