You’ve made the decision: a new market has to be conquered for export. You have clear signals that your home market is in decline and that the markets in Eastern Europe are starting to open up. In any case your mantra is: attack is the best form of defense.
Taking into account that you want to avoid the mistakes made by others, you look around for strong partners who are already present in those countries, act globally and have experience in the export market. At the same time you still have to solve the issue of finance, so you consider approaching the international banks, which are present everywhere.
Along those lines let me share with you an experience, which repeats itself like a long-running show at the theatre.
Mid 2005 the first signs of the end of the real state bubble could already be detected in the Spanish Real Estate Market. Some of the bigger players in the market realized quickly that looking towards new markets would be the right thing to do. Eastern Europe appeared underdeveloped and full of opportunities not to be missed. To make it short: quite a number of companies decided to go East and the best place, due to volume seemed to be Poland. They identified the banks as strong partners, for their ability to finance the projects and their Know-how in mortgage products, project finance and currency risk management. So far, so good.
Participating in the “Spanish Day” in Warsaw in 2007 – clearly before the Financial Crisis, you could already note the frustration and disappointment of the parties involved. In fact they had correctly identified the opportunities of the market, but ignored a series of fundamental (soft) facts, which led to a dance with disaster.
1. In Poland like everywhere you have to deal with human beings. Just writing big cheques won’t bring the success
2. The costs in Spain might be divided as 80% for land and 20% for construction, but nobody told them that in Poland the game goes the other way around. In other words:
Spanish Real estate developers spent too much money on acquiring land with nothing left for construction cost itself.
3. Real Estate projects follow other local rules, which means building approval of final projects depend on criteria like hours of sunshine entering the window!
4. The required quality of the construction work as well as differing weather conditions add some unexpected challenges.
5. Negotiations and cooperation often mean another big hurdle to be managed due to big cultural differences.
Talking to the bankers I got the feeling they weren’t really aware of these conditions and that they were selling credit instead of giving relevant information. They didn`t understand it would have been good to do so for their own sakes.
Having said that, I wrongly believed they would have learnt the lesson, but they simply drew the conclusion that Poland was the wrong market.
So we met the same players again in Romania and later in Ukraine, still not surrounding themselves with local specialists. To know that you know nothing seems to me the best way of learning, even if you do need quite a sense of modesty.
But maybe it’s me who is wrong and we are not talking about the construction sector, but simply about real estate speculation in which everybody enjoys participating?
This is intelligence at work, these insight is applicable in most exportcases but also in central organised governance and law! Food for thought!
An excellent post, Marc. I remember working in Belarus in the summer of 2008, implementing a due diligence on a large commercial real estate project in Minsk. After all the financial modelling was finished, we concluded that the project IRR was about 15%. Our client rejected this, saying that their IRR in Dubai was 50%. That was one month before Lehman folded and Dubai crashed. In our worse case model, we had run sensitivities based on a major market decline of about 20% in property values. This scenario materialised just 3-4 months later. http://www.navigator-consulting.com/projects/real-estate-investment-due-diligence/26
Muchas gracias por lo que aportas a tus lectores