Solutions to Private Equity & Real Estate Funds

 
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Private Equity and Real Estate funds have been actively investing across various sectors including the Real Estate Sector.  Our association with such funds have significantly increased from as little as 2 in 2013 to as many as 22 funds in the last Financial Year.  At Sreenidhi, we maintain very high standards of Quality, Independence and the same is evident from the manifold increase in our clients.  We customize our approach and report depending on our client's requirement.

A basket of services for PE & RE funds are

 
 
Commercial Due Diligence

Commercial Due Diligence is specifically designed for potential investors in a Real Estate project (like large corporate houses, Debt Funds, Private Equity Real Estate funds etc) to provide a thorough assessment for a particular project within the prevailing commercial environment.  

 

The 6 broad areas that we cover during CDD are:

  1. Market

  2. Competition

  3. Potential

  4. Pricing dynamics

  5. Challenges

  6. Business Plan

 

Our CDD reports would encompass the following:

  • Market Structure, size, economic demographics & their drivers

  • Key players, market shares, competition practices

  • Demand – Supply analysis

  • Pricing strategy and challenges

  • SWOT analysis

 

Sreenidhi’s Commercial Due Diligence program is customized to each client's individual needs and level of intensity& urgency. Our commercial due diligence assignments can last anywhere from a few days to several weeks, and are generally driven by a potential closing date or the complexity of a project.

 
Technical Due Diligence

Technical Due Diligence is the process of systematic review, analysis and discovery in which a prospective purchaser, occupier or financier of property gathers information about the physical characteristics of the property in order to enable them to make an informed assessment of the risks associated with the transaction.

 

The benefits of Technical Due Diligence include:

(a) gaining an understanding of the condition and design of the property;

(b) establishing the suitability of the property for its intended use;

(c) understanding the need for and quantifying future costs and other liabilities;

(d) providing a level of protection for institutional investors; and

(e) providing a solid foundation for price negotiations and allocation of risk.

 

The majority of large property “owners” are institutional investors who manage a portfolio of property assets on behalf of their beneficial owners. They may be held in the form of listed or unlisted property trusts, property companies or syndicates. The managers of these investment vehicles have a fiduciary responsibility to the ultimate owners in making acquisitions, to ensure that all reasonable risks and liabilities are understood.

 

Further, the maxim of “caveat emptor’ (let the buyer beware) is still a guiding legal principle in all property transactions. Unless the seller expressly promises something about the physical condition of the property, the seller does not warrant anything in relation to its condition. The party acquiring must take reasonable steps to discover as much about the acquisition as possible before committing to a commercial transaction. The process of Technical Due Diligence is therefore critical to any successful property transaction.

 

Our Technical Due Diligence reports generally comprise the following

 

General property description

Access to the subject property

Structural description including its fabric

External or OTS areas

Services engineering (Building services)

Environmental issues

Town Planning / Developmental Control Regulations.

Statutory compliance review

FSI / Plot coverage ratio and analysis.

Reinstatement / Replacement cost analysis

Capital Expenditure forecasts

Operation Expenditure Assessment

 

Our TDD reports gets customized depending on the client’s requirement and based on the project under evaluation.

Specialized Property Valuation

Properties, depending on the type and use, are divided into non-specialised and specialized properties.  For non-specialized property, there exists sufficient transaction activity, and thus the level of prices can be established without having to interpret the property's underlying essentials. The final price is determined by comparison. The market of specialized properties is significantly more diverse than the non-specialized one. The main reason for this is that specialized properties do not transact sufficiently often (or there is no established market of transactions) to allow establishing the price of property by comparison with previously sold assets.  Under these circumstances, the process of valuation is based on a restricted number of methods, which assess the nature and underlying essentials of property in a way that its value can be established by referring to the cost of replacement, income- or profit-producing qualities of the property. This is the foundation of the valuation methods used for the valuation of specialized property.

 

Valuations are required for many different purposes ranging from open market transaction to compulsory purchase. Although the underlying preferred method of valuation should not be dependent upon the purpose of the valuation, it is important that the purpose is determined before undertaking any calculation.

 

We generally adopt the below methods of valuation for Specialized properties

The Income Capitalization approach

The Sale Comparison Method

The Residual Value method.

The Net Replacement Cost Method.

The Contingent Valuation

 

It must also be noted that the method of valuation adopted largely depends on the nature and purpose of valuation.

 

We, at Sreenidhi, have over the last decade gained extensive expertise in conducting specialized valuation.  The research data and inputs gathered both thru internal and external data sources help us handle such complex valuation assignments, with ease.

Commercial Real Estate Valuation

The term commercial property (also called commercial real estate, investment or income property) refers to buildings or vacant land intended to generate a profit, either from capital gains or rental income or sale of units. 

 

Commercial Real Estates are broadly classified into 6 categories:

  1. Office Buildings

  2. Industrial Properties

  3. Retail/Restaurant

  4. Residential projects

  5. Vacant Land

  6. Specialised properties.

 

The basic elements of an investment are cash inflows, outflows, timing of cash flows, and risk. The ability to analyze these elements is key in providing services to investors a realistic value of commercial real estate.

Cash inflows and outflows are the money that is put into, or received from, the property including the original purchase cost and sale revenue over the entire life of the investment. 

Cash inflows include the following:

  • Rent

  • Operating expense recoveries

  • Fees: Parking, vending, services, etc.

  • Proceeds from sale

  • Tax Benefits

  • Depreciation

  • Tax credits (e.g., historical)

Cash outflows include:

  • Initial investment (down payment)

  • All operating expenses and taxes

  • Debt service (mortgage payment)

  • Capital expenses and tenant leasing costs

  • Costs upon Sale

 

The timing of cash inflows and outflows is important to know in order to project periods of positive and negative cash flows. Risk is dependent on market conditions, current tenants, and the likelihood that they will renew their leases year over year. It is important to be able to predict the probability that the cash inflows and outflows will be in the amounts predicted, what is the probability that the timing of them will be as predicted, and what the probability is that there may be unexpected cash flows, and in what amounts they might occur.

While easily said, the challenge arises in drawing up assumptions and the resultant estimates.  These assumptions and estimates are of paramount significance as they impact the valuation directly.

At Sreenidhi, we begin with basics.  Our experts based on several decades of experience and based on the research inputs, make CRE valuations as objective as possible, which otherwise is largely subjective in nature.

Earned Value Analysis

Earned Value Analysis is a technique used to assess project progress by comparing the amount and cost of work that was planned to have been done by a particular stage with the amount that has actually been done and what it has actually cost. This gives a good indication of how the project is progressing compared to what was planned and enables forecasts to be made about the eventual cost and time that will be required to complete the project.

 

Typically Earned Value Analysis is carried out for each of the packages that make up the project. Actual outputs are measured against planned outputs (often on a weekly basis) using the units that individual companies use to price and measure work. This provides an opportunity to investigate discrepancies and take remedial action where necessary. It also provides a fairly accurate insight into the financial health of the project and also provides an early warning of either diversion of financial resources or financial crunch.

 

We generally recommend this analysis for fund houses where capital infusion is directly proportionate to the construction progress.

 
Investment Deployment Report

Investment Deployment Report (aka) Construction progress reports are prepared regularly (often quarterly) during the construction phase of a project.  This report will generally be a summary of the reports received, discussion held with site engineers and site visit observations.

 

A Construction Progress report generally includes the following:

 

  • A summary of the progress made in each key area of the project.

  • Analysis of progress against the plan.

  • An explanation of the causes of any delays.

  • Progress photos.

  • Analysis of key progress indicators.

  • A broad assessment of any quality issues.

  • An assessment of any other issues that need to be addressed and proposals for addressing them.

  • Any other specific instructions required from the client.

  • Look ahead to the next period (including specific requirements for progress photos during the next period)

 
 
 
 
 
 
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