Minimizing the Risks of Investing in Commercial Real Estate


Speaking these days about investment in general, and investment in commercial real estate in particular, it is impossible to avoid mentioning the ongoing crisis situation in the world economy. This crisis struck investment projects worst of all. These days, many investors have to think about such things as: "Is there a probability of successfully protecting investments in commercial real estate, or is it necessary to give them up?"

Thus, instability has captured all niches of the building business.

First of all, the problems in the banking sector have considerably complicated the process of financing building projects. It concerns not only the deliveries of loans and credits, as well as termination of delivery. Also, it is doubtful that there were bank guarantees and warranties in the first place. It is not only the documents which already have been given out to participants of the building market that are in doubt, but institution of the guarantee, as a way of maintaining the obligation, which was based on trust.

In the real estate sector, the financial crisis has not only complicated the regularity of deliveries that were expected. The panic of the first days of the crisis brought about mass staff reductions and dismissals of employees. As a result, companies had to incur unjustified expenses under labor legislation on payments of severance pay.

In the construction sector, the danger of interference by the state has increased. For a long time already, there has been talk about strengthening state involvement in the building business. The modern market situation, with the destabilization of relations of the basic participants, with preservation of heavy prices in the housing accommodation market and the erosion of the population's purchasing power, can give the authorities a reason for starting the state development of a corporation like Gazprom for the real estate market. In that case, private campaigns should concede items at the conclusion of the state investment contracts, at reception of the land lots under construction, and struggle for the market of services of operating campaigns.

Here are some of the basic measures that can be used as protection against the crisis:

1. Reduction of costs and optimization of processes, including transfer and outsourcing of expensive processes.

2. Strengthening of the coherence of participants of the market through horizontal and vertical integration and introduction of new forms of calculations with counterparts (bills, barter).

In practice these measures form two trends:

First of all, the block of contracts for construction work, which the participant of the market is not in a condition to carry out, possibly due to money issues, is formed. In general and during pre-crisis times, there was such a trend, and now the parties of such contracts should check the reliability of each other. If there are no doubts, minimization of expenses through the attraction of experts can justify itself.

One more method to involve experts and to reduce risks is to take advantage of the services of leasing companies. We should mention the possibility of using the leasing-giver's investment experience, as positive result of this method it is possible to name fiscal incentives to represented participants of leasing relations. And first of all, it is the abnormal depreciation of the subject of leasing that allows amortizing a building for 10 years.

But not everybody will decide to use the services of extraneous experts. Similar communications have become too vulnerable these days and requests for stability of relations have been considerably increased. Therefore, even at the expense of an increase in costs, companies should try to harden vertical and horizontal ties as much as possible. Uniform management should be carried out at each stage of investment and building in the commercial real estate. The process of mutual integration probably will even be strengthened by a crisis situation.

The trends of allocating special divisions as a part of the company and integration of specialized market participants into the company structure will not cease. As a rule, such procedures occur in the form of an absorption or merger, but for these actions small participants cannot appear on either side.

In that case it is possible to pay a legal institution to draw up an agreement for joint cooperation, allowing it to be coordinated and lead by long term activity, and not to carry out the procedure of reorganization of the legal entity. This scheme allows the parties to save a lot of time and energy that is usually expended on reorganization of a legal entity, including financial verification. The promptness of the agreement is an advantage to everyone involved. But at the conclusion of the agreement, the parties should keep in mind the rather extensive responsibility of companions not only by the agreement, but also by all results of entrepreneurial business.

Speaking of indicated measures and tendencies, the feature of a property market in a crisis situation is its high level of stability and limitation of maneuverability should not be forgotten.

On the one hand, it limits the ability of the participants to restructure profitable items of expenditure, having minimized damage from crisis.

On the other hand, real estate objects as objects of trade are not inclined to depreciation as a result of the change in economic circumstances. Therefore the means invested in real estate can be simply enough returned, after economic circumstances improve, practically without having lost any value.