Over the past several months I have engaged extensively with residents, contractors, companies, clients, regulators and others on leveraging the long-term approach to creating value for owners of property within a residential development, while ensuring that the lifestyle they bought into is at the level of fair expectancy. There is nothing inherently wrong with returning capital to shareholders by means of lifestyle investments in a measured fashion, as part of a broader growth strategy. Indeed, it can be a vital part of a responsible strategy that protects the capital already invested with future return possibilities.
It is critical, however, to understand that management and the board have a duty of care and loyalty, not to every investor who owns property at any moment in time, but to the company and its long-term owners. Successfully fulfilling that duty requires that the board engage with a company’s long-term providers of capital, who are the residents. They must resist the pressure of short-term shareholders to extract value from the estate if it would compromise value creation for long-term owners and, most importantly, should clearly and effectively articulate their strategy for sustainable long-term growth.
A board of directors has a tough task in response to the acute pressure to meet short-term financial and lifestyle goals, without the expense of losing long-term value in an economy filled with uncertainty. This pressure originates from several sources including the proliferation of shareholders seeking immediate returns or savings on contributions, the ever-increasing velocity of capital, a media landscape defined by the 24/7 news cycle of political events, and public sentiment that often fails to encourage long-term investment if at the cost of immediate returns and enjoyment.
Some developments are faced with very real challenges. A decision must be made to invest some of the capital reserves into rejuvenation of facilities, or new facilities that add value to the lifestyle of those who invested in the principal vision of the estate. This requires careful consideration of several legal, financial, governance and other commercial problems in order to ensure that the capital invested truly delivers its desired outcome, and to keep the capital balance on a level where it could be rebuilt or be deemed sufficient for future requirements.
I will continue to focus on these and related issues, because I recognise that although much of the financial and business community agrees on the need for a long-term safety net, if what we are seeking to protect in the future does not include the benefits of a fully functioning estate, we will be protecting a lifestyle with little to offer the changing needs of future investors.
Many luxury residential developments find themselves outclassed or ill equipped in comparison to newer developments. This can lead to a sudden devaluation of property and an exit strategy by strong investors. Ensuring that a development stays abreast with trends and changing lifestyles is imperative. During periods where the strategy deviates from the long-term trajectory, uncertainty prevails. In such cases, the HOA must act to ensure that the owners’ interests are effectively served.
Asset managers like an HOA have a key role to play, which is why they must engage actively with companies on the key governance factors that support long-term, sustainable financial performance. Chief among these is board leadership and, in my view, the board is management’s first line of defence against short-term pressures, balancing what we want today versus what we might require in future.
As I am sure you recognise, the effects of the short-termist phenomenon can be troubling to those seeking to save themselves for prosperity. For those looking to survive to the next month while enjoying the spoils of their work, it is easier to adapt to change. In the face of these pressures, the lifestyle benefits associated with staying in a luxury estate become even more important. The lifestyle benefits of property and associated facilities become the only release in a very uncertain economic climate. To this degree, amongst the pressures to deliver these lifestyle facilities, a long-term approach must be used to ensure security in investment while at the same time being able to deliver those much needed lifestyle benefits. This is a difficult balancing act, to leverage benefits today against long-term security.
The fear of failure must not overshadow the very reality of what would happen if one does not act, and one should rather fear not acting. The latter has in history proven to be the downfall of many companies where the capital reserves have no value once the opportunity to shape the future has passed.
In summary, I must admit that neither the bank balance nor the lifestyle is the winner alone – they must co-exist, and be continually evaluated so as to ensure that one does not overshadow the other.