Modeling is a way of business in real estate

Reading Time: 4 minutes

This is the first in a series of blogs in my Real Estate Operational Performance Series, where I will discuss the benefits of modeling for Sensitivity Analysis & Stress Test for the Portfolio business in Real Estate.

article-image-2Recent payment performance of local Singapore firms “deteriorated strongly” year-on-year in the third quarter of 2016. Prompt payments declined to about 42 per cent of total payment transactions in the third quarter, compared to a year ago when 51 per cent paid their bills on time. The Real Estate sector registered the highest proportion of slow payments for the third consecutive quarter, with payment delays accounting for more than half of all payment transactions.

As a result, cash flow forecasting becomes a clear gap and the highest priority for CEOs and Boards in large real estate companies in Singapore. Unlike other industries, real estate is driven from the balance sheet and as a result, business models are driven by highly orchestrated cash flow discipline. The sum total of a groups “source & use” of funds determines its success in the long term. Are these cash flow forecasts managed with precision? Do companies have the right tools and support required for running a high performance business?

A standard, and perhaps flawed approach in the industry, is to get carried away with the “boom and bust” cycles in a highly volatile economy. Decisions made today on capital businesses are at the minimum ten years into the future in terms of impact – therefore modeling this with repeated and prudent stress test, and actively monitoring it’s success is critical.

A well balanced strategy deploys simple but frequent monthly end to end sensitivity stress tests on its individual and group cash flow forecast.  What’s required is specialised teams that support the CEO; focused on the capability to perform sensitivity and stress tests on existing capital outlays and cash positions into the future.

A short term liquidity crunch, a fall in commercial rental rates / utilisation, demographic stress, yield or a long term slump in residential PSF rates and its impacts are simple examples of why its significant to run sensitivity bottom up (not top down, with min or no value). It has to have significant operational models integrated into a holistic model for it to make any contribution to support CEO with risk patterns over the long term and short term views. Industry leaders who take a long term view always set clear industry leadership examples and these go a long way into the future. (David Simon, CEO Simon Property Group (Largest US listed RE) was ranked five among the HBR best performing CEO ranking for his long term view of the business, which is seen as extremely rare in today’s world).

When we review strategic support groups in property companies, it is clear they are still struggling to structure the processes need for existing assets; leaving major part of the business with risks on future assets and hence future cash flows. This leaves a large gap which is resolved by converging multiple models across the operational part of the business.

There is a prevailing narrow view that cash flow forecast is the ability to aggregate rentals from existing assets and thus a perception which consolidates only 10% of CEO needs. Across the board, I see a tremendous appetite to get the house in order and have the capability to have end to end cash flow forecast with a capability to do bottom up stress test and sensitivity analysis on its portfolio models.

Many real estate companies are not taking steps to resolve this problem. While the appetite exist at CFO and CEO levels, there is huge gap on understanding the risks and gaps. Its very likely that the level of complexity of these forecast models and hence the complex work pattern of these model owners drive us to a thought process that we stay on with our current “demand and supply” process.

We ask each segment and segments ask departments and thus we get what we need in excel exchanges across the organizations. This has been proven as a non-integrated faulty framework where we miss out on sensitivity parameters for bottom up forecast. Imagine a refinancing model contributing to group cash flows and its impact on results cannot be put through a structured stress test on group cash flows. This fails completely and hence we resort to manual and erroneous models for board approvals.

Imagine, if we have to build a simple process for us to bring together all our cash flow forecast models from Commercial, Retail, Residential and RIET from a group perspective; Most important to allow segments to run their forecast models their way and interconnect these to group models – we have resolved with our process of an integrated cash flow forecast with awesome capability for sensitivity analysis and stress test at any levels. And more important, we have to get the collaboration of all these leaders to contribute to their respective models to deliver the finite results; Here we are sorted on our basic building block which can then drive us to prudent investment decisions and execute these decisions with monthly volatility reports and its impact on our cash forecasts into 10 or 20 years in the future.

Here, The whole business runs on a single cash flow regime and thus contributing to any external or internal shocks in its business.

article-image-3Modeling is a way of business in Real estate. Segment leaders are experienced modelers and they play a vital role. There is no industry standardisation like other industries and hence it’s a pretty ad hoc and complicated excel model regimes that exist today. It’s impossible for rigid tools and frameworks to take up this role as it requires strong modeling capabilities like excel. Simply put, Rental forecast models support existing assets, Project models support individual properties which are current or future, refinancing models with variable cash positions, while equity real estate investors spend their time modeling the upside while their debt partners spend their time modeling the down side.

Equity investors generally focus on an investment’s internal rate of return, cash-on-cash return, equity multiple and other return metrics while debt investors focus on debt coverage, loan to value, debt yield and refinance risk. These models should be geared toward the modeller, while it automatically services the group level cash flow forecast models and its parameters.

I’m excited to see Real Estate organizations build this capability, so that we can support the CEO and business leaders in running the cash flow forecast with insights into all operational part of the business.

This will help all Real estate groups to support an end to end process on sensitivity and help them continue to stress test their capability in turbulent times. This is a genuine gap which can be sorted for Singapore Real estate companies, thus offering an end to end Cash flow forecasting capability for a minimum of 10-15 years into the future.

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This is the first in a series of blogs in my Real Estate Operational Performance Series, where I will discuss the benefits of modeling for Sensitivity Analysis & Stress Test for the Portfolio business in Real Estate. Recent payment performance of local Singapore firms “deteriorated strongly” year-on-year in the third quarter of 2016. Prompt payments declined to about 42 per cent of total payment transactions in the third quarter, compared to a year ago when 51 per cent paid their bills on time. The Real Estate sector registered the highest proportion of slow payments for the third consecutive quarter, with payment delays accounting...

Reading Time: 4 minutes

This is the first in a series of blogs in my Real Estate Operational Performance Series, where I will discuss the benefits of modeling for Sensitivity Analysis & Stress Test for the Portfolio business in Real Estate.

article-image-2Recent payment performance of local Singapore firms “deteriorated strongly” year-on-year in the third quarter of 2016. Prompt payments declined to about 42 per cent of total payment transactions in the third quarter, compared to a year ago when 51 per cent paid their bills on time. The Real Estate sector registered the highest proportion of slow payments for the third consecutive quarter, with payment delays accounting for more than half of all payment transactions.

As a result, cash flow forecasting becomes a clear gap and the highest priority for CEOs and Boards in large real estate companies in Singapore. Unlike other industries, real estate is driven from the balance sheet and as a result, business models are driven by highly orchestrated cash flow discipline. The sum total of a groups “source & use” of funds determines its success in the long term. Are these cash flow forecasts managed with precision? Do companies have the right tools and support required for running a high performance business?

A standard, and perhaps flawed approach in the industry, is to get carried away with the “boom and bust” cycles in a highly volatile economy. Decisions made today on capital businesses are at the minimum ten years into the future in terms of impact – therefore modeling this with repeated and prudent stress test, and actively monitoring it’s success is critical.

A well balanced strategy deploys simple but frequent monthly end to end sensitivity stress tests on its individual and group cash flow forecast.  What’s required is specialised teams that support the CEO; focused on the capability to perform sensitivity and stress tests on existing capital outlays and cash positions into the future.

A short term liquidity crunch, a fall in commercial rental rates / utilisation, demographic stress, yield or a long term slump in residential PSF rates and its impacts are simple examples of why its significant to run sensitivity bottom up (not top down, with min or no value). It has to have significant operational models integrated into a holistic model for it to make any contribution to support CEO with risk patterns over the long term and short term views. Industry leaders who take a long term view always set clear industry leadership examples and these go a long way into the future. (David Simon, CEO Simon Property Group (Largest US listed RE) was ranked five among the HBR best performing CEO ranking for his long term view of the business, which is seen as extremely rare in today’s world).

When we review strategic support groups in property companies, it is clear they are still struggling to structure the processes need for existing assets; leaving major part of the business with risks on future assets and hence future cash flows. This leaves a large gap which is resolved by converging multiple models across the operational part of the business.

There is a prevailing narrow view that cash flow forecast is the ability to aggregate rentals from existing assets and thus a perception which consolidates only 10% of CEO needs. Across the board, I see a tremendous appetite to get the house in order and have the capability to have end to end cash flow forecast with a capability to do bottom up stress test and sensitivity analysis on its portfolio models.

Many real estate companies are not taking steps to resolve this problem. While the appetite exist at CFO and CEO levels, there is huge gap on understanding the risks and gaps. Its very likely that the level of complexity of these forecast models and hence the complex work pattern of these model owners drive us to a thought process that we stay on with our current “demand and supply” process.

We ask each segment and segments ask departments and thus we get what we need in excel exchanges across the organizations. This has been proven as a non-integrated faulty framework where we miss out on sensitivity parameters for bottom up forecast. Imagine a refinancing model contributing to group cash flows and its impact on results cannot be put through a structured stress test on group cash flows. This fails completely and hence we resort to manual and erroneous models for board approvals.

Imagine, if we have to build a simple process for us to bring together all our cash flow forecast models from Commercial, Retail, Residential and RIET from a group perspective; Most important to allow segments to run their forecast models their way and interconnect these to group models – we have resolved with our process of an integrated cash flow forecast with awesome capability for sensitivity analysis and stress test at any levels. And more important, we have to get the collaboration of all these leaders to contribute to their respective models to deliver the finite results; Here we are sorted on our basic building block which can then drive us to prudent investment decisions and execute these decisions with monthly volatility reports and its impact on our cash forecasts into 10 or 20 years in the future.

Here, The whole business runs on a single cash flow regime and thus contributing to any external or internal shocks in its business.

article-image-3Modeling is a way of business in Real estate. Segment leaders are experienced modelers and they play a vital role. There is no industry standardisation like other industries and hence it’s a pretty ad hoc and complicated excel model regimes that exist today. It’s impossible for rigid tools and frameworks to take up this role as it requires strong modeling capabilities like excel. Simply put, Rental forecast models support existing assets, Project models support individual properties which are current or future, refinancing models with variable cash positions, while equity real estate investors spend their time modeling the upside while their debt partners spend their time modeling the down side.

Equity investors generally focus on an investment’s internal rate of return, cash-on-cash return, equity multiple and other return metrics while debt investors focus on debt coverage, loan to value, debt yield and refinance risk. These models should be geared toward the modeller, while it automatically services the group level cash flow forecast models and its parameters.

I’m excited to see Real Estate organizations build this capability, so that we can support the CEO and business leaders in running the cash flow forecast with insights into all operational part of the business.

This will help all Real estate groups to support an end to end process on sensitivity and help them continue to stress test their capability in turbulent times. This is a genuine gap which can be sorted for Singapore Real estate companies, thus offering an end to end Cash flow forecasting capability for a minimum of 10-15 years into the future.

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