Liquidity planning for property developers and entrepreneurs

After years of zero interest rates and record-high asset prices, the wind has changed for property developers and investors.

Ongoing, rolling liquidity planning is absolutely crucial for property companies in the current environment. In the following article, we outline possible strategies and approaches.

Interest rate volatility and economic uncertainty characterise the current environment

The financing of property projects is currently facing complex challenges that are affecting the entire industry. Market fluctuations, particularly with the recent interest rate increases and ongoing economic uncertainty, pose considerable risks for the financing of property projects. Many portfolios have had to be revalued in the past twelve months, which in some cases has led to drastic valuation adjustments.

The European Central Bank (ECB) has also recognised systemic risks and imposed higher capital requirements on commercial banks, which they in turn have to enforce against institutional property investors. As a result, many property investors are finding themselves in an increasingly difficult environment for refinancing outstanding loans, while portfolio values are falling at the same time. The most prominent victim of this changed refinancing environment was probably René Benko’s Signa Holding.

Project developers are faced with the additional challenge that capital is no longer as loose on the buyer side as it once was during the 0% interest rate era. This can lead to delays in the sale of properties under construction, which can put additional pressure on the liquidity of property developers.

Multi-project management as a challenge

The cash flows of property developers are complex because they pass through a wide variety of phases; from the initial planning and project studies, to the purchase of land, obtaining the necessary permits and approvals, the actual construction phase and the sale or rental of the completed properties. Each phase generates its own income and expenditure streams in addition to financing requirements that need to be managed and planned.

CFOs at institutional property investors and asset managers are faced with the additional challenge of being responsible for several projects in different phases at the same time. Depending on the structure, these projects are often strictly separated on a legal basis, but frequently there can also be cross-financing situations within the portfolio.

It is absolutely crucial to plan the cash flow properly at project, legal entity and group level.

Liquidity planning: this is how property developers proceed

In order to plan liquidity adequately, it is first necessary to take a thorough inventory of the current financial situation; this forms the basis for any liquidity planning.

• Current cash holdings: The first step is to assess how many liquid funds and short-term realisable assets are in the possession of the company or group.
• Outstanding customer invoices: The second step is to gain an overview of outstanding customer invoices (debtors): how long have they been outstanding, who is behind them, what are the outstanding amounts? Are there any invoices that are at risk of default or should not be included in short-term liquidity planning for other reasons?
• Outstanding vendor invoices and short-term liabilities: How much is owed to whom and at what time? This includes open supplier invoices (creditors) on the one hand, but also salaries, management fees and obligations from concluded credit agreements on the other.
• Loans: Are there any open credit lines that can still be utilised? What are the possible covenants for these and what costs in the form of interest and fees would result from utilising them? Are loans that have already been granted also linked to covenants and, if so, can these be honoured? What would be the (financial) consequences of non-compliance?
• Rental income: How high is the portfolio’s rental income, how long do the rental agreements have left to run, and how solvent are the tenants behind them?
• Investments and running costs: How high are the monthly running costs, and are there any planned investments that require additional liquidity?
• Development projects: For property developers, there are additional cash flows as a result of investments, but possibly also income from (partial) sales. These must be clearly itemised.

Once this overview of the initial situation has been established, the next step is to map the compiled values in a clear liquidity plan.

Ideally, liquidity planning should be carried out on a rolling basis over a time horizon of 6 to 18 months.

It is advisable to think in terms of various scenarios, particularly in the case of factors associated with uncertainty, such as additional costs due to rising interest rates, unscheduled loan repayments as a result of covenant breaches or project delays.

Excel or specialised software for liquidity planning?

Most property entrepreneurs still use Excel to plan their liquidity. At first glance, the spreadsheets also fulfil their purpose: they allow a high degree of flexibility when mapping different scenarios and input factors.

With liquidity planning in Excel, the following problems usually occur at some point:

Liquidity planning in Excel is prone to errors. Data is entered incorrectly, cell links get mixed up as versioning progresses and formulae fail to run.

Liquidity planning in Excel is rarely based on live data. Financial data is not automatically updated in Excel. This means that valuable time is lost updating bank balances, outstanding invoices and short-term obligations.

The problem with versioning: multiple versions of the same Excel sheet often lead to chaos, especially if several people are working on the same sheet together. With cloud-based files or Google Sheets, this is partially mitigated – but coordination is still tedious.

Excel does not scale. The larger an organisation becomes, the more complex the Excel sheets, which form the “data backbone”, so to speak, usually become. What’s more, there are usually few people in the organisation other than the creator of the sheet who can really maintain it in the long term.

Multi-entity and multi-project setups are very difficult to map. Most property entrepreneurs have several projects at different stages and with different cash flow structures. Mapping this in Excel is very time-consuming and complex.

And last but not least: Mapping different scenarios (WHAT IF considerations) is almost impossible in Excel, depending on the structure of the sheet.

How Tresio supports property developers with liquidity planning

Modern software solutions such as TRESIO provide a remedy. TRESIO comes from the SME sector and already serves around 1,000 organisations in Switzerland, Europe and the USA. In the meantime, the Swiss start-up has made a name for itself in particular for liquidity planning in small to medium-sized corporate groups and family offices / asset managers with property exposure.

The starting point in TRESIO is the centralised management of bank accounts. Thanks to the multibanking view, cash holdings are displayed on a daily basis, broken down by entity and currency. If required, an additional breakdown to property and project level is possible – holdings can be mapped to a depth of up to 9 levels.

For short-term liquidity planning, the open invoices (debtors and creditors open item list, OP) are also included. These are imported into TRESIO either via direct interfaces from the ERP, via (S)FTP server or via Excel / CSV upload.

Obligations from loan agreements are mapped via the loan module. This supports the management of loan conditions and the monitoring of interest and amortisation payments.

A wide range of options are available for creating this planning data to map current costs. These supplement the short-term income and liabilities that come from the data points described above.

Thanks to its rolling nature, TRESIO provides a constantly updated liquidity cockpit. Alternative scenarios and WHAT-IF simulations are generated at the touch of a button and conveniently shared – either as an Excel download or via read-only access rights.

How time-consuming is the introduction of TRESIO?

Thanks to the modern and modular architecture of our system, the introduction of TRESIO takes only a few weeks, as opposed to the multiple month’s of integration you may have experienced with legacy treasury systems.

We typically proceed as follows:

1. We get to know each other in a non-binding initial meeting, usually online. You tell us more about your organisation and its requirements and needs, and we give you an initial overview of TRESIO. 30 minutes is enough for an initial overview.
2. If you are interested, you can then send us an overview of the banks to be connected and any ERP systems. We will check for you how these can be connected to TRESIO. This clarification is usually free of charge for you.
3. In a follow-up meeting, usually just one week after the initial contact, we will show you how we can map your existing banking and system landscape in TRESIO. We may require a few additional clarifications at this stage, depending on our findings, but very often we can already give you an initial cost estimate or even a binding offer at this meeting.
4. The next step is implementation. Our team will help you coordinate with the banks and, if necessary, with the ERP providers.
5. If you still require minor customisations to the system, our diligent development team will also get to work now. However, we can also map many cases with the existing standard software – let us surprise you!
6. The introduction takes around 1 to 3 months. For Swiss banks and banks in neighbouring countries, 1 month is often enough; for banks overseas or smaller private banks, we are probably closer to 3 months.
7. After that, you’re ready to go. Our Customer Success Team will still be happy to help you.

We would be very happy to evaluate the possibilities for your organisation.

If you are still using Excel today, there are considerable efficiency gains to be made.

If you already have a treasury solution in place, we would be happy to examine the potential for optimisation and savings.