The housing market buying frenzy of 2020/2021 seems to be over but an uncertain long and short term real estate market has now taken over. The days of buyers closing on a house without even seeing it in person no longer exist, and many real estate markets are coming down from all time highs.
But this doesn’t mean that real estate companies are going into hibernation mode. In fact, there are plenty of opportunities for those who can make informed and strategic decisions.
By using FP&A software tools, real estate companies can gather all of the necessary data and create individual, informative plans of action to maximize efficiency and profits.
FP&A software will greatly improve the 3 most important financial aspects of real estate: Forecasting, Budgeting, and What-If scenarios.
Forecasting
Thanks to the multifaceted complexity of real estate, forecasting plays a critical role in every aspect of the business. Inflated lumber prices during the pandemic (directly tying into housing prices) caused prices to skyrocket.
During the large market selloff of the past 6 months, lumber fell as much as 63% causing great concern for a housing crash. But a recent 18% surge had analysts optimistically predicting a “soft landing” for real estate.
While the price of lumber is only one small aspect of the broad real estate market, this is a prime example of the complexity that needs to be taken into account in the fast paced changes of today.
The Fed raising interest rates (which directly affects mortgage rates), consumer sentiment, concerns about inflation, and long term economic outlooks are all aspects that real estate companies need to take into consideration before .
Forecasting includes both expected results from the company, as well as how outside scenarios (such as those mentioned above) will affect the company’s profit. Forecasting is an updated budget which takes into account the historical data along with market conditions and predicts the expected revenue of the company.
With an FP&A solution, real estate companies can easily compile all of the historical data from the company and the broader local and national markets and create the most realistic financial forecasts possible.
Budgeting
Budgeting details how the financial plan will be executed- whether on a month to month basis or annually. Depending on the type of budget (Incremental, Zero-based, Value proposition, etc.), real estate companies will update and change their budget more or less frequently.
Here too, FP&A solutions will greatly increase the speed and accuracy of budgeting, as FP&A solutions automate reports and budgets. These tools can save hundreds of work hours per month by reducing the amount of manual labor required for things such as the month end close while also increasing accuracy and reducing the amount of errors.
The correct individualized budget sets the tone for everything else in the finance department.
What-if Scenarios
In most industries, what-if scenarios are not the main focus of FP&A as there are many constants that only change in extreme circumstances, such as Covid-19 or sudden market shifts. For real estate, what-if scenarios are part of every day business.
Even in the best of times, consumer tendencies can change rather quickly. A slight change in mortgage rates or rising rents will shift preferences to different cities which then creates hot or cold markets. Changes in material costs or labor prices can push profits lower or higher as well.
By using FP&A software, real estate companies can upgrade the speed and accuracy of their what-if scenarios with standard or individualized dashboards and reports.
Case studies involving real estate companies using FP&A software
1) Montreal Mini Storage Using Datarails to automate the finance department and gain insights
Real estate companies come in many different forms and an increasingly popular one with high returns is self storage companies. Quebec’s largest privately owned self storage company, Montreal Mini Storage, started using FP&A software solution Datarails and received almost instant ROI.
After experiencing exponential growth, the company wanted something that can both automate manual financial work as well as help them dive deeper into financial insights and forecasts. Datarails does just that by reducing the amount of work that the operations team has to do as well as by consolidating financial statements that allows them to see trends that otherwise would take the company many hours to find. All in all, Montreal Mini Storage saves $300,000- $500,000 (CAD) per year from the benefits of Datarails.
2) A large REIT company using Riveron to re-evaluate and modernize its FP&A function
Another pop
ular form of real estate companies are Real Estate Investment Trusts (REITs). Being that 90% of its profits must go to shareholders through dividends in order to qualify as a REIT, these companies value profit and efficiency even more than others. The REIT company used FP&A software solution Onestream to modernize and automate their FP&A function and finance and technology business advisory firm Riveron to implement it.
The REIT company started seeing more organized and efficient results by using a platform that supports the entire office of the CFO, and even saw results from non-finance departments. The company has significantly reduced time to prepare, review and finalize annual budget and quarterly forecast. Management now has direct insight into the monthly close and reporting process, and end users can leverage a standardized tool to synthesize data and make more informed decisions quickly.