Capital markets re-think strategies to manage political risk in property investment

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By Tom Ahern
Senior Vice President, The Saint Consulting Group

house-of-cardsGo to a local zoning board meeting on any given Tuesday night and you are bound the see the following: lawyers, lots of lawyers, usually in suits and not exactly looking like the general citizenry of the town or hamlet. There will also be developers and their assorted consultants — traffic engineers, landscape architects, environmental engineers. But look again, and now you may also see a representative from the investment firms that source capital for these projects.

When investment firms, private equity or hedge funds, banks and other instruments of capital invest in real estate development, they enter the uncertain world of land use politics. Developers routinely hire land planners, engineers and lawyers to contain their risks and protect their investment as they seek the public approvals and permits necessary to build. But who is protecting the interests of the capital investors as local politics are injected into the debate?

An interesting dynamic is shifting the way these sources of debt and equity approach local politics.

The goal for many is to simply better manage the risk that comes with investing in real estate development projects. Now, it matters not whether the investment is made in a wind farm, a hospital, a copper mine or a traditional retail power center.

In the past, investment firms would simply provide the capital and step back and wait for the developers to complete the project. A little hoping and praying would go into the waiting period, but rarely, if ever, did the source of capital inject themselves into the local permitting and approvals process. That is changing, both as a result of the recent economic downturn and of the responsibility of investment firms to ensure better returns for fund investors.

So, how can a private equity firm with hundreds of millions of dollars (or euros or British pounds) invested in multiple projects around the US or the UK better manage the political risks? First, by getting a top to bottom scope review of the political realities of the community. The investor who best understands the true timeline of a local approvals process can better manage the flow of capital needed for the project.

Political risk comes not only from the uncertainty of the local elected officials, but also from local activists and citizens who may step forward to oppose the project. We have seen cases where a small group of committed citizens is able to hold up a development project for years — freezing capital and putting in jeopardy the assumed return on investment to the fund investors. Managing risk also comes from understanding how to build support for the project, a job that used to be the exclusive interest of the developer. No longer.

Scoping a project before it begins is just the first step for investment firms in managing the political risks of development. No longer are many in the investment community sitting back and trusting that the developer or their consultants will deliver the project on time and on budget. They are engaging their own team of consultants to build local support, to manage the local political environment and increase the likelihood of a smooth approvals process.

A recent conversation with an investment fund manager confirmed this new focus for those writing the checks — they simply cannot afford to have million of dollars tied up in projects that, despite the best efforts of the local development team, stand little or no chance of getting approved and built in a reasonable amount of time.

Tom Ahern is senior vice president for capital markets and health care, The Saint Consulting Group, email: phone 781 836-4343

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