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Financial engineers are responsible for creating derivative financial products aimed at enhancing a business’s performance while reducing or managing risk. The difficult business environment obtaining globally and in Zimbabwe calls for financial innovation which allows companies not only to survive but to grow and expand using underutilised assets which they may have such as real estate.
This strategy partly relies on similar awareness and collaboration between fund managers of institutions such as NSSA, Old Mutual, First Mutual, Pearl, Dawn, etc, and business leaders from the industrial sector collaborating to create new financial products and transactions that create mutually beneficial outcomes.

Other financial intermediaries have a crucial role to support the success of this effort to unlock liquidity and value.
Portfolio optimisation finds an investment strategy that best fits a fund manager’s financial goals and preferences.

Derivative securities, such as property/stock options, REITs and commodities futures, have play-offs that are related to the value of an underlying asset, such as a property, stock or a commodity.

Financial engineering helps to find the relationship between the derivative security’s price and that of the underlying asset.
These include equity, fixed income such as bonds, commodities such as oil or gold, as well as derivatives, swaps, futures, forwards, options, and embedded options.

Considering the current liquidity constraints on the Zimbabwe capital markets most industrial and manufacturing companies should consider sale and leaseback structures backed by options.

‘‘Sale and leaseback,’’ is a financial transaction, where a company sells an asset (property for example) and leases it back for the long term.
The company continues to be able to use the property but no longer owns it. By selling the property it would have raised capital and can reduce its borrowings and cost of funds plus create a more predictable and preferable cash flow.

The transaction works when fixed assets such as real estate, planes, cars, plant and equipment are involved.
In recent months some of Zimbabwe’s iconic firms David Whitehead and CAPS Holdings have been on the brink of collapse and closure despite owning significant real estate.

Obviously a financial engineering solution could have addressed some of the problems with management selling real estate to an institution such as NSSA thereby get cash and then rent the premises from the Authority.

Such a sale and lease back structure can be backed up by writing an option which would allow CAPS/David Whitehead an option to buy back the premises should their fortunes change.

Such pre-emptive actions will ensure that the two companies remain viable and avoid forced sale situations where creditors end up obtaining court orders to seize such property.

Specialist property firms such as Dawn Properties, Pearl and Mashonaland Holdings can play a leading role in injecting liquidity this way.
The industrial firm sells its corporate real estate assets to a specialist property firm or an institutional investor, or a real estate investment trust (REIT), and then leases the property back at a rental rate and lease term that is acceptable to the new investor/landlord.

The lease term and rental rate are based on the new investor’s required rate of return costs, the sellers credit rating, and cost of funds, based on the initial cash investment i.e. the purchase price paid by the new investor.

Advantages for such a company are varied. These include finance expansion and invest in new business opportunities, an opportunity to pay off debt and clean up the company’s balance sheet and a chance to improve the company’s business income tax position.
Additionally, the company as a tenant can deduct all rent payments as business expense on tax computations.

The advantages for an investor include acceptable return on the investment and ownership of a depreciable asset, long-term asset with guaranteed revenue.

The investor/landlord can also take an expense deduction for tax purposes. Since the financial engineering process utilises existing financial instruments and assets (property, bonds, shares and other financial instruments) to create a synthetic, an enhanced product with predictable risk and cash flow characteristics this means finance managers, accountants and financial advisors need to spend more time assessing what the company has and how it can be re-arranged to enhance the company’s financial position and improve share price and shareholder return.

The new and improved product created by the financial engineer is simply a repackage of several independent but complimentary products made available to ensure a company’s survival and growth.

Disclaimer
GMRI Real Estate is a Property holding division of GMRI Capital, which owns, manages, develops and leases out its own property. We do not act as Agents for the public or third parties.

This article is provided as is for informational purposes only as a public service, not intended for trading purposes or advice. Prior to execution of any Property/real estate trade, you are advised to consult your authorised financial advisor/real estate agent to verify the accuracy of all information. Neither GMRI Real Estate nor any independent provider is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.

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