Technical Due Diligence: Risk-proofing Realty

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Technical Due Diligence can play a crucial role in assessing the risks associated with new projects and retrofitting of old structures, thereby ensuring that all structures, new and old, are feasible and viable, and comply with environmental and social benchmarks of the new normal, says a Colliers report.

Indian real estate has seen massive growth over the years, with foreign and domestic institutional investors pumping in money into the burgeoning sector. In the last 5 years, real estate investments have been growing with
increased traction from global investors.

During 2017-2021, foreign capital flows in real estate jumped 3 times to USD24.0 billion, compared to the preceding five-year period. Real Estate Investment Trusts (REITs), introduced in the year 2019, too have
become an attractive alternate financial platform to raise funds for investors.

Over the last few years, regulatory reforms such as establishment of Real Estate Regulatory Authorities (RERA) in all States and implementation of the Goods & Services Tax (GST) have infused increased levels of
confidence amongst investors, giving a fillip to foreign investments.

As developers and investors venture into new geographies and asset classes, there is an increased demand for investigation into a real estate project across facets. Understanding associated risks and potential upsides of any prospective project has become pivotal to all stakeholders.

At such a stage, investors, developers and occupiers look for diligent investigation of properties, also known as Technical Due Diligence in real estate parlance. Challenges such as structural defects and statutory risks
can have financial implications on developers, while creating a trust deficit for occupiers and investors.

Technical Due Diligence provides a structured, in-depth evaluation of properties
by undertaking equipment health assessment and outlining critical risks and issues, ranging from compliance and costing to project monitoring on a timely basis. Technical Due Diligence of a property ensures that a property is developed as per prescribed norms at a time when there is increased focus
on aspects related to its environmental and social sustainability and implications for health and wellness. The process can start anywhere from the pre-construction stage till the final building assessment.

Since about 19% of grade A office stock across top six cities has become outdated (which means they are older than 15 years), stakeholders can also opt for Due Diligence for existing buildings, to ensure that the
building is in line with the changing expectations in the new normal.

Costs

The cost of conducting Due Diligence of a property is generally less than 0.3%* of the project cost (this is indicative, and depends on type of asset class, built-up area (BUA), location of project and scope). However, the benefits outweigh the costs incurred as it can save the stakeholder from substantial loss of
money, time and legal hassles.

Benefits

Investors
 Due Diligence would help investors take informed decisions and understand
future potential of the property in question.
 Statutory assessment would help identify opportunities and limitations of
investments.
 Assessment of the building’s health would help establish its future
development potential and the associated risks.
 Basically, Due Diligence would result in such baseline data as the extent of land, survey numbers and ownership.
 It would also help benchmark Environment & Social (E&S) factors for
future value appreciation.

Developers

 Detailed study would help determine the development feasibility and adequacy of the project.
 Design gap analysis with respect to building norms would help assess the
potential for development accurately.
 Detailed estimate on cost and scheduling with regular quality audits would lead to efficiency in overall life cycle of the project.

Occupiers

 Due Diligence would help potential occupiers negotiate a better deal.
 It would validate area specifications and density for occupier to optimise space.
 It would help occupiers take measures to mitigate risks in case business operations are impacted in the future.
 There would be a clearer estimation of future costs for repair and maintenance.

 It would help outline the impact in case of adverse weather calamities and see how best the project adheres to E&S parameters.

The new normal

Prior to the pandemic, Due Diligence was largely conducted to check regulatory and compliance issues. Moreover, the focus was on physical and statutory parameters. Such aspects were largely linked to the overall financials of the project, dealing mainly with investment required, construction costs,
profit projections and cost control.

After the pandemic, which caused a global economic and health crisis, investors, developers and occupiers have intensified their efforts to improve their management approaches towards Environment and Social (E&S) issues.
Stakeholders are looking to be more aligned towards aspects of E&S, especially to benchmark the current building performance against sustainability criteria since the way enterprises deal with their E&S issues can impact its valuation and long-term performance.

With changing expectations and increased focus on E&S compliance, Due Diligence experts have a massive opportunity in the market. Existing and upcoming commercial office buildings present an opportunity platter
for Due Diligence. Experts can look at aspects like retrofitting and upgrade of existing buildings and parameters such as buildability, statutory requirements and design adequacy for the upcoming projects.

Developers, investors and even occupiers can avail Due Diligence checks on under- construction buildings, from scheduling and costing to recommendations to mitigate anyfuture risk.

Huge stock waiting

Top six Indian cities (Bengaluru, Chennai, Delhi-NCR, Hyderabad, Mumbai, Pune) are seeing a strong pipeline of office buildings in the next 2-3 years, with about 180 million sq. ft. of Grade A office stock in various stages of
construction.
As office buildings get outdated, developers are looking to upgrade and retrofit them. Availing Due Diligence services can help firms understand the extent of upgrade required. The top six cities have Grade A office buildings of about 120 million sq. ft. that can be refurbished.