A strategic turnaround model for distressed properties

Abstract

The importance of commercial real estate is clearly shown by the role it plays, worldwide, in the sustainability of economic activities, with a substantial global impact when measured in monetary terms. This study responds to an important gap in the built environment and turnaround literature relating to the likelihood of a successful distressed commercial property financial recovery. The present research effort addressed the absence of empirical evidence by identifying a number of important factors that influence the likelihood of a successful distressed, commercial property financial recovery. Once the important factors that increase the likelihood of recovery have been determined, the results can be used as a basis for turnaround strategies concerning property investors who invest in distressed opportunities. A theoretical turnaround model concerning properties in distress, would be of interest to ‘opportunistic investing’ yield-hungry investors targeting real estate transactions involving ‘turnaround’ potential. Against this background, the main research problem investigated in the present research effort was as follows: Determine the important factors that would increase the likelihood of a successful distressed commercial property financial recovery. A proposed theoretical model was constructed and empirically tested through a questionnaire distributed physically and electronically to a sample of real estate practitioners from across the globe, and who had all been involved, directly or indirectly, with reviving distressed properties. An explanation was provided to respondents of how the questionnaire was developed and how it would be administered. The demographic information pertaining to the 391 respondents was analysed and summarised. The statistical analysis performed to ensure the validity and reliability of the results, was explained to respondents, together with a detailed description of the covariance structural equation modelling method used to verify the proposed theoretical conceptual model. vi The independent variables of the present research effort comprised; Obsolescence Identification, Capital Improvements Feasibility, Tenant Mix, Triple Net Leases, Concessions, Property Management, Contracts, Business Analysis, Debt Renegotiation, Cost-Cutting, Market Analysis, Strategic Planning and Demography, while the dependent variable was The Perceived Likelihood of a Distressed Commercial Property Financial Recovery. After analysis of the findings, a revised model was then proposed and assessed. Both validity and reliability were assessed and resulted in the following factors that potentially influence the dependent variables; Strategy, Concessions, Tenant Mix, Debt Restructuring, Demography, Analyse Alternatives, Capital Improvements Feasibility, Property Management and Net Leases while, after analysis, the dependent variable was replaced by two dependent variables; The Likelihood of a Distressed Property Turnaround and The Likelihood of a Distressed Property Financial Recovery. The results showed that Strategy (comprising of items from Strategic Planning, Business Analysis, Obsolescence Identification and Property Management) and Concessions (comprising of items from Concessions and Triple Net Leases) had a positive influence on both the dependent variables. Property Management (comprising of items from Business Analysis, Property Management, Capital Improvements Feasibility and Tenant Mix) had a positive influence on Financial Turnaround variable while Capital Improvements Feasibility (comprising of items from Capital Improvements Feasibility, Obsolescence Identification and Property Management) had a negative influence on both. Demography (comprising of items only from Demography) had a negative influence on the Financial Recovery variable. The balance of the relationships were depicted as non-significant. The present research effort presents important actions that can be used to influence the turnaround and recovery of distressed real estate. The literature had indicated reasons to recover distressed properties as having wide-ranging economic consequences for the broader communities and the countries in which they reside. The turnaround of distressed properties will not only present financial rewards for opportunistic investors but will have positive effects on the greater community and economy and, thus, social and economic stability. Vii With the emergence of the COVID-19 pandemic crisis, issues with climate change and sustainability, global demographic shifts, changing user requirements, shifts in technology, the threat of obsolescence, urbanisation, globalisation, geo-political tensions, shifting global order, new trends and different generational expectations, it is becoming more apparent that the threat of distressed, abandoned and derelict properties is here to stay, and which will present future opportunities for turnaround, distressed property owners, as well as future worries for urban authorities and municipalities dealing with urban decay. The study concluded with an examination of the perceived limitations of the study as well as presenting a comprehensive range of suggestions for further research.Thesis (PhD) -- Faculty of Engineering, Built Environment and Information Technology, School of the built Environment, 202