RE Investors Should Go ‘Back to Basics’

In the midst of economic uncertainty, falling markets and a stimulus package that may or may not help business grow, a new Ernst & Young report on real estate business risk advises property firms to go back to the basics. The 2009 Ernst & Young real estate business risk report, produced in conjunction with strategy consultancy Oxford Analytica, itemized the 10 business risks faced by the industry as ranked by leading sector analysts. Given the risks outlined by analysts in the report, it is time for owners, investors and users of real estate to use the time afforded by this lull in real estate activity to prepare their businesses for the next period of economic growth, Ernst & Young analysts warned. Among the top risks, according to the report: * continued uncertainty and impact of the credit crunch* commercial vacancy rates as well as property valuations* global economic and market fluctuations* aging or inadequate infrastructure* a global war for talent with countries forced to compete for human capital* changing demographics* inability to find and exploit non-traditional global opportunities; * pricing uncertainty* the green revolution, sustainability and climate change * economic vulnerability and regulatory risks in developing markets* increasing energy costs. Given these challenges, an Ernst & Young said it anticipates a “fundamental shift back to traditional real estate underwriting principles, including comprehensive cash flow analysis and prudent levels of debt and equity in consummating real estate transactions. This ‘back to basics’ movement will lead to the greater transparency necessary to restore confidence between buyers and sellers.” The real estate sector has felt the tightening conditions in credit markets perhaps more than any other sector due to its heavy reliance on capital, according to Ernst & Young. Financial conditions for real estate projects are undoubtedly worsening and the current financial market landscape is expected to persist for the next couple of years.