November 2008 - Bruce D. Greenberg
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Maximizing the Stakeholders’ Investment
Bruce D. Greenberg, MAI, SRA, ASA, President, Valuaciones Montaña Verde, SA de CV
Recently, the tourism real estate industry has been struck hard by the financial downturn due to the loss in the capital markets, government bailouts, consolidation of stronger banks, credit market freezes and foreign exchange volatility globally. The approach of real estate sales in México’s tourist corridors has changed drastically during the last 24 months and the development and investment communities are eagerly looking for guidance towards the future.
On Friday, October 17, 2008, Mauricio Monroy, Sr. Partner from Deloitte, and Benjamin Greenberg, Sr. Director from Valuaciones Montaña Verde, conducted a joint presentation during the Baja California Meeting Point (BCMP) conference in Tijuana. This conference, historically known as a promoter of future investment into México’s tourist corridors, shook it up a little, and asked Deloitte and Montaña Verde to discuss the current status of México’s market place during this recession.
Today, the industry is faced with many challenges. Undoubtedly, México has benefited from the tens of thousands of families who have purchased homes in the beautiful resort corridors built by the great developers who have shaped many world-class communities, but it is time that an overall reality check is performed during this new cycle we are faced with today.
During these times it is so important that the stakeholders of México work hard to address liquidity and solvency problems, contain cash flow deterioration, prevent foreclosures, comply with construction deadlines and deliver units to buyers accordingly to the contracts at hand. Additionally, the industry must work together to correct market and product mismatch, estimate the value and prevent defaults on the payments due from consumers, restructure financial commitments and address the lack of consumer confidence and buying power.
Between 2000-2005, developers and investors of North America, in particular México, achieved great rates of return. In México it was fairly common, if not typical, to achieve rates of return between 40-100%. The typical return during this same time in the U.S. was between 15-30%. Markets, anywhere in the world, risk loosing their attractiveness and affordability when they become subject to substantial increases in the number of investors and projects, unit prices, and rates of returns. México faces a fine line today.
Subsequently, other factors during this real estate cycle have brought the industry to where it is today. Overall, safer real estate practices should have been met with higher standards. Sales agents could have provided safer advice for the purchasing of real estate, especially for those purchasing in foreign countries. Significant numbers of sales were made up of unsophisticated buyers and/or investors and speculators. Developers even collected deposits from consumers and planned to build their projects based on OPM (other people’s money) rather than taking out construction loans. Even worse, some developers even used consumer deposits to acquire their sites.
Developers and investors became excited about the great rates of returns in the real estate industry and many rushed to snatch up “condo sites” well in excess of market value without having performed professional market or feasibility studies to prove the value of the land or acquiring financial planning or projections. By avoiding costs of these studies, many in the industry ignored the econometrics pointing to the economic downturn in the United States; declining real estate values, housing sector slowdown, lack of liquidity in the financial marketplace, the high rate of bankruptcies and foreclosures, inflation, increasing fuel prices, the rise of unemployment, the upcoming presidential elections, and the weak posture of the airline industry.
Today, Deloitte and Montaña Verde clients are faced with many questions concerning the future of México’s tourism real estate industry.
• Where is the market going?
• When will the global economic turmoil end?
• How will this down economy effect my project?
• When will the U.S. consumers return as buyers?
• Who should I sell to?
• How long can business sustain under these conditions?
• How is the business going to recover financially?
Service providers such as ours, Deloitte and Montaña Verde, have the expertise to provide the developer and lending communities with recovery plan services. These services could help maximize the stakeholder’s recovery during these difficult times by evaluating projects and identifying projects’ possibilities of continuity. Montaña Verde would complete an analysis of their market and would further explore the projects’ demographic and economic challenges, while Deloitte would analyze their cash flow, financial vulnerability, tax, and legal challenges. Both Deloitte and Montaña Verde’s teams can explore possible alternatives, including a refocus of the project, exploration of buy-in and buy out opportunities, an analysis of equity raising, debt restructuring and bankruptcy protection.
Deloitte and Montaña Verde’s presentation at the BCMP conference assured the developer and lending community that there is opportunity to rise over the current economic situation and that the community can come together and work cohesively to re-build the spirit of which the resort communities of México were founded on.
Deloitte and Montaña Verde are available to meet and discuss the needs of your project and/or development.
Valuaciones Montaña Verde SA de CV
Bruce D. Greenberg
520-750-8200 (US)
Bruce@MVConsultants.com
Benjamin Greenberg
818-259-6381 (US)
Ben@MVConsultants.com
Deloitte
Mauricio Monroy
664-622-7870 (MEX)
mmonroy@deloittemx.com
Harold Hoekstra
664-622-7888 (MEX)
hhoekstra@deloittemx.com
