US - Real estate companies face fiercer competition now than ever before and would benefit from adopting a "back to basics" approach to emerge stronger from the financial crisis, according to Ernst & Young (E&Y).
The 2009 E&Y real estate business risk report suggests the globalisation of property companies, changing demographics and the difficulty in finding and exploiting new deals is generating tougher competition when it comes to securing investors' capital and purchasing opportunities.
"Real estate is typically the second highest cost item on an income statement after payroll and so provides excellent opportunities for companies to unlock hidden value, particularly through a back to basics approach," said Mark Costello, leader of Ernst & Young's construction and real estate advisory services in America.
E&Y's report ranked "continued uncertainty and the impact of the credit crunch" as the top risk facing the property industry, followed by "global economic and market fluctuations" and the "impact of ageing or inadequate infrastructure".
According to Howard Roth, global and Americas real estate leader for E&Y, property companies are likely to revert to traditional real estate underwriting values by thoroughly analysing cash flows and using prudent levels of cash and debt in transactions.
"This ‘back to basics' movement will lead to the greater transparency necessary to restore confidence between buyers and sellers," he added.
The report warned financial conditions for real estate projects are worsening and are likely remain challenging for the next two years.
Two out of three construction projects are currently over budget or behind schedule, influenced by the uncertainty surrounding the economy and the lack of financing.
"Yet deploying risk mitigation or accelerated delivery methods after careful assessment of a project can also reduce risk and cost and bring in projects on time and on budget," said Malcolm Bairstow, leader of the global advisory services for the real estate and construction sectors at E&Y.
According to Costello, property companies tend to "mask their organisational efficiencies" when things are going well and insisted they should concentrate on simplicity, transparency and quality deals.
"Companies which address those issues now and solidify their businesses will be in a much better position to address future risk threats," he added.
E&Y's report also listed a "global war for talent", "changing demographics" and an "inability to find and exploit non-traditional global opportunities" as the fourth, fifth and sixth highest risks respectively.
Pricing uncertainty came seventh in the table, as fewer transactions mean property valuations are becoming a problem for owners, buyers and sellers.
Sustainability was ranked the eighth-highest risk, while increasing energy costs came in 10th.
Given that developing markets are a key focus for property investors, regulatory risks and economic vulnerability in these countries was considered the ninth-highest risk.
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