Real Estate Investment is a crucial part of our personal and corporate lives. However, its importance is never emphasized and the approach to Corporate Real Estate Investment is, at the most, done on an ad-hoc basis and usually not based on a structured process.
Considering the magnitude of such an investment, the foray into Real Estate Investment by any corporation needs serious thought and also a structured process. Below we outline the necessary steps for Corporations to consider in embarking in the exciting world of Real Estate Investments.
Step One. To take the first cohesive step into Corporate Real Estate Investment is of course research. One will need to be comfortable with the performances of a particular sector in terms of demand, supply, trends and forecasted performances. The research must also establish the yields performances to give an idea of the expected returns and also the cost of acquisition and ownership.
Step Two. The purpose of research is also to set a base for the next step which is to establish the investment objectives. Objectives can be divided into two sections, at the corporate level and at the operational level. At the corporate level, a decision must be made on whether property is going to be the core or the supplement/diversification towards the revenue and performance of the company and whether it is property investment or development. At operational level, the nuts and bolts are decided upon such as:
- The sectors to be invested in
- Type of properties to invest in
- Amount of Exposure in each sectors
- Benchmarked Yields and Operational Costs for each sector
- Holding period for each type of properties
- Financing Options and Models
- Competency Levels and Management Team Required
At the end of the first two steps, you should have determined the core area of focus your corporate real estate investment, i.e. what are your options, what is appropriate for your organization and what you organization is capable to invest in.
Step Three. After you have clearly defined what you want to invest in, the nest step is of course sourcing the properties. The easiest and the most cost effective way is of course via Real Estate Agents who are generally appointed by the Vendors to seek our organizations that are looking for property investments. It is best to inform a couple of Real Estate Agents on your intentions and to provide them with some information on your investment requirements.
Step Four. Proposals will come in thereafter and for the next step which is the initial review, we suggest using a decision making matrix to decide whether to proceed further. A sample of this matrix as prepared for one of our corporate clients based on their investment objectives and criteria is appended. Only if the matrix provides a percentage above a pre-determined level (usually above 70%) then do we move to the next level, i.e. a detailed analysis.
Step Five. In this detailed analysis, all the matters pertaining to the proposal is thoroughly reviewed including title matters, yields, anticipated growth, tenancy terms and schedules, management contracts etc. Some of this information is usually made available upon a letter of intent and confidentiality is made to the vendors and the rest via market research and investigation. This can either be done in house by the investment team or outsourced to Real Estate Agents and Property Consultants alike.
Step Six. The initial review was excellent and the detailed analysis shows that the investment is not only viable but suits the companies risk and investment profile very much. The next step is of course seeking approval from management to proceed with the negotiations and to pre-determine the threshold levels. Upon management approval, we move to the most exciting stage of Corporate Real Estate Investment, Negotiations.
Step Seven. As mentioned, this is the most exciting part of the whole process. In Malaysia, there is no fixed manner in which negotiations take place. The preferred manner is to first generally agree on the salient terms and conditions and then for either the Vendor or the Purchaser to make an offer to the other party to accept. The toughest part is of course the general agreements. Issues to content with include the price, terms of payment, date of completion, conditions precedent, treatment of deposits with stakeholders etc.
Step Eight. This is the longest step in terms of time as it about Closing the Deal. Once the offer is accepted, earnest deposits will be paid to the Real Estate Agents as stakeholders and thereafter, the sale and purchase agreements will be drawn out to be executed. Upon execution of the sale and purchase agreements, the balance deposits are paid (usually upto 10% of the sale price) with the balance to be paid upon completion of the sale (i.e. upon fulfillment of conditions precedent). Thereafter there will be a handover date for the purchaser to take possession of the building and that concludes the deal. From then on, Management takes over.
The process of getting started into Corporate Real Estate Investment is definitely challenging. Though real estate investment has a lot of the upside, caveat emptor as real estate investment has also its fair share of drawbacks, the main being:
- Real Estate investment has a high cost of entry and ownership
- Real Estate investment offers less liquidity as compared to equities
- Real Estate investments generally require a long holding period
With this in mind, it is always good to back up your Corporate Real Estate Investment decisions with sound research, structured decision making process and reliable advise.
Sample of Corporate Real Estate Investment Decision Matrix
Source: Zerin Properties Corporate Real Estate Services