Optimization, Not Optimism, Drives RE Companies’ Capital Agenda

By Michael Fishbin, Global Leader, Ernst & Young Hospitality Services Practice: According to a survey of senior executives from large companies around the world conducted late last year by Ernst & Young, optimism for the global economy has weakened.

According to a survey of senior executives from large companies around the world conducted late last year by Ernst & Young, optimism for the global economy has weakened.

Nearly 40 percent of executives polled said the global economic downturn would continue for at least a year while one quarter of respondents think it could persist for more than two years.  But such a despondent outlook is not universal.  Certain sectors within the real estate economy, notably homebuilding and hospitality, are seeing renewed growth and investment with housing starts surging to their highest levels in four years and a lack of new building and increasing consumer demand resulting in higher revenue per available room for hotels.

However, 76 percent of real estate, hospitality and construction executives surveyed said they saw no signs of improvement in the global economy.  This pessimism was up slightly from April 2012, when 61 percent of those surveyed said they saw no improvement.  Not surprisingly, the number of respondents in the real estate, hospitality and construction sector who said their companies were focused on growth declined almost 20 percent in the year between Octoober 2011 and 2012, to 27 percent from 43 percent.

 

With a diminishing emphasis on growth, more companies planned to refocus on initiatives that maintained stability, reduced costs and improved their overall operational efficiency.

Another impact of this outlook among company executives in the sector is that despite strong fundamentals for transactions such as M&As –including rising cash balances and largely stable credit availability — there is less appetite for transactions.  In fact, at just 25 percent of respondents, deal appetite is at its lowest since Ernst & Young began the Global Capital Confidence Barometer in October 2010.   At that time, 41 percent of respondents intended to pursue a transaction of some type.  Contributing to this lack of confidence is the valuation gap between buyers and sellers.  While the gulf has improved in the last six months, it continues to deter potential transactors and the vast majority of respondents expect the trend to continue through the balance of this year.

With recovery taking longer than expected, some companies in real estate, hospitality and construction are pursuing organic growth by focusing their efforts on repositioning their mix of existing products and services to appeal to target customers.  For example, in the hospitality sector, some hotel operators are catering to specific guest segments by providing female-only floors and increasing their distribution channels through mobile applications.  Meanwhile, more homebuilders are catering the growing over-55 demographic by focusing on developing more senior living facilities.