It is no secret now that cement companies regularly struggle to make ROI on invested funds (ROI) much more than their price of supplies (CP). (As the dynamics of this industry shift, savvy businesses are producing value by focusing on the micro-marketplaces where they can gain a competitive advantage.) But while any of this is certainly news to most investors, it doesn’t mean that cement is doomed to failure. There are four significant reasons why cement has been able to overcome these challenges and continue to be a strong competitor:
First, commercial real estate loans and commercial mortgages are both secured by concrete. In other words, cement companies create value in the form of long-term, fixed income. It is a sound business practice to build a solid financial base for any project. The more financial resources a company has accumulated, the better its ability to weather any crisis or volatile market dynamics.
Second, as competition wanes for any given project, it is more important than ever for a company with an existing pipeline to stay ahead of its competition. By providing an alternative to the current market (i.e., a higher price), a cement company can maintain a share of the pie even as its competition expands. And in an increasingly competitive environment, any piece of real estate owned can create value for its owner. Thus, a cement company can continue to grow even as competitors fail.
Third, a well-built micro-market presence creates a ready market for any given project. Simply put, a micro-market represents a subset of any given market. A cement company with multiple outlets is virtually guaranteed to create value for any investment in the secondary market. Investing in these multiple real estate types can demand that any given project becomes too saturated that selling it becomes a loss leader for investors.
Fourth, while many investors focus primarily on secondary market commercial real estate investments, those opportunities can become much less appealing as the economy changes. The current trend is that fewer people are buying homes in the suburbs and particular priced houses in the city. People are choosing to live closer to work, shopping, and other amenities. As a result, more people are demanding urban living, and the demand for urban condos will only increase as the economy improves. A good micro-market plan should recognize this shift in the market and target the correct locations to capitalize on this trend.
Fifth, companies can use their own money or leverage to create value in their cement company. Leveraging includes borrowing against the company’s equity to finance a purchase. This strategy can be beautiful to savvy investors experienced in flipping homes in the secondary market but not familiar with buying distressed properties. Investors can easily find companies that are selling well undervalue and distressed properties in distress by reviewing a company’s balance sheet, operating expenses, debt, and assets. By using financing to finance the acquisition, the company can add significant value without directly leveraging cash.
Sixth, investors have access to secondary market REO properties through “REO clubs” and often negotiate the purchase price much more efficiently than an individual investor. Unlike the private sector, where knowledge and skill are paramount, the primary focus of club members is to buy low and get out quickly. In the secondary market, this translates into buying soon, often at discounts to market value. Clubs also provide a forum where investors can discuss strategies and collaborate on deals. Many clubs also offer capital resources such as bonds, equity, and other investment vehicles with attractive terms. These resources are often not available to individual investors.
Seventh, the current foreclosure crisis has created great opportunities for small real estate investing companies. For many years, companies focused on foreclosures, and commercial real estate was too large to be successful. With the recent recession and the rise of foreclosed houses on the secondary market, a smaller group of companies focused on commercial properties that can significantly increase the value of properties for sale or rental. They can often acquire properties with little competition and leverage their size and resources through micromanaging operations to maximize profits and minimize losses.