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Many project developers and realestate holders are facing financial
difficulties in the real estate market.
The current state of the real estate
sector is concerning. Daily news
reports highlight the need to haltvarious major construction projects.
It’s about time for developers to takeaction by implementing measures
to preserve liquidity and ensure
their survival, while also establishing
structural reforms to stabilize andsecure capital serviceability.

In the current landscape, it‘s evident that it‘s notjust individual projects feeling the impact, but theentire spectrum of projects managed by developers.
High construction costs and rising interest rates
emerge as the predominant factors behind project
halts. According to research from the Munich-based
ifo Institute, a notable 11,9 percent of residential
construction companies surveyed are currently
grappling with financing challenges, marking thehighest figure in 30 years1. The situation is getting
worse as the industry‘s optimism in recent years
has exposed shortcomings in financial planning,
failing to account for either rising interest rates or
growing material costs. Declining prices also imply
that the development projects cannot be sold atconstruction costs.
Stakeholders, particularly capital providers likebanks and shareholders, need a realistic foundation
for decision making, to assess whether it makes
sense to provide project developers and realestate holders with the required liquidity or not.
This liquidity is crucial as it is vital to proceed withongoing projects as well as for the future viability.
Given the current overall economic situation,
the future doesn‘t promise clarity and stability.
On the contrary, there‘s significant uncertainty
regarding the trajectory of interest rates andconstruction costs. Moreover, pricing dynamics
within the current market environment preclude
the passing on of increased costs. Consequently,
a fundamental assessment of economic viability
is crucial when determining the next steps. The
following approaches provide the foundation for
informed decisionmaking, creating transparency for
all stakeholders, and ultimately, critically evaluating
existing business models.
1 Stornierungswelle im Wohnungsbau markiert neuen Höchststand© 2024 KPMG AG Wirtschaftsprüfungsgesellschaft, a corporation under German law and a member firm of the KPMG global organization of independent member firms affiliatedwith KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Transparency and scenario based financial
planning
Making decisions involves weighing alternatives
in terms of their respective meaningfulness andeconomic viability. In the current economic climate,creating transparency is more critical than ever. An
independent assessment of a company in the formof an Independent Business Review provides one
way to achieve this.
Specifically, this entails establishing anunderstanding of the initial circumstances,identifying deviations in past planning fromthe current reality, and attaining clarity on the
primary anticipated market trends. Following
this, it becomes crucial to evaluate the upcoming
challenges. Utilizing insights into the company‘scurrent economic position and its underlying drivers
enables proactive planning for the company‘s future
trajectory. Since future economic advancement
depends on multiple interconnected factors, it‘s
imperative not only to depend on a single financial
projection but also to create varying scenario-basedplanning assessments.
In practical terms, making informed decisions,particularly for stakeholders, requires financial
projections that incorporate various scenarios andassumptions. These projections account for diverse
risk profiles and capture market uncertainty throughdifferent premises, thereby determining the required
capital needs. As part of this process, the necessary
liquidity level is often evaluated across three distinct
scenarios in financial projections – Best Case, BaseCase, and Worst Case. By outlining the different
risk profiles in these scenarios, banks, for instance,
can gain a credible understanding of capitalrequirements for each scenario. Moreover, theseprojections transparently outline the underlying
assumptions in each scenario. While stress testingis a routine practice for banks, project developers
are still acclimating to this approach. Historically,
their planning has been shaped by a secure market
environment, lacking the comprehensive detail now
demanded by financiers.
Adjustment of the strategical focus
Currently, 61,4 percent of surveyed companies
report dissatisfaction with their businessconditions, as per a survey conducted by IWand ZIA2. Furthermore, the prevailing sentimentis pessimistic, with the majority of businesses
anticipating a significant downturn in the next

twelve months. Adjusting their strategic focus could
empower companies to diversify more effectively,
thereby mitigating risks. For project developers,
the adaptation of existing business models offers apathway, where developers may need to temporarily
assume property ownership to prevent forced sales.
Using property holders as an example, there exists
potential for future space repurposing to enhance
profitability and ensure liquidity, in collaboration withfinanciers.
Securing future viability through investment insustainability
In the coming years, businesses will face mountingpressure to meet ESG requirements, impacting
both their current property holdings and future
development projects. Within this framework,
it is imperative to strategize specific measures
aimed at achieving sustainability compliance.
Integrating ESG principles into the real estate sector
commences with a thorough understanding of thepresent situation and the formulation of tailored
ESG objectives. Building upon this groundwork, thenecessary investment to implement sustainable
practices can be accurately determined. Given
the enduring nature of real estate investments,
the planning process should be initiated as earlyas possible. Sustainable buildings are increasingly
demanded not only by tenants but also by investors,
highlighting the importance of investing insustainability to ensure future market attractivenessand maintain creditworthiness.
Complying with sustainability standards involves
making investments that require additional liquidity.
Within the framework of evolving strategic
direction, it is imperative to systematically assess
future capital requirements, which may be partiallyneglected in current financing arrangements due
to ESG factors. Early recognition of forthcoming
megatrends (such as ESG, declining demand,demographic shifts) and their implications provides
an opportunity to promptly identify actionable steps
and capitalize on strategic opportunities.
In combination with the current market conditions,
ESG requirements typically entail additional
financing needs. Amid regulatory and financial
challenges, planning and scenario analysis maylead to prioritizing and/or extending the timeline forcertain measures. This, in turn, carries implications
for the profitability and marketability of individualprojects.

2 Projektentwickler erleiden Stimmungseinbruch (iwkoeln.de)© 2024 KPMG AG Wirtschaftsprüfungsgesellschaft, a corporation under German law and a member firm of the KPMG global organization of independent member firms affiliatedwith KPMG International Limited, a private English company limited by guarantee. All rights reserved.

SummaryThe current landscape of challenges calls for a proactive and timely examination of both present
circumstances and future prospects to secure a company’s survival. Transparency regarding boththe current state and future outlook of the company is fundamental to initiating any course of action.
Subsequently, potential future scenarios are outlined through scenario-based financial projections.
Depending on the existing business model, it may be advisable to explore a new strategic direction
by aligning the business model accordingly. Concurrently, ensuring future sustainability should
consistently prioritize investments in sustainability.

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Contact
KPMG AG
WirtschaftsprüfungsgesellschaftPeter Wiegand
Partner
Deal Advisory,
Turnaround & Restructing

Dr. Kristin Kriemann
Senior Managerin,
Deal Advisory,Turnaround & Restructing

M +49 173 5764227
pwiegand@kpmg.com

M +49 171 5626241
kkriemann@kpmg.com

www.kpmg.de
www.kpmg.de/socialmedia

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