Cedar’s Sanjiv Anand shares lessons for the real estate sector
With over 30 years of global management consulting experience, Cedar Management Consulting Chairman Sanjiv Anand has shared a number of important lessons for players in the real estate sector on how they can successfully navigate the current environment.
The Covid-19 crisis has had a detrimental effect on a host of industries over the past 12 months. However, it has also had a number of unexpected upsides for the real estate sector. In the US, for example, after initially stalling, sales in the housing market boomed through 2020.
While this might see many real estate companies enjoying strong runs at the start of 2021, however, the Chairman of Cedar Management Consulting has issued a stark warning to the market: “don’t get ahead of yourselves.”
Speaking in an online video addressing the problems faced by the real estate sector, Sanjiv Anand stated, “The most important thing to remember is not to get ahead of yourself – do not bank the bank, otherwise you will find yourself on the wrong side of the curve.”
“Real estate is very topical at the moment because in a number of countries around the world the sector is in deep trouble. People very often think it is to do with the specific country, and of course aspects do relate to that, but the issue that I think has happened is that people have violated the rules of the game.”
Anand went on to state that real estate “wasn’t developed overnight,” and that many countries, especially more mature markets, have been heavily organised for the last 60-70 years. So what has gone wrong? What should operators in those markets have done differently to avoid finding themselves in trouble in the future?
“The problem always starts with debt,” Anand explained. “If debt is available, if there is liquidity in the market, there is always a tendency to borrow more and more money, and if you look at the history of successful real estate developers, typically, if the debt equity they own is 1:1, then everything is fine. The moment you start loading your debt, getting 2:1 or higher, there is a significant carrying cost on interest – and many developers in trouble have violated this golden rule.”
On top of this, he added, many real estate developers are too concerned with more glamourous or lucrative work, meaning they neglect other more practical or operationally important work. For instance, he stated that “it’s always good to have a facilities management business,” as “when you are not doing any development, you need revenue to keep the lights on.” However, while facilities management might be apt for paying wages and bills, it is often neglected “because developers think ‘Oh it’s less money than building another tower, so why should we bother?’”
Following on from this, Anand suggested developers might select projects more carefully. Pointing to the choice between building a township or a tower, he warned that a township is multiple units, not just one on top of the other. This means “you need to put in infrastructure, sewage, roads, lighting, public amenities,” so while it might seem like a lucrative project, it will also come with a hefty price-tag for developers.
Anand also stated, “At the same time, developers need to appreciate that owning a land bank is not just to have somewhere to build. If I buy 2 million square feet of land in a year, there is a potential for me to transact some of that land, if I get a better price, and make some money that way.”
Ultimately, Cedar Management Consulting's Chairman suggested that developers “should always buy a little bit more land than you need for this reason” – and when the market turns, “the easiest thing to offload is usually empty land.”
Most importantly of all, however, Anand noted that real estate developers need to keep on top of the broader economic situation to inform their decision making regarding a potential downturn.
He concluded, “The question I often get from real estate developers is how do we predict a downturn in the market? When a market goes down, one knows one is in trouble for selling apartments etc. I would generally say that there are enough indicators on economic activity that if you track it on a monthly basis, it could tell you there will be a situation in 24 months, where the market will go south. You need to determine what the indicators of that are in your local market – it could be automotive sales, it could be three or four different indicators.”
