Full steam ahead or time to test the waters with a project WOF?
While one of life’s great constants is change; change in itself doesn’t immediately equate to a negative effect. Don’t worry, this isn’t where we tell you to ‘pivot’. What we will say, however, is in the property market there is a direct correlation between change and risk management, or at least there should be if you’re trying to make the proverbial lemonade.
Despite the current challenges, we would consider property to be a comparatively lucky sector in the post-Covid climate. That being said, we have seen unprecedented changes to the factors that traditionally influence our market and we face significant uncertainty in the months and years ahead. The fact that so few expert commentators are willing to try to predict market trends should be a cue to all that it’s simply smart business to recognise the situation we find ourselves in and take the necessary steps to reassess the risks and reset. At Greenstone, we are actively recommending to our clients/or doing, Project Warrant of Fitness’s.
Greenstone Group focuses on items like feasibilities, contracts, procurement strategies and project structures as a matter of course. All are linked and play their part toward the whole. What we are finding in most instances is that material changes to pre-covid arrangements do exist and need to be managed to counter negative effects and support positive outcomes.
We have encountered some defensiveness towards WOFs and peer reviews. We do accept the common sentiment that it is easier to critique than it is to create, most of us at some level do fear critique – it’s an understandable human reaction. But it’s that fear of criticism that can hold back innovative progress. There is significant value during challenging times in laying everything bare and letting objective independent eyes scrutinise and apply some sensitivity testing. This doesn’t have to be threatening. If it discovers nothing, it’s an affirmation of pure genius, however, like with any WOF, there is more often preventative work that can be done to optimise performance and the likelihood of successful project outcomes.
A project WOF or peer review is a prudent investment in our current market
Uncovering errors and dangerous assumptions, and highlighting opportunities, is where the gold lies. In turn, this provides a more informed platform to adjust for success. A project WOF or peer review is a prudent investment in our current market. There’s no need to fear the thwack of rubber gloves; a trusted advisor will handle the process in a professional manner.
Some of our clients do this periodically in their project cycles, either as good practice or to tick the required boxes for boards and financiers. It may not be the silver bullet for a complete stuff up but the underlying point is that, in our experience, the exercise can yield tangible value, especially when market correction can’t be relied upon to highlight or mitigate the effects of decisions made in an environment and context that has subsequently changed.
A project WOF is not a 12-step programme – it includes continuous monitoring and reviewing the current property climate and influences. Reflecting on what recent events have served us up, the factors that have current influence on most property projects and that should be acknowledged include:
- corporate casualties, funding restrictions and retraction in pipeline;
- more challenging work environments on the ground;
- people and IP moving around our industry, both by design and by circumstances;
- changes in corporate governance, risk appetite and in measures of success;
- changes in legislation, regulatory structures and consent servicing;
- changes in utility network operator’s capital position;
- changes to manufacturing, supply lines and logistics both locally and internationally;
- changes to global markets and investment profiles;
- changes to interest rates and lending requirements; and
- land values in a state of flux.
Further, the influences of immigration and foreign investment will likely be increasingly material as kiwis come home due to lost offshore jobs or now unsustainable lifestyles abroad.
On a national front, supply constraints still remain and we haven’t yet seen the sub-contractor adjustment that is required to support competitive build rates at a domestic level, central government is attempting to bring new stimulation initiatives to the market (or at least trying to repackage some stalled ones), and we have a looming general election which will have some economic effect regardless of the outcome.
At the local government level, some regions have been financially exposed and their local authorities will need to consolidate operations and increase rates rather than support and stimulate their local economies.
Looking beyond our borders at the world stage, there is mayhem with some countries still coming to grips with virus management while others are exercising opportunism in territory disputes and general muscle flexing. We also seem to have forgotten about the environment again.
From where we sit, we aren’t seeing the extent of distressed projects that we expected to see at this point in the cycle and we are seeing some positive activity in the market.
It is unlikely that we have seen the extent of the dip in all sectors and question marks remain as to how well we are insulated from international events. From where we sit, we aren’t seeing the extent of distressed projects that we expected to see at this point in the cycle and we are seeing some positive activity in some markets. This gives us optimism, especially when paired with things like population growth, investment demand, low interest rates and new markets emerging.
Our landscape has changed, and it is dangerous to keep doing things the same way. It’s now more important than ever to clinically scrutinise both revenue and expense lines for projects, when targeting risks and opportunities. We are not always seeing single factors impacting projects; adjustments in the margins can add up to be substantial.
It is likely that project success moving forward will require a more clinical approach in the short to medium term at least to planning, risk management and execution. If one or more of these factors could have an influence on the metrics of your development proposal or project, I would suggest that it is time to pause and take stock (if you haven’t already done so); challenge yourself honestly and model adjustment scenarios.
At Greenstone Group, advisory and risk management is our game. We have quality market intelligence and the added benefit of multiple sector experience. Our motivation is to keep developments off the distressed project pile. We are happy to confidentially help support clients in understanding their net position, key risks, possible moves and implications.
Get in contact with one of our Property Advisors today.