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·A practical help to decision makers.
Currently in Asia, Dubai, Europe, or other places in the world, it is a pity to see that a lot of real estate companies have stopped their important projects or even face bankruptcy because of the difficulty in financing.
Here I want to share with the large real estate developers and conglomerates about how to use a best and realistic method to succeed in financing and then survive this crisis. I call this method Optimized Retail Real Estate Securitization, or ORRES, which I conclude from my job, and used for many times.
ORRES, is to practically sell your mature retail real estates, or shopping centers, to get significant cash revenue in the shortest time. You can use this cash injection to support your important projects and weakening company. Better to sell the retail real estate than to die.
However, how to attract the investors to buy high value retail real estate in current market? How to avoid the problem that investors cannot get loans from banks now?
Asset Dividing –> Sales & Marketing –> Cash Injection –> Buyback Scheme
For example your company has a mature shopping center that is 80,000 square meters. The average value for this shopping center in your country is US$ 10,000/square meters.
1) The first step: ASSET DIVIDING.
Divide this shopping center into 80,000 pieces. So 1 square meters / piece. And define the actual location of every piece in the shopping center.
Notice: this is not equity REITs. In REITs you only get a security, which does not reflect the real location of the asset you hold. In this case the buyer is the actual owner of every divided asset.
2) The second step: SALES & MARKETING.
Sell the 80,000 pieces to the public. Critical items:
A) The average price of every piece is US$ 10,000. Every buyer should use CASH to buy the pieces instead of the loans from the banks. So for the small individual buyers, they can use a small amount of money to buy one piece. For the large institutional investors, they can buy a lot of pieces.
This gives everybody an investment alternative, and an opportunity to invest a trusty mature shopping center. Now, the absence of investment alternatives is a major theme.
You can get the separate deeds for every piece from the authorities where you got separate deeds for every independent shop in the past when you sold shops in new developments.
B) In the first three years, your company will pay the buyers 10%, 11%, 12% respectively (or other numbers that suit your country) as their fixed return, whatever the shopping center will doing well or not. And the rentals of this shopping center will belong to your company, whatever it will be higher than the fixed return or lower.
It will be better if the fixed return can be guaranteed again by another independent organization (the third party) to make the investors reassured.
C) From and including the fourth year, the buyers will get the rentals as their return, not the fixed-return guaranteed by your company.
D) From and including the fourth year, the buyers will set up a Management Commission to manage and operate this shopping center. The Management Commission will appoint an independent shopping center management company to manage it. Of course the original management team used by your company will be one of the candidates.
The Management Commission is like a board appointed by the shareholders. In this case, the buyers of the 80,000 pieces are the shareholders of this retail real estate.
The mechanism of Management Commission should be settled at first. The buyers who do not agree with this item are not our sales targets.
3) The third step: CASH INJECTION.
Because this investment is accessible, attractive, and flexible, your company will get US$ 800 million sales revenue in CASH quickly, which you can use to support other important projects and weakening company.
4) The fourth step: BUYBACK SCHEME.
Several years later, your company wants to recapture the ownership of this mature and famous shopping center, when the financial situation of your company and the global financial market recover. Your company can use buyback scheme to achieve it.
The two sides can set up a mutually satisfied future price when they initially make this transaction. Of course your company can give up this right if your company do not like the ownership anymore. And if there are some investors who refuse the buyback scheme, your company can still control this shopping center (see commentaries 7).
1) ORRES is not equity REITs. In ORRES, the buyers are the actual owners of the every independent piece of asset. ORRES sells properties, not securities.
2) ORRES avoids the difficulty to set up a REIT. It is apparent that you need a long time to launch a REIT.
3) ORRES gives the quickest way to generate a large sales turnover. Because it gives all kinds of investors an accessible (in terms of amount of money), attractive (in terms of the asset – a mature shopping center), and flexible (in terms of free combination of asset pieces) way to invest in current market which lacks investment alternatives.
4) ORRES suits the large companies and conglomerates that need immediate cash injection very much. ORRES does not suit the companies who pay more attention to the properties rights (feeling of ownership) of a famous shopping center, or to the long-term stable cash flow brought by a mature shopping center. The users of ORRES believe that better to sell the retail real estate than to die.
5) ORRES is based on the regulation that this retail real estate can be managed by the Management Commission, not the buyers themselves.
6) Fixed return is to eliminate the doubts about the future operation of this shopping center in this slowing-down market, and as such to make this investment much more attractive and trustworthy.
7) ORRES gives the opportunity that your company can still control the shopping center after the fixed return period: just sell less than 50% of this asset and then your company will be the majority in the Management Commission.
8) 10%, 11%, 12% fixed return and a period of 3 years are just an example. The actual numbers should come out from the detailed research about the current market of your country.
9) US$ 10,000 is the average price of this whole shopping center, but not the price of every piece from the ground floor to the top floor. You need detailed job to decide every piece’s price in every different location.
10) The location of every piece is not important to the buyers, because they do not actually run the retail real estate but get fixed return in the first 3 years and rental income in the future. Based on the average rental of the whole shopping center, you can design a coefficient to define the rental of every piece.
Written by Frank Cheung, Board Executive Director & General Manager at UF Property Consulting Group, China. February 22, 2009.
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