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PROPERTY FINANCE

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Presented By: Vincent Rague, Chief Investment Officer ... Rating of Select African Countries. Page 7. Global Trends (cont) Economics, Politics and Policy ... – PowerPoint PPT presentation

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Title: PROPERTY FINANCE


1
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
2
SUMMARY
  • GLOBAL TRENDS
  • IMPACT of RE ON ECONOMY
  • CONSTRAINTS AND CHALLENGES
  • IFC ROLE
  • IFC PROJECT INVESTMENT CRITERIA
  • EXAMPLES OF DEALS
  • CONCLUSION

3
Global Trends
  • Demographics
  • Rapid Global Population Growth, most of it in
    Emerging Markets
  • Africas Population 669 million (2000) and
    Over 770m (2006) most under 30 years of age
  • E.g. Turkeys Population 36 million (1970) and
    Over 70m (2005) most under 30 years of age
  • Rapid Urbanization - Rural Urban migration
  • Africas Urban Population/Total Pop Less that
    20 (1970) vs. 41 (2002)
  • Turkeys Urban Population/Total Pop 29 (1970)
    vs 61 (2002)

4
Global Trends (Cont)
  • Economics, Politics and Policy
  • Compelling GDP Growth Rates for Emerging Markets
    vs. OECD ( p.a.)

5
Global Trends (cont)
  • Economics, Politics and Policy

Source SP, Sept 2001 April 2007
6
Rating of Select African Countries
7
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.

8
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

9
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

10
Attractive YieldsYields in Select Countries
11
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.

12
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 under-developed due to
scarcity of housing stock
13
IFC Role and Additionality
  • IFCs 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

14
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
15
Unique Solution Driven Service Offering
Property Finance Value Chain
Detailed Design
Infrastructure Devt
Origination
Urban Planning Permits
Land Acquisition
Feasibility Study
Mortgage Finance
Sales Marketing
Construction Finance
Transfer Titling
Construction
16
IFC Investment Products
investments at different levels in the value
chain given the risks


Equity Mez Debt PCG Senior Debt
In. Risks
CAPITAL MARKETS
Development Stage Finance

MORTGAGE FINANCE
Senior Debt S-TPCG
Construction Finance
CONSTRUCTION FINANCE
Mortgage Finance
REIT Corp Bond ABS etc.
Capital Markets
17
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

18
Typical Deal Structure of a Large-Scale Housing
Production Project
Equity Side
Debt Side
50 to 70 of total funding needs
10 to 50 of total funding needs
  • Equity Partners
  • Core Sponsor
  • Others to be decided (could inc. IFC)
  • Upfront Costs
  • Land
  • Soft costs
  • Portion of infrastructure works
  • Government permits
  • Initial construction phase
  • Banks
  • Major and mid-size banks to share risk and gain
    experience in Construction Finance
  • Capital Markets
  • SPV issues MTN w/tranches and rollover
    provisions, in local currency, variable rate, IFC
    partial guarantee

19
Case Study 1 ARECO - South Africa
  • 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.

Investment Committee
Sponsor
P r o p C o
SPV1
IFC
Equity Investment
  • 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

SPV2
Other Investors
SPV3
SPV4
SPV5
  • 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 arms length, full valuation basis
  • IFC will not be a shareholder in Propco

20
Case Study GRDC, Georgia
  • 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.

Project Description
  • Local sponsors
  • International sponsors individuals and
    institutional
  • Strong management team Solid execution capacity
    and local market experience

Sponsor Management
  • Equity Investment up to 20
  • Debt Investment Total equity and Debt of Up to
    35 of Project cost

IFC Investment
  • Valuation
  • Investing in a land bank
  • Constructions Loans, a new area for IFC?
  • Implementation risk

Risks Issues
21
Case Study GRDC, Georgia
Equity Investment at Holding Level
Debt Investment at Project/SPV Level
  • Valuation
  • Methodology
  • Negotiation
  • Exit
  • Sunset/Liquidation
  • IPO or Sale

Security Covenants (incl. DSCR, DSRA, etc.)
Cash Flow Analysis
Monitoring and Supervision
  • Financial
  • Return

22
Property/Construction Finance TUHF Multi-Family

IFC
International Finance Market
TUHF
Credit Line
Mortgages

Rent Contracts
Renters
Owners
23
Before and After TUHF Financing
24
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
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