Friday Letter Back to basics

The real estate industry is no different. As economies around the globe continue to feel the impact of the collapse of the credit markets, there are few, if any, fund managers not studying their portfolios with extreme care.

For those that overstretched themselves during the days of easy and cheap debt, those investigations will be revealing some unpalatable truths. Yet, even for managers who invested more conservatively, today’s market is still presenting plenty of challenges.

One of those challenges is ensuring the continued cash-flow of existing assets. Whether it be retail, office, residential, industrial or hospitality, in today’s market GPs want to ensure the rents keep rolling in. And this is where the basics – the intrinsics of real estate – come into play.
Amid the current market turmoil, it is vital for all real estate managers to know their tenants extremely well.

The days when an investor could safely assume the future financial viability of his tenants have gone. When the likes of Lehman Brothers, Hypo Real Estate, AIG and the big motor companies, General Motors and Ford, go bankrupt or are pushed to the edge of bankruptcy, nothing can be taken for granted.

As one GP told PERE this week, it’s now time to be more “defensive” and to look “very hard at the sources of cash flow for any of your assets”. That doesn't mean those same GPs are not looking at new opportunities as well. It does mean though they are look to protect the assets they already have.

Who, after all, can predict how deep or how ugly the economic downturn will turn out to be? Will the economy have fully recovered in 18 months, just as half of all senior executives in the private equity buy-out industry believe, according to one recent survey? Or will the volume of maturing real estate debt between 2009 and 2011 prove our private equity cousins wrong?

No-one has all the answers. But GPs know it will pay tomorrow to be prudent today.