Transcript Vincent Rague: Property Finance

PROPERTY FINANCE
Annual Affordable Housing Update:
Opportunities in a Changing Economy
Presented By: Vincent Rague,
Chief Investment Officer
International Finance Corporation, Washington, DC
IPED CONFERENCE - CHICAGO
JULY 10 - 11, 2008
Page 1
SUMMARY
1.
2.
3.
4.
5.
6.
7.
GLOBAL TRENDS
IMPACT of RE ON ECONOMY
CONSTRAINTS AND CHALLENGES
IFC ROLE
IFC PROJECT INVESTMENT CRITERIA
EXAMPLES OF DEALS
CONCLUSION
Page 2
Global Trends
Demographics:
1. Rapid Global Population Growth, most of it in Emerging
Markets

Africa’s Population: 669 million (2000); and Over 770m (2006) –
most under 30 years of age

E.g. Turkey’s Population: 36 million (1970); and Over 70m (2005) –
most under 30 years of age
2. Rapid Urbanization - Rural


Urban migration
Africa’s Urban Population/Total Pop: Less that 20% (1970) vs. 41%
(2002)
Turkey’s Urban Population/Total Pop: 29% (1970) vs 61% (2002)
Page 3
Global Trends (Cont)
Economics, Politics and Policy
Compelling GDP Growth Rates for Emerging Markets vs. OECD (% p.a.)
2002
2003
2004
2005
2006
Asia (ex-Japan
6.2
7.0
8.0
7.5
7.1
Emerging Europe
4.1
5.3
6.4
5.7
5.8
Latin America
-0.2
2.1
5.8
4.3
4.4
USA
1.6
2.7
4.2
3.5
3.4
Europe
1.0
1.0
2.1
1.6
2.3
Japan
-0.3
1.8
2.3
2.6
2.9
AFRICA
3.5
4.3
6.2
6.1
5.5
2.8
5.9
9.9
7.6
6.0
(Source: IMF)
TURKEY
(93-2002)
Page 4
Global Trends (cont)
Economics, Politics and
Policy
S&P Credit Ratings
Sept 28, 2001
April 30, 2007
∆ in Notches
China
NR
A
Na
Indonesia
B-
BB
↑4
Korea
A
A+
↑1
Malaysia
A
A+
↑1
BBB+
A
↑2
Romania
B+
BBB
↑5
Russia
B
A-
↑8
South Africa
A-
A+
↑2
Turkey
B-
BB
↑4
Mexico
Source: S&P, Sept 2001 & April 2007
Page 5
Rating of Select African Countries
Page 6
Global Trends (cont)
Economics, Politics and Policy
 Political Stability
 Structural Reforms of Economy
 Liberalization – globalization econ integration
 Increased Access to Mortgage/Housing
Finance
 Economic Integration – Regional Blocs, NEPAD, etc.
Page 7
Global Trends (Cont)
Impact on Real Estate Sector
Growing pent-up demand for urban
infrastructure
- roads, water, electricity, sewage, etc.
Growing Incomes and Growing Middle
Class
- Increased demand for quality accommodation
• housing, commercial, industrial, hospitality and social space
Growing aspirations
Adoption of Global Norms and Standards
Proliferation of Unplanned Settlements
Page 8
Role of Real Estate, Housing in Economy
Huge Economic Impact – Employment,
Commerce and Industry
– In the US
» Housing Accounts for approx 8% of GNP
» Housing and Housing Services Account for approx.
18% of GNP
Page 9
Attractive Yields
Yields in Select Countries
Botswana
Egypt
Kenya
Nigeria
South
Africa
Zambia
Office
12%
11%
12%
9%
8%
12%
Retail
11.5%
9%
14%
8%
8%
11%
Industrial
14%
12%
15%
14%
9%
15%
Residential
15%
8%
9%
6%
5%
14%
Page 10
CONSTRAINTS TO REAL ESTATE SUPPLY
Huge Pent-Up Demand for Housing and Real Estate IN
EMERGING MARKETS
- High Transaction Costs (Stamp Duty/Transfer
Taxes)
- Lack of Transparency & Reputation Issues
- Highly Fragmentated
- Limited Access to Large Pools of Risk Capital
- Limited Capacity by Municipalities and
Governments to deliver Bulk Infrastructure
• Roads, Sewage, Water, Electricity, etc.
Page 11
Why IFC & Property Finance
Many emerging markets, there is a logjam of development in
Mortgage/housing finance…..
Developers not
producing
sufficient
inventory - lack of
risk capital &
mortgage takeout
Lack of Housing
Inventory
(supply/demand
imbalance)
Mortgage markets
are underdeveloped due to
scarcity of housing
stock
Page 12
IFC Role and Additionality
IFC’s Goal is to help create viable communities
By Supporting:
•
•
•
•
•
Development of Local Property Markets
Increased Access to Risk Capital for Property Finance
Catalyst To Attract Foreign Investment
Deepening of Local Capital Markets
Supporting Public Private Partnership Initiatives – to
Deliver Sustainable Urban Infrastructure
• Sustainability, environmental standards and best
practices
Page 13
Investment Vehicles: Investment Types & Options
Integrated Property Company that
delivers all aspects of RE Value Chain
Every market is unique.
Real Estate Investment Trust
Investment solutions are
typically Integrated tailored based on Sponsors
and investment/market
opportunities.
Real Estate Development Facility – on
a project-by-project basis
Unbundled parts of R.E. Development
– upfront soft costs and infrastructure
Trusts – especially for Not-for-profit
urban renewable and affordable
housing
Page 14
Unique Solution Driven Service Offering…
Property Finance Value Chain
Origination
Construction
Finance
Feasibility Study
Sales &
Marketing
Land Acquisition
Mortgage
Finance
Page 15
Urban Planning
& Permits
Construction
Detailed Design
Infrastructure
Devt
Transfer &
Titling
IFC Investment Products
… investments at different levels in the value chain given the risks
Equity
Mez Debt
CAPITAL
Development
Stage
MARKETS
Finance
PCG
Senior Debt
Senior Debt – STPCG
MORTGAGE
Construction
Finance
FINANCE
CONSTRUCTION
Mortgage
Finance
FINANCE
REIT Corp
Bond; ABS
etc.
Capital Markets
Page 16
A Typical Deal: Prerequisites
Requirements of the Deal:
Transparency at all operational levels
On-site full time and professional Project Management
Clear Land and Property Titling Regime
Strong Reputable Sponsors
Adoption of Global Norms and Standards in corporate
governance, financial reporting and accounting
Adoption of Sustainable Environmental and Social Standards
Page 17
Typical Deal Structure
of a Large-Scale Housing Production Project
Equity Side
Debt Side
10 % to 50 % of total funding needs
50% to 70% of total funding needs
Equity Partners:
• Core Sponsor
• Others to be decided (could inc.
IFC)
Banks:
Major and mid-size banks to
share risk and gain experience
in Construction Finance
Upfront Costs:
• Land
• Soft costs
• Portion of infrastructure works
• Government permits
• Initial construction phase
Capital Markets:
SPV issues MTN w/tranches
and rollover provisions, in local
currency, variable rate, IFC
partial guarantee
Page 18
Case Study 1 – ARECO - South Africa
•
Sponsor
Investment
Committee
DEVCO
•
•
•
IFC
Other Investors
OTHER INVESTORS
P
r
o
p
•
SPV1
Equity
Investment
SPV2
•
SPV3
•
•
•
C
o
SPV4
Devco is a pure property development
company, likely set up as a JV between
Sponsors other developer(s).
IFC may take a stake in Devco
It acts as developer of both commercial and
residential properties
Execution of development only, obtaining fees
for development services rendered
Property management fees are earned for
management of completed properties,
whether sold or held.
Portfolio of residential and commercial
properties
Developed by Devco
Some properties sold off to Propco (example:
SPV4), or to other investment vehicles
Other Properties retained because they are
judged to not yet have matured or attained
maximum valuation
SPV5
•
•
PROPCO
•
•
Page 19
Propco is a portfolo company of Sponsor,
plus other potential investors
It holds for long-term investment a portfolio of
developed properties, many developed by
Devco, some developed by other developers.
Devco originated properties are sold to
Propco on an arm’s length, full valuation
basis
IFC will not be a shareholder in Propco
Case Study – GRDC, Georgia
Project
Description
Sponsor &
Management
• Capitalization of vertically-integrated real estate company in
Georgia to finance the development of its portfolio of 18 properties
• IFC invited to join Round # 3 of equity financing and provide debt
facility on a project basis.
• Local sponsors –
• International sponsors – individuals and institutional
• Strong management team – Solid execution capacity and
local market experience
IFC
Investment
• Equity Investment: up to 20%
• Debt Investment: Total equity and Debt of Up to 35% of Project cost
Risks &
Issues
•
•
•
•
Valuation
Investing in a land bank
Constructions Loans, a new area for IFC?
Implementation risk
Page 20
Case Study – GRDC, Georgia
Equity Investment at
Holding Level
Valuation
- Methodology
- Negotiation
Debt Investment at
Project/SPV Level
Exit
- Sunset/Liquidation
-IPO or Sale
Cash Flow
Analysis
Security &
Covenants (incl.
DSCR, DSRA, etc.)
Monitoring and
Supervision
Financial
Return
Page 21
Property/Construction Finance: TUHF Multi-Family
IFC
International Finance Market
TUHF
Credit Line
Mortgages
Rent Contracts
Owners
Page 22
Renters
Before and After TUHF Financing
Page 23
CONCLUDING REMARKS
 Attractive Investment Opportunity – for both local
and foreign investors
 Opportunity Requires Institutional Approach – to
attract capital and large scale projects
 RE Has Huge Development Impact
 Helps Develop Local Capital Markets
 Creates Sustainable Urban Environments
 Challenge Remains to Find Solutions to Address
Affordable and Social Housing Needs
Page 24