20 March 2014

Training Manager's Guide To... Real Estate Finance

Our real estate finance expert guides you through all the need to know areas and highlights to skill gaps that may be affecting your organisation...

What is Commercial Real Estate Finance and Investment?

Real estate finance centres on the investment required and likely returns from property construction. Real estate can provide long-term, stable income with capital growth potential. It is a good diversifier in a bonds and equity portfolio. Its risk-return ratio is lower than equities but higher than bonds. For lenders it provides asset backing and an illiquidity yield pickup over corporate bonds.

What are the need to know key terms?

Prefs, promotes and waterfall
The language of private equity. Describes and defines the return sharing structure between the investors and the fund manager.

Green Alpha
The potential extra income / capital return achieved by properties with the best sustainability features.

changes to the property's systems or structure after its initial construction and occupation to improve amenities and make significant reductions in energy and water usage.

Whole Loans
a stretched debt comprising senior debt and a mezzanine tranche from a single source, where the lender reserves the right to syndicate the senior and the retain the mezz.

Weighted Average Unexpired Lease Term. A key metric in judging a property’s vulnerability to future vacancies, evidence of long term stable income or an opportunity for refurbishment / redevelopment.

Real Estate 2.0
Market features which have changed since the credit crisis in an attempt to avoid or minimise the impact of market failure.

What is important to know right now?

Asset management and rigorous due diligence have become more important and better organised. The growth of debt funds has diversified the provision of commercial real estate credit in response to lower levels of bank finance and increased regulatory control. Institutional investors have driven changes to fund structures with demands for greater control and accountability via separate accounts and joint ventures. Remuneration arrangements for funds now favour performance related fees and structured IRRs.

Who works in Real Estate Finance and Investment and what is their job function?

Undertakes complex 3rd party market valuations and appraisals, writes reports for loan security and transaction support, including inspections, market research, modelling and detailed report writing for a variety of client types.

Assembles land and design team, sets out the business case to bring forward a development and prove its financial viability. Property investment companies may also develop via joint ventures, or on their own account, to hold for recurring income and achieve improved performance. Funds may share development risk by a forward sale before construction completion which makes finance easier to source.

Investment agent
Provides impartial advice on the sale, acquisition and funding of commercial property. They have an understanding of local investment and occupational markets, utilising an network of professionals and research data they identify on and 'off market' opportunities to meet the specific sector and regional requirements of their client. Once a transaction has been agreed they take it through to completion.

Asset manager
Fulfils a fiduciary relationship with the real estate owner and accepts the responsibility for managing the real estate asset so that it achieves the optimum performance in accordance with the owner’s investment objectives. The role involves balancing the loan/equity ratio to maximise leverage, employing and coordinating professionals with expertise in particular aspects of operating the property, minimising liability exposure through appropriate lease provisions and constantly reviewing the hold, improve, refinance, sell decisions.

What are the key challenges and common skill gaps in the Real Estate Finance and Investment department

Commercial Real Estate deals can be complex, highly structured and project specific with generic solution, so the key skills include:
  • Risk management to identify, measure and where appropriate seek to price, mitigate or transfer risk
  • Excel modelling to analyse deal structures, stress test and present results in a clear, transparent form to decision makers
  • Debt structuring to assess to appropriate leverage for the acceptable risk tolerance
  • Ability to spot red flags in the due diligence process

Now take a look at Euromoney Training's entire range of Real Estate training courses.

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