Circle The Wagons For Real Estate Development Underwriting

by | Mar 23, 2020

We are in an unprecedented moment. It’s been a crazy week watching the volatility of the global markets, and naturally there will be significant spill-over and changes to the way we do business in the future. Things are rapidly changing before our very eyes, but there are many sensible measures being taken; equally there is quite of bit of reactive response. It’s hard to judge the right or wrong of it.

That said, there will be some unique opportunities in the coming months for investors looking at hard assets, especially in real estate; real estate should be a good defensive play with better pricing and better access to deal flow. And the problems of three weeks ago are still there; the structural shortage of “affordable” housing, and the lack of funding by banks, who due to increased regulation after the financial crises of 2008, have mostly retreated from the development lending space. At the end of the day, Developers will still build homes, and sophisticated investment managers will continue to invest into reputable sponsors and projects.

In the meantime, developers will want to ensure two things:

  1. Namely that they have factored in any potential costs escalations in their budgets and appraisals,
  2. And that their own liquidity is sufficient to weather any storms.

While estimating future GDV levels may be more opaque, allocating sufficient contingency in development models is a sensible thing and will go a long way to help investors and lenders feel comfortable with the underwriting.

Supply chain disruptions in materials as well as in labour could significantly impact any new development and contingency level risk mitigation needs to be part of any developer’s business plan. Real estate developers should also ensure their balance sheets are stronger by injecting more of their own skin, and raising capital. Lenders and investors will want comfort that there is relative risk being shared and that sponsors have the liquidity to manage any supply interruptions and delays as well as sales period slowdowns.

Successful real estate development is about buying right, and managing costs while putting out a product people want. Yes there will be plenty of opportunities around the corner, but this is not real estate 2006 anymore.

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