My last blog post for real estate developers was about the currently very difficult land acquisition. This time, we're switching sides and turning our attention to the topic of investor talks.
In general, the past few years have been good years for sellers and those seeking financing, but I still think realistic expectations and good preparation are the be-all and end-all when conducting investor meetings.
Good preparation includes consideration of mutual goals on the one hand, and approximate determination of alternatives on the other. The topic of listing the goals is usually best approached with a brainstorming process at the end of which two possible lists of goals are drawn up; one's own and those of the investors. In the second step, one's own goals are then ranked according to importance, while those of the investors are critically scrutinized. For the supposedly most important investor goals, possible solutions are developed and priced. It is important to offer solutions that are actually suitable from the investor's point of view. For example, a long-term lease with a tenant with a poor credit rating or a deposit of 6 months rent will not give a very conservative and long-term oriented investor a special feeling of security.
The determination of alternatives, on the other hand, is a rather clearly structured process.
The most obvious alternative for existing investors is first of all not to buy and to keep the money for future investments. The return on this "investment" in the worst case is the current negative Euribor, but only under the assumption that the investor does not find better investment opportunities or more favorable custody options.
On the other hand, there are the CFs of the investor when making the investment.
At the beginning there are the acquisition costs, i.e. purchase price and incidental costs. At the end of the investment period are the sales proceeds, this time reduced by incidental costs.
During the holding period, there are rental income and current costs. The most important items are:
+Rental income in the case of letting
+Operating cost income on rental
-non-allocable operating or asset costs
-administrative costs of the investor
-taxes (at investor level)
If debt capital were used, the interest would still have to be deducted.
The following calculation compares the gross return with the net return of the investor using an example with "typical" assumptions.
Table: Net return at the level of the investor (e.g. fund), no capital gains tax or personal tax of the end investor taken into account.
Looking at the calculation, it becomes clear that the net return, which is decisive for the investor, quickly becomes very low. Specifically, in the above (realistic) example, a gross return of 3% (10*12/4,000) leads to a net return of 1.3% (4.57*12/4,224). So the difference to the alternative of hoarding money is not that big anymore.
In addition, money remains the most flexible store of value and the investor must price the opportunity to strike with it at better terms at some point in the future.
Furthermore, it is to be expected that professional investors tend to have better alternatives than cash. How good these are can be seen in the case of funds from the regular reports, from which the current net return at fund level can be calculated.
If you compare this with the net return of the investment offered, you get a feeling whether the investor is improving his position through the investment.
If this is not the case, the seller's return expectations are probably too high.
If a reduction is not economically feasible for the seller, he can alternatively sell the property to a private party. This usually means significantly more effort, but sometimes also leads to significantly higher purchase prices.