Real estate industry in crisis
While the past years were characterised by growth for the real estate sector and the construction industry, the business climate is deteriorating significantly. Uncertainty and caution are spreading among the players in the real estate market. While the Corona pandemic was only a minor, exogenous shock, the current polycrisis-like effects are a serious test for the business models of real estate companies. Sharply rising building material and service costs, energy costs, supply bottlenecks and disproportionately increased refinancing costs have a disruptive effect on the operative business.
Depending on the business model, entrepreneurs have to manage different risks and make provisions:
- Inflation and energy prices in conjunction with falling real wages are a burden on the retail sector and thus on retail landlords. They are confronted with space reductions, cost-cutting attempts as well as insolvency facts on the part of retailers.
- For the traditional manager in the residential segment, there is a need for advance financing for his tenants due to the high energy prices. If the tenants are able to pay, the service charges are only reimbursed via the service charge statement.
- Since 2022, construction companies and project developers have been confronted with a changed market situation. For increased building and land prices, entire groups of buyers have been lost due to their restricted financing environment. The rise in interest rates for property financing is overburdening many households and underestimating the adaptability of companies. Banks have become more restrictive in their lending, fundamentally limiting lending for project developers, reducing loan-to-value ceilings or requiring additional covenants. Projects therefore have to be recalculated or cancelled altogether. This has led to a decline in incoming orders and building permits and will result in underutilisation of capacities from autumn 2023.
But how can companies recognise and manage these risks and the associated effects on the earnings and liquidity situation in good time? In practice, we as restructuring experts at WAYES are only involved when there is a significant earnings crisis or even insolvency facts, such as impending insolvency. A turnaround under one’s own steam is then often no longer possible. In addition to exogenous reasons, one main cause is insufficient early financial recognition. Companies at risk of insolvency cannot anticipate crisis indicators and initiate countermeasures in time.
We recommend integrated corporate planning as a planning and early warning system. It provides information on the medium-term development of the company’s earnings, financial and asset situation. Different partial plans, e.g. for sales, projects, material costs and personnel, are linked and their mutual effects are shown. Management is informed at an early stage about compliance with targets and medium-term liquidity development. Integrated corporate planning thus allows a stress test of elasticity and timely initiation of countermeasures.
– Jan Schönemann