Successfully managing projects amid recession talks
The World Bank has warned of a “considerable” risk of stagflation, with subdued growth likely to persist “throughout the decade.”
In the latest Global Economic Prospects report, World Bank president David Malpass said global growth could fall to 2.1 percent in 2022 and 1.5 percent in 2023, if downside risks materialize—a sobering prognosis for the world economy. Stagflation, which refers to recession combined with high inflation, is rising.
In April, the International Monetary Fund also cut its global growth forecast to 3.6 percent, from 4.4 percent in January. It is unusual for these institutions to make such drastic revisions in their economic projections within one quarter.
It is clear that these inflation-driven pronouncements reflect the impact of Russia’s war on Ukraine, particularly on oil and food prices. We should anticipate an economic pattern heading south with a likely prolonged down cycle to add to pre-existing inflationary pressures. Coupled with continued supply chain disruptions, many central banks have instituted policy actions that will counter an erosion of consumption leading to slow growth.Is V- or U-shaped recovery increasingly unlikely? Are we seeing signs of another gathering storm? Can anyone find safe harbor?
As a real estate analyst, I suggest that property investors need to prepare for what lies ahead. A silver lining in an otherwise gloomy economic environment is the fact that housing, as an asset class, remains resilient.
A senior executive (former MBA student) of an investment house sent me a worried text about this impending scenario and asked if there are positive indicators in the property sector. I countered him with a reassuring reply: “As we reopen and re-energize industries, you can expect housing amongst the asset classes to lead the property sector, moving forward. Why? Inventory is limited, loan applications are on the rise, jobs are back, interest rates have been adjusted to acceptable rates (overdue), the elections are over, the Malacañang transition was seamless and most importantly, confidence is rising. On the property side, many of my developer friends saw buyer inquiries doubling starting in the first quarter.”
The point I am driving at is that the resilience and overall robustness of the property sector should never be discounted in any economic swings.
No stakeholder or investor likes uncertainty, but it is also important to note that market cycles—both in the housing sector and the wider economy—are completely normal. They are always expected to happen.
We may have experienced one of the longest property streaks in Asia that started to roll in 2010 immediately after the global financial crisis (GFC) but it does not mean we will not slide. The pandemic made us realize the importance of sustainability and structural preparedness. It also forced developers to shift their revenue (sales) mentality to a more strategic mindset.
So how do developers and homebuilders brace themselves when “shit hits the fan?” I am sharing some initiatives (Code R.O.M.A.D) that will mitigate the impact if and when another negative economic event happens.
Financial forecasts, simulations
Review your financial forecasts and run simulations with each of your projects—vertical and horizontal—so you can determine which of these are the most fragile. With each combination of these variables, measure how long you can maintain a positive cash flow. This table exercise makes your finance people mindful if you’re holding enough money in your capital reserve account or you need to bridge additional funding from external sources.
Organizational, project auditFor the last two quarters, we have been swamped with so many requests to initiate organizational preparedness, market reviews, project audit, stress tests and concept studies for projects that were deferred as a result of the pandemic. In my experience, project audit, (re-conceptualize or develop a replacement concept) can translate to significant savings and successful re-entry into the market.
Anticipate volatilities
Manage your existing project portfolio for the anticipated market gyrations that usually come with every economic downturn.
Focus on receivables, invest in an efficient sales administration backbone
This is non-negotiable as it is all about cash flow. Any market down cycle should now compel you to prepare a proactive post sales management infrastructure that will plan the entire gamut of receivables management and customer service.
I strongly advise developers/owners/senior executives/consultants to get a firm handle on this critical unit. Establishing policies, procedures and templates related to sales administration and documentation, inventory management, and other post-sales services all the way to housing loan documentation and facilitation can make or break your company.
Digital Execution
The world has changed dramatically. The new generation of homebuyers and renters value convenience and competence more than ever. Predictably this year and in 2023, developer efforts are being focused toward a more buyer-friendly market.
My advice is, if you want to grow your real estate business, you have to meet their needs and the only way to compete in today’s complex marketplace efficiently with scale is a social media strategy. Social media and digital innovation outperform more traditional marketing and operational strategies in many areas. There’s no getting around it.
What you plan to implement in 2025 must be rolled out now before you get waylaid by your competitors that are riding the digital wave. It is no longer a question of whether it is an option to invest in the digital world but more of, why are you still not engaged in this space.
Market conditions can change quickly and developers can eliminate uncertainty for as long as their business activities center on strategic thinking (long term), innovation and operational efficiency. By focusing on these initiatives, you will set yourself up for success when the recession (just around the corner) starts to bottom out.
The author is an executive director of W+B Advisory Group
