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PROPERTY FINANCE Annual Affordable Housing Update: Opportunities in a Changing Economy Presented By: Vincent Rague, Chief Investment Officer International Finance Corporation, Washington, DC IPED CONFERENCE - CHICAGO JULY 10 - 11, 2008 Page 1 SUMMARY 1. 2. 3. 4. 5. 6. 7. GLOBAL TRENDS IMPACT of RE ON ECONOMY CONSTRAINTS AND CHALLENGES IFC ROLE IFC PROJECT INVESTMENT CRITERIA EXAMPLES OF DEALS CONCLUSION Page 2 Global Trends Demographics: 1. Rapid Global Population Growth, most of it in Emerging Markets Africa’s Population: 669 million (2000); and Over 770m (2006) – most under 30 years of age E.g. Turkey’s Population: 36 million (1970); and Over 70m (2005) – most under 30 years of age 2. Rapid Urbanization - Rural Urban migration Africa’s Urban Population/Total Pop: Less that 20% (1970) vs. 41% (2002) Turkey’s Urban Population/Total Pop: 29% (1970) vs 61% (2002) Page 3 Global Trends (Cont) Economics, Politics and Policy Compelling GDP Growth Rates for Emerging Markets vs. OECD (% p.a.) 2002 2003 2004 2005 2006 Asia (ex-Japan 6.2 7.0 8.0 7.5 7.1 Emerging Europe 4.1 5.3 6.4 5.7 5.8 Latin America -0.2 2.1 5.8 4.3 4.4 USA 1.6 2.7 4.2 3.5 3.4 Europe 1.0 1.0 2.1 1.6 2.3 Japan -0.3 1.8 2.3 2.6 2.9 AFRICA 3.5 4.3 6.2 6.1 5.5 2.8 5.9 9.9 7.6 6.0 (Source: IMF) TURKEY (93-2002) Page 4 Global Trends (cont) Economics, Politics and Policy S&P Credit Ratings Sept 28, 2001 April 30, 2007 ∆ in Notches China NR A Na Indonesia B- BB ↑4 Korea A A+ ↑1 Malaysia A A+ ↑1 BBB+ A ↑2 Romania B+ BBB ↑5 Russia B A- ↑8 South Africa A- A+ ↑2 Turkey B- BB ↑4 Mexico Source: S&P, Sept 2001 & April 2007 Page 5 Rating of Select African Countries Page 6 Global Trends (cont) Economics, Politics and Policy Political Stability Structural Reforms of Economy Liberalization – globalization econ integration Increased Access to Mortgage/Housing Finance Economic Integration – Regional Blocs, NEPAD, etc. Page 7 Global Trends (Cont) Impact on Real Estate Sector Growing pent-up demand for urban infrastructure - roads, water, electricity, sewage, etc. Growing Incomes and Growing Middle Class - Increased demand for quality accommodation • housing, commercial, industrial, hospitality and social space Growing aspirations Adoption of Global Norms and Standards Proliferation of Unplanned Settlements Page 8 Role of Real Estate, Housing in Economy Huge Economic Impact – Employment, Commerce and Industry – In the US » Housing Accounts for approx 8% of GNP » Housing and Housing Services Account for approx. 18% of GNP Page 9 Attractive Yields Yields in Select Countries Botswana Egypt Kenya Nigeria South Africa Zambia Office 12% 11% 12% 9% 8% 12% Retail 11.5% 9% 14% 8% 8% 11% Industrial 14% 12% 15% 14% 9% 15% Residential 15% 8% 9% 6% 5% 14% Page 10 CONSTRAINTS TO REAL ESTATE SUPPLY Huge Pent-Up Demand for Housing and Real Estate IN EMERGING MARKETS - High Transaction Costs (Stamp Duty/Transfer Taxes) - Lack of Transparency & Reputation Issues - Highly Fragmentated - Limited Access to Large Pools of Risk Capital - Limited Capacity by Municipalities and Governments to deliver Bulk Infrastructure • Roads, Sewage, Water, Electricity, etc. Page 11 Why IFC & Property Finance Many emerging markets, there is a logjam of development in Mortgage/housing finance….. Developers not producing sufficient inventory - lack of risk capital & mortgage takeout Lack of Housing Inventory (supply/demand imbalance) Mortgage markets are underdeveloped due to scarcity of housing stock Page 12 IFC Role and Additionality IFC’s Goal is to help create viable communities By Supporting: • • • • • Development of Local Property Markets Increased Access to Risk Capital for Property Finance Catalyst To Attract Foreign Investment Deepening of Local Capital Markets Supporting Public Private Partnership Initiatives – to Deliver Sustainable Urban Infrastructure • Sustainability, environmental standards and best practices Page 13 Investment Vehicles: Investment Types & Options Integrated Property Company that delivers all aspects of RE Value Chain Every market is unique. Real Estate Investment Trust Investment solutions are typically Integrated tailored based on Sponsors and investment/market opportunities. Real Estate Development Facility – on a project-by-project basis Unbundled parts of R.E. Development – upfront soft costs and infrastructure Trusts – especially for Not-for-profit urban renewable and affordable housing Page 14 Unique Solution Driven Service Offering… Property Finance Value Chain Origination Construction Finance Feasibility Study Sales & Marketing Land Acquisition Mortgage Finance Page 15 Urban Planning & Permits Construction Detailed Design Infrastructure Devt Transfer & Titling IFC Investment Products … investments at different levels in the value chain given the risks Equity Mez Debt CAPITAL Development Stage MARKETS Finance PCG Senior Debt Senior Debt – STPCG MORTGAGE Construction Finance FINANCE CONSTRUCTION Mortgage Finance FINANCE REIT Corp Bond; ABS etc. Capital Markets Page 16 A Typical Deal: Prerequisites Requirements of the Deal: Transparency at all operational levels On-site full time and professional Project Management Clear Land and Property Titling Regime Strong Reputable Sponsors Adoption of Global Norms and Standards in corporate governance, financial reporting and accounting Adoption of Sustainable Environmental and Social Standards Page 17 Typical Deal Structure of a Large-Scale Housing Production Project Equity Side Debt Side 10 % to 50 % of total funding needs 50% to 70% of total funding needs Equity Partners: • Core Sponsor • Others to be decided (could inc. IFC) Banks: Major and mid-size banks to share risk and gain experience in Construction Finance Upfront Costs: • Land • Soft costs • Portion of infrastructure works • Government permits • Initial construction phase Capital Markets: SPV issues MTN w/tranches and rollover provisions, in local currency, variable rate, IFC partial guarantee Page 18 Case Study 1 – ARECO - South Africa • Sponsor Investment Committee DEVCO • • • IFC Other Investors OTHER INVESTORS P r o p • SPV1 Equity Investment SPV2 • SPV3 • • • C o SPV4 Devco is a pure property development company, likely set up as a JV between Sponsors other developer(s). IFC may take a stake in Devco It acts as developer of both commercial and residential properties Execution of development only, obtaining fees for development services rendered Property management fees are earned for management of completed properties, whether sold or held. Portfolio of residential and commercial properties Developed by Devco Some properties sold off to Propco (example: SPV4), or to other investment vehicles Other Properties retained because they are judged to not yet have matured or attained maximum valuation SPV5 • • PROPCO • • Page 19 Propco is a portfolo company of Sponsor, plus other potential investors It holds for long-term investment a portfolio of developed properties, many developed by Devco, some developed by other developers. Devco originated properties are sold to Propco on an arm’s length, full valuation basis IFC will not be a shareholder in Propco Case Study – GRDC, Georgia Project Description Sponsor & Management • Capitalization of vertically-integrated real estate company in Georgia to finance the development of its portfolio of 18 properties • IFC invited to join Round # 3 of equity financing and provide debt facility on a project basis. • Local sponsors – • International sponsors – individuals and institutional • Strong management team – Solid execution capacity and local market experience IFC Investment • Equity Investment: up to 20% • Debt Investment: Total equity and Debt of Up to 35% of Project cost Risks & Issues • • • • Valuation Investing in a land bank Constructions Loans, a new area for IFC? Implementation risk Page 20 Case Study – GRDC, Georgia Equity Investment at Holding Level Valuation - Methodology - Negotiation Debt Investment at Project/SPV Level Exit - Sunset/Liquidation -IPO or Sale Cash Flow Analysis Security & Covenants (incl. DSCR, DSRA, etc.) Monitoring and Supervision Financial Return Page 21 Property/Construction Finance: TUHF Multi-Family IFC International Finance Market TUHF Credit Line Mortgages Rent Contracts Owners Page 22 Renters Before and After TUHF Financing Page 23 CONCLUDING REMARKS Attractive Investment Opportunity – for both local and foreign investors Opportunity Requires Institutional Approach – to attract capital and large scale projects RE Has Huge Development Impact Helps Develop Local Capital Markets Creates Sustainable Urban Environments Challenge Remains to Find Solutions to Address Affordable and Social Housing Needs Page 24