"The global economy may be back from the brink of disaster, but companies do not expect a return to the 'normal' conditions we have experienced for much of the previous decade, according to the E&Y report, titled "Lessons from Change." Across the 14 business sectors E&Y covers, executives have been emphasizing eight key performance objectives. They include: optimizing capital availability and deployment, revitalizing the risk management framework, optimizing operational flexibility, revitalizing their current business models, strengthening stakeholder confidence, optimizing market reach and reinforcing management talent.
Within the real estate sector, increasing capital availability, rethinking current business models and assessing risk management are regarded as especially important, says E&Y. "It is important to review your historic assessment of investment risks to determine how well they corresponded with the actual risks," the report advises. "Then, you can reevaluate all your risk management policies and procedures."
Based on meetings with real estate executives as well as those in other industries, the E&Y report discusses "lessons from change" under five key headings: growing and preserving capital, managing risks effectively, controlling costs, rethinking the business model and concentrating on long-term growth. In the area of growing capital, the report cites building liquidity through strategies such as debt refinancing and raising equity or debt in public markets, along with adopting a capital-oriented business plan that centers on obtaining and preserving cash.
To manage risk, real estate companies should reevaluate their risk management policies, focus on keeping quality tenants, evaluate operating costs and assess exposure to risk from the supply chain and from government regulation, the report says. Controlling costs can take a variety of forms, including scrutiny of costs, evaluating the core business to determine whether it meets return requirements and growth expectations and maximizing operational flexibility. More specifically, the report recommends evaluating the risks in acquiring distressed assets.
In rethinking the company's business model, real estate firms should consider forming new partnerships or strategic alliances along with getting the principals and founders of the organization involved. Managing investors' expectations is also a must, E&Y says. "Communicate with them early and often."
In planning for the long term, E&Y advises assessing business practices and key metrics, looking at how to build a sustainable organization and concentrating on organic growth. "When companies do decide to invest globally or domestically, it's important to understand that not all markets have been impacted nor will they recover in the same way," says Richard Sinkuler, E&Y's global real estate markets leader. "Doing your homework and on-the-ground due diligence will be critical going forward."
Talent is another parameter: "Build on a core of people with proven real estate skills and experience," according to the E&Y report. "Companies need to plan strategically with respect to future human resource needs."
As a case study, the E&Y report cites the example of Simon Property Group. Amid the gloom and doom that permeated the industry in late 2008 and early 2009, particularly in the retail sector, the REIT took the risky step of issuing 15 million shares of common stock and about $500 million in senior secured notes.
"The stock offering and bond sale were very expensive capital," Simon EVP and CFO Stephen E. Sterrett says in the E&Y report. "But they punched a hole in the capital markets that had been essentially closed, and refuted the notion that a blue-chip REIT like ours could not raise capital." The risk paid off, and the REIT raised about $2 billion in an eight-week period.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
