HOW REAL ESTATE COMPANIES CAN MODEL THEIR WAY TO ACCURATE CASH FLOW FORECASTING

Karen Clarke, Regional Vice President, Northern Europe, Anaplan

Cash flow forecasting is a major priority for CEOs and boards across large real estate companies. Unlike other industries, real estate is driven from the balance sheet and thus, business models are founded in highly orchestrated cash flow discipline. The total of a group’s “source & use” of funds determines its success in the long term. Real estate companies need to ensure that cash flow forecasts are managed with precision and that they have the right tools and support required for running a high-performance business.

A standard, and perhaps flawed approach in the industry, is to get carried away with the “boom and bust” cycles in a highly volatile economy. Decisions made today on capital businesses are likely to have impacts at least ten years down the line, so repeatedly modelling this actively and monitoring it’s projected success is critical.

A well-balanced strategy deploys simple but frequent monthly end-to-end sensitivity stress tests on individual and group cash flow forecasts.  What’s required is specialised teams that support the CEO; focused on the capability to perform these tests on existing capital outlays and cash positions into the future. A short-term liquidity crunch, a fall in commercial rental rates or utilisation, demographic stresses, a yield or long term slump in residential price-per-square-foot rates – all are simple examples of why it’s vital to run analysis from the bottom up. Significant operational models need to be integrated into a holistic model for the process to support the CEO with risk patterns over the long and short term.

Strategic support groups in property companies are still struggling to structure the processes needed for existing assets; leaving major parts of the business with risks on future assets and therefore future cash flows. This leaves a large gap that can be filled by converging multiple models across the operational part of the business. Across the board, there is a tremendous appetite to get the house in order and have end-to-end cash flow forecasts with a capability to do bottom up stress tests and sensitivity analysis on portfolio models.

However, many real estate companies are not taking steps to resolve this problem. While the appetite exists at the CFO and CEO level, there is a huge hole in actually understanding the risks and gaps here.

Cash flow forecast models from commercial, retail and residential must be allowed to run their own forecast models their way, while also being able to interconnect these at a group level, with the capability for sensitivity analysis and stress tests with more granularity. Even more important, they need to have the collaboration of all the leaders in these segments to contribute to their respective models to deliver the finite results. All in, this will provide the basic building blocks which can then drive us to prudent investment decisions and execute these using data. Here, the whole business runs on a single cash flow that can manage and quickly respond to any external or internal shocks in the business.

Real estate organisations need to build this capability, to support the CEO and business leaders in running the cash flow forecasts with insights into all operational parts of the business. This will help them to support an end-to-end process in turbulent times.

Karen Clarke, Regional Vice President, Northern Europe, Anaplan

Cash flow forecasting is a major priority for CEOs and boards across large real estate companies. Unlike other industries, real estate is driven from the balance sheet and thus, business models are founded in highly orchestrated cash flow discipline. The total of a group’s “source & use” of funds determines its success in the long term. Real estate companies need to ensure that cash flow forecasts are managed with precision and that they have the right tools and support required for running a high-performance business.

A standard, and perhaps flawed approach in the industry, is to get carried away with the “boom and bust” cycles in a highly volatile economy. Decisions made today on capital businesses are likely to have impacts at least ten years down the line, so repeatedly modelling this actively and monitoring it’s projected success is critical.

A well-balanced strategy deploys simple but frequent monthly end-to-end sensitivity stress tests on individual and group cash flow forecasts.  What’s required is specialised teams that support the CEO; focused on the capability to perform these tests on existing capital outlays and cash positions into the future. A short-term liquidity crunch, a fall in commercial rental rates or utilisation, demographic stresses, a yield or long term slump in residential price-per-square-foot rates – all are simple examples of why it’s vital to run analysis from the bottom up. Significant operational models need to be integrated into a holistic model for the process to support the CEO with risk patterns over the long and short term.

Strategic support groups in property companies are still struggling to structure the processes needed for existing assets; leaving major parts of the business with risks on future assets and therefore future cash flows. This leaves a large gap that can be filled by converging multiple models across the operational part of the business. Across the board, there is a tremendous appetite to get the house in order and have end-to-end cash flow forecasts with a capability to do bottom up stress tests and sensitivity analysis on portfolio models.

However, many real estate companies are not taking steps to resolve this problem. While the appetite exists at the CFO and CEO level, there is a huge hole in actually understanding the risks and gaps here.

Cash flow forecast models from commercial, retail and residential must be allowed to run their own forecast models their way, while also being able to interconnect these at a group level, with the capability for sensitivity analysis and stress tests with more granularity. Even more important, they need to have the collaboration of all the leaders in these segments to contribute to their respective models to deliver the finite results. All in, this will provide the basic building blocks which can then drive us to prudent investment decisions and execute these using data. Here, the whole business runs on a single cash flow that can manage and quickly respond to any external or internal shocks in the business.

Real estate organisations need to build this capability, to support the CEO and business leaders in running the cash flow forecasts with insights into all operational parts of the business. This will help them to support an end-to-end process in turbulent times.