Real Estate Finance
The traditional real estate investment management fee structure offers a context for the examination of the fee structure on high-yield real estate funds. Although the traditional "core" investment managers have devised a range of modest incentive fees, as well as some more creative acquisition and disposition fees, the total fee load has remained approximately 100 basis points for some time. An analysis of the fee structure on the higher yield products reveals that the total fee load is between 550 and 2,200, from a basis point viewpoint. Obviously, this is a very different scenario than the traditional core example with about 100 basis points of total fee. Nonetheless, the investor net IRR is higher on even a modest win in these higher yield situations. With so many confusing indicators in the marketplace, investors are looking at the forecasts of the major economic and real estate market analysts and wondering how much they should rely on the accuracy of those forecasts. In its RERC Industry Outlook: 2003, Real Estate Research Corp. notes that the past offers no evidence as to how the economy and real estate markets will respond to current market contradictions during the coming years. Current indicators regarding the real estate market are discussed.
Real estate lenders and investors need to maintain vigilance in their underwriting and investment in order to reduce volatility in property pricing and returns. Given the significant reduction in new construction and the prospects of increased demand as the economy improves the ability of real estate to generate income and cash flow should see most lenders and investors through the current tough period. However, for certain investors in the hotel and office segment--where the prospects of a turnaround are still a long way off and cost cutting has reached its limit--the turnaround will not come soon enough, thus presenting opportunities for new higher risk capital.
The home business is a tough one, confess retailers, as inventory management is critical to profitability. Unlike apparels, home décor is never an impulse purchase, so products move at a relatively slower pace. This affects their pricing model as they need to recover the cost of real estate and overhead investment. Since a good home store would devote at least 60 per cent space to furniture, which isn't a fast moving consumer good, retailer need to have a large footprint so that with supply chain management, prices can be brought down. Large format global players like Lifestyle believe they have the footprint and experience to manage large stocks. On the other hand, other smaller players are expanding fast to capitalize on large volumes. For home décor in India, this is the Next Big Thing.
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