Further Economic Challenges to Come?

By Michael Fishbin, Global and Americas Hospitality Leader, Ernst & Young L.L.P.: Nearly half of the real estate, hospitality and construction companies (including REITs) Ernst & Young surveyed for its second quarter Global Capital Confidence Barometer perceive the global economy declining, compared with just 39 percent that see it improving.

Nearly half of the real estate, hospitality and construction companies (including REITs) Ernst & Young surveyed for its second quarter Global Capital Confidence Barometer perceive the global economy declining, compared with just 39 percent that see it improving.

Sentiment around economic and employment growth underpins a negative outlook in corporate confidence. Only 6 percent of respondents are confident about the prospects of short-term market stability, compared with 21 percent last October.  Successful REITs must learn to live with this increased volatility as the “new normal.”

The survey also shows that 58 percent view credit availability as stable or improving at a global level, a decrease of five percentage points from October 2011, reflecting the current economic conditions.

In addition, 64 percent of companies in the real estate, hospitality and construction sector are focused on maintaining stability or surviving over the next 12 months, an increase of seven percentage points from last year.

The survey also indicates that 51 percent believe there is a valuation gap of more than 21 percent between buyers and sellers.  Forty-two percent expect the valuation gap to remain the same in the next 12 months. This gap has resulted in a decline in the number of transactions taking place.

Due to this valuation gap, 83 percent of companies are currently focused on organic growth and reducing debt with excess cash instead of pursuing acquisitions to grow their businesses.

The survey clearly shows that REITs and others in the real estate sector see the economic outlook as challenging, yet executives are continuing to grow their companies organically and maintain stability. In order to achieve these goals, our survey findings suggest REIT managements should:

  • Think innovatively about how to enhance revenue and cost efficiencies;
  • Re-engineer business processes and develop partnerships to create synergies;
  • Use business intelligence to develop strategic market initiatives and drive revenues;
  • Invest in new technology to build a competitive advantage; and
  • Learn and adapt quickly to the new market forces.

 This article is based on results of a survey of senior executives from large companies around the world conducted in April 2012 by the Economist Intelligence Unit (EIU).  Ernst & Young’s real estate, hospitality and construction practice analyzed the survey results, specifically focusing on responses from companies, from the real estate, hospitality and construction sectors.