Cobalt news
Adapting to a changing environment
Timothy Rowe
20/08/2008
As far as the property investment market is concerned, there seems to be signs of some light at the end of the tunnel. Buyers and sellers are ending the standoff and evidence of a number of investors beginning to transact deals is coming to the surface. The evidence is scant and we shouldn’t count our chickens but it is there! This activity is not just there due to the fact that buyers and sellers are finding common ground, but also due to the fact that they are being supported in their transactions by willing lenders and Valuers.
The last year has seen little activity as the credit markets have been frozen and market participants have been taking the measure of the changing circumstances. Gradually participants have become more willing to address the issues in the investment market, beginning with the reconciling of values and now moving towards readjusted expectations on prices and their risk adjusted return criteria. New sources of equity funding, most notably sovereign backed funds, have also come into the mix, giving the market the ability to operate effectively once more. This evolution has also come to the fore due to the launches of alternative funding products notably mezzanine funds.
Due to the fact that we are seeing an ongoing tightening of lending appetite from the corporate banks and a lack of liquidity from the Investment Banks, the need for mezzanine finance is as important as ever. As an asset class, mezzanine is the layer of debt that sits at the bottom of the capital structure and holds some of the characteristics of equity. In situations where banks and lenders consider a transaction to be high risk, it is increasingly difficult to get sufficient funding via a traditional term loan. Therefore, several specialist mezzanine finance teams are being set up to take advantage of this ongoing need for funding. Opportunities like this are attracting traditional real estate bankers who have an in-depth understanding of both property lending and high risk debt. They are property financiers who understand both capital structure and the hard assets. We are seeking out such people for a number of our clients and they are highly sought after. These hybrid skill sets are found both in the direct property environments and in the financial institutions and offer employers a new perspective on the opportunities available to them in the market.
Another direct result in the market of the need for different skills to handle situations in a less supportive environment, is that Boards of Directors are actively looking at their executive teams. For example, will an investment professional who has only seen a benign market for the last decade really going to be equipped to drive value from a portfolio that is not going to see yield growth without any value add activity? Often the conclusion is that in changing times different skills are required to compliment or replace the existing talent in a team.
Further evidence of this is seen when it comes to the disciplines of equity and debt raising. In a market where investors and banks were falling over themselves to back property companies and funds, such skills were surplus to requirements. Now that the lack of equity and debt is a significant part of the reason that the market is blocked, such experts are required within funds and property companies and the banking professionals are attracted by the opportunities. This is taking up some of the slack which has been created by inactive banks and redundancies.
The market is changing and whilst it might not be by design, it is forcing organisations and property professionals to sharpen up there skills to adapt to these changing times, the alternative being that otherwise they may not be fit for purpose.