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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   June 2014

Large-Scale Construction Projects Are Back

Sovereign wealth funds provide a major influx of investment capital

Large-Scale Construction Projects Are Back

The time has come for commercial mortgage brokers to work the large-scale projects that they were forced to shelve during the beginning of the financial crisis, thanks to a change taking place in the commercial real estate marketplace. Those who are savvy enough to recognize and take advantage of this trend will find themselves entrenched in a profitable niche.

For decades, foreign investors have made myriad investments in the U.S. financial markets. Because of the poor performance of many other asset classes — such as bonds, which are currently considered to be expensive, with limited returns — investments in real property, although more risky, are now more desirable because of their higher returns.

With certain asset classes performing poorly in recent years, many investment funds around the world are considering increasing their real estate holdings. Today, foreign investment in the U.S. has reached a growth level that needs to be diversified into additional types of investments. Real estate is an investment category that provides vast opportunities and is showing great expansion.

Sovereign wealth funds

In recent months, an interesting new trend in the capital markets has developed: Sovereign wealth funds are seeking large-scale investments in the U.S. real estate market. The net result of this influx of capital is that a new era of large-scale construction projects is beginning.

Many construction projects of all types, especially those costing more than $50 million, had been abandoned — or never even started — in the wake of the 2007 market downturn. The lack of available funds left many downtown metropolitan landscapes dotted with partially constructed hulks that loomed like enormous skeletons.

With the recent resurgence of funds flowing into many major markets, however, large construction projects have come to life. The cranes are operating once again as financing becomes available to developers. The funding market for these projects is becoming liquid again, and a key reason for this resurgence is foreign investors’ appetite for U.S. real estate.

One of the main sources for funding these expensive projects is capital coming from sovereign wealth funds. This is typically money from nations that wish to invest in the U.S. real estate market as a means of diversifying their portfolios while simultaneously minimizing their risks.

In past years, these sovereign funds invested domestically or in neighboring countries. These funds are typically in amounts of multiple billions of dollars because they usually comprise revenues generated by a country’s energy reserves, commodity exports, national pension investments or other resources.

Sovereign wealth funds are usually state-owned investment funds that invest in assets such as real estate, stocks, bonds, precious metals and alternative investments. The large-dollar volumes of these funds and the prospect of increasing returns on investments in U.S. real estate are fueling overseas investors’ interest in funding construction projects on U.S. soil.

The dollar values of these funds are so large that even a small percentage shift of them into real estate translates into billions of dollars for the U.S. real estate marketplace. The larger sovereign wealth funds are moving into property and infrastructure investments, which are less liquid than equity or debt markets but deliver stable income with a relatively attractive yield. These funds do not limit their investment to primary markets — they are staunch investors in secondary markets as well.

The U.S. economic recovery is the main attraction for these investors. According to a recent survey by the Association of Foreign Investors in Real Estate, the U.S. is the most stable and secure country for investment, with a margin of more than 50 percentage points over second-ranked Germany. The U.S. also provides the best opportunity for capital appreciation, with a 26 percent margin over second-ranked Spain.

Broker opportunities

Commercial mortgage brokers should move quickly to take advantage of this fresh flow of capital. They may want to go back to their clients whose major development projects were brought to a halt by the collapse in 2007 to determine if there is still interest in completing the projects. The key to success is to present these projects to the handful of funding sources that have access to these sovereign capital funds.

The companies with access to sovereign funds typically have the capability of funding projects that range from $100 million to $3 billion and can accommodate several of these large-scale projects simultaneously. The process for presenting these large-scale projects is usually as simple as presenting any project that’s worth double-digit millions of dollars.

Loan process

The first step is to provide a clear and concise executive summary that explains the project, its impact on the surrounding community, the reasons it is necessary and why it will be a success. In addition, any executive summary should detail the backgrounds and experience of the deal’s principals.

When there is legitimate interest from a funding source, the source will request a complete business plan and timetable for the project’s major milestones. This information should include a use-of-funds breakdown, which will be helpful in determining tranches and disbursements of funds.

Originators and their clients should expect a rigorous due-diligence process, but it will likely be no more complicated than the same process for a loan of a much smaller amount. The same items will have to be identified and justified. The fact that the project is of a much larger scale does not change the standard foundational requirements of a strong project.

All corporate documentation must be in order; contracts, agreements, partnerships and joint ventures must be disclosed; and required business reports from third parties must be acquired. Other items that must be disclosed are any litigation, taxation situations, insurance issues, relevant government regulations, and business and personal financial records.

Depending on the funding source that you present your client’s projects to, the funding process can be completed within a 60- to 90-day period. Many funding sources accustomed to dealing with large-scale projects have existing systems that break down the process into easily manageable steps, eliminating confusion and simplifying the overall process. This is another reason why funding a project of this magnitude is usually no more complicated than funding a much smaller project.

• • •

Creative mortgage professionals who identify and gain access to sovereign-wealth-fund capital have a lucrative opportunity to brush the cobwebs off of those large-scale construction projects that were nearly impossible to fund a few years ago. The lifeblood of huge amounts of capital has flowed back into the market. The financial rewards of these large-scale projects are much greater than for smaller-scale projects, yet the time involved to close them and the intricacies of the transactions are virtually identical. 


 


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