Expo Real: Financial Challenges Facing Real Estate Transactions 2016

10. November 2015

The European real estate market has not been looking as healthy as 2015 for almost a decade. In this landscape, Germany and UK are the strongest markets. However, a recent study shows that profits could be much higher if efficiency was improved.

As the Fair Expo Real opened its doors this year in Munich, participants seemed pretty excited about the last quarter’s results in the market. The volume of transactions increases, cross-border deals flourish, and the future just looks brighter than ever. This year again, Drooms commissioned a study aiming at a better understanding of real estate transactions. 100 professionals have been asked their opinion about due diligence processes with a focus on what can still be improved. A call to more efficiency does not sound hype? The numbers suggest it should: more efficiency can generate stellar earnings, and Drooms’ study provides the numbers to prove it.

Up to € 500 Million Wasted Every Year

Only 16 percent of the respondents define real estate transactions as “very efficient”. The majority (55%) believes that inefficiency in due diligence causes a loss of at least € 500 million every year*. The 29 percent points out that the loss could be as twice as big, i.e. more than one billion per year. Respondents claim that this waste of resources results from the combination of two main factors: handling the pressure coming from shareholders in the transaction and the lack of structure in the due diligence data rooms.

The first factor has to do with time and costs management. “The financial pressure impending on transactions is increasing. To ensure maximum revenue, it is critical that all participants in the deal create a synergy”, declares a portfolio manager whose everyday life consists in calculating risks and profits on behalf of his clients. Like him, 77 percent of our respondents sense this increasing pressure towards reducing costs. Such a pressure facing members of a due diligence, rises the need of speeding up processes by making them more efficient.

The second factor is having the wrong technology. Among the reasons for inefficiency are the so-called “time wasters” inside the data room, such as waiting for lacking documents (36%), searching for documents in the data room (26%) and the slow uploading of documents (15%).

Easier Life and Higher Revenue

85 percent of the respondents believe that there is a ground for improvement in transactions. The documents needed for a due diligence are more or less always the same. For instance, if huge due diligence transactions are indexed differently every time, shareholders will only feel confused and will eventually be missing documents. To this extent, developing standards is absolutely necessary to keep the process clear and self-explanatory. “With the gif data room index for real estate, Germany is pioneering”, comments Jan Hoffmeister, managing director of Drooms who advocates for more efficiency through standardizing. No more time will be wasted looking for the right index point, resulting in better motivation on the shareholders’ side.

As Confucius said: “Success depends upon previous preparation, and without such preparation there is sure to be failure”. In matters of being prepared, is there anything better than an index that organizes everything on your behalf?

*Last year’s predictions assessed losses up to € 300 million, confirming a raising trend of inefficiency.