The plan put to the test
A real estate purchase is one of the most thoroughly prepared decisions in asset management. For weeks, rents are questioned, investments are calculated and development scenarios are calculated. Every assumption must be plausible before an investment is released. However, this work does not end with the closing. It changes its character. Forecasts become reality. Some assumptions are confirmed, others come under pressure after just a few months. Suddenly, the question no longer arises as to whether the business plan was convincing. The decisive factor is whether it still explains what is actually happening in the portfolio. This shows whether it fulfils its purpose. With the closing, the business plan loses its role as a basis for decision-making. From this point on, it becomes the benchmark for managing the investment.
Assumptions have no expiration date
No asset manager expects a business plan to be fulfilled point by point. Nevertheless, deviations are often treated as if they had refuted the original plan.
A business plan is not intended to predict the future. It describes the conditions under which an investment appears economically viable. Letting, financing or investments are based on assumptions that are plausible at the time of the investment decision. They cannot do more.
Renting out later than expected changes this initial situation, as does rising construction costs or a different interest rate environment. None of these developments automatically makes the business plan worthless. It first changes the economic framework under which the investment is assessed. It is therefore crucial to take a different look at the business plan. It is not its accuracy that is decisive. The moment when an assumption changes becomes interesting. Only then does it become clear what economic consequences arise from it.
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Not every number tells the same story
Many reports end where the actual work begins. They contrast the plan with reality, identify deviations and thus conclude the process. This creates transparency. However, this does not in itself create a basis for control. A business plan does not consist of equally important assumptions. Some hardly influence the economic success of an investment. Others shift the entire business case. In reporting, both are initially treated equally. Economically, they often have completely different weights. The size of a deviation alone therefore says little. Only its economic effect makes it relevant. Those who look exclusively at differences recognize changes. Those who understand their consequences create the basis for better decisions.
Sensitivities make priorities visible
Two business plans can look almost identical at first glance. Both calculate with full occupancy after two years. Both assume the same rent development. Both achieve the targeted return. The difference only becomes apparent when individual assumptions begin to falter. If the lease is postponed by six months, this hardly changes the economic course of the first investment. In the case of the second property, the calculation immediately comes under pressure because follow-up financing falls exactly within this period. The same deviation leads to completely different consequences. The situation is similar with construction costs. Five percent additional costs remain without noticeable effects for one property. For another, the financial leeway shrinks so significantly that planned measures have to be reassessed. Sensitivity analyses make these differences visible. They do not show what development will occur. They reveal which assumptions an investment can react to calmly – and which have a much greater influence on economic success than the business plan initially suggests.
Act early instead of correcting later
The crucial work is only just beginning. After all, not a single decision follows from the realization of which assumptions have a particularly strong influence on the economic success of an investment. Asset management has to make them. Let’s assume that a rental is delayed by six months. The business plan provided that the additional rental income would stabilize the cash flow as early as the third quarter. Now this point in time is being postponed. At the same time, an energy-efficient modernization with an investment volume of 2.5 million euros is scheduled for the fourth quarter.
Now asset management begins. Which measures are legally or technically mandatory? Which can be postponed by a few months without affecting the value of the property? Is the existing liquidity sufficient or does the investment plan need to be adjusted? The business plan does not provide an answer to this. It only shows where a new decision needs to be made.
Even crises become part of the calculation
The example of delayed letting concerns a single property. The challenge becomes even greater when the economic conditions for the entire market change within a short period of time. The outbreak of the Ukraine war marked such a turning point in 2022. Within a few months, energy prices and construction costs skyrocketed. At the same time, the European Central Bank initiated the fastest turnaround in interest rates in its history. Follow-up financing became more expensive, and investment calculations had to be revalued. The consequence continues to have an impact today. Business plans no longer only reflect the most likely course of an investment. They are also increasingly taking crisis and stress scenarios into account. Banks are paying more attention to refinancing capacity, liquidity reserves and reliable scenario analyses when it comes to financing. These additional requirements are designed to support responsible management. After all, not every crisis can be predicted. This makes it all the more important to know how resilient an investment will remain if the unexpected occurs, even before making an investment decision.
The business plan remains a working tool
Today, a business plan must not only show the conditions under which an investment is successful. It must also show how resilient it remains when the framework conditions change unexpectedly. Nevertheless, every plan remains a snapshot. Even the best business plan cannot predict whether a major tenant will unexpectedly file for bankruptcy, an approval process will be delayed by months, or geopolitical events will fundamentally change financing costs within a short period of time. The more detailed business plans become and the more scenarios they take into account, the greater the temptation to understand them as a complete answer to the future. But they are not. They represent the best possible level of knowledge at the time of an investment decision. From this moment on, their real test begins: in comparison with reality.
