New research highlights growing focus on due diligence in real estate transactions
16. November 2017
- Three quarters (73%) of real estate investment professionals believe focus on due diligence will grow further in the next 12 months
- Rise in focus driven by increasing deal costs (cited by 75% of respondents) and inherited tax risk and other liabilities (50%)
- Half of respondents believe investors compromise on the quality of their due diligence in their rush to complete deals quickly
- Two thirds (68%) of respondents said technological development of automated document analysis software will bring the biggest benefits to real estate due diligence
- Drooms launches NXG Findings Manager to help speed up the due diligence process in real estate transactions
London – The increasing complexity and size of real estate transactions is putting more emphasis on the need for due diligence in M&A activity, finds new research from Drooms, the leading provider of virtual data rooms in Europe. Three quarters (73%) of real estate professionals said that the focus on due diligence would grow still further in the year ahead, driven by factors such as increasing deal costs (cited by 75% of respondents) and inherited tax risk and other liabilities (50%).
Respondents believe that many factors are in danger of being overlooked or underestimated in real estate purchases. These include tax issues relating to cross border transactions (mentioned by 50% of respondents), how a structure of a deal will impact an ultimate exit (46%), legacy liabilities from prior owners’ legal and regulatory violations (35%) and regulatory issues when structuring cross border and domestic deals (27%).
Building on this, respondents report that there are a number of document types that are difficult to access when performing due diligence during a real estate transaction. Notably, they include environmental and sustainability compliance with current and planned regulations, mentioned by 56% of investment professionals surveyed for the study.
This has led some investors to compromise on the quality of their due diligence in the rush to complete deals quickly. Over half (51%) of investment professionals surveyed for the study said that they somewhat agreed or strongly agreed that this was the case, compared to 32% who disagreed and 16% who neither agreed nor disagreed.
Jan Hoffmeister, Co-Founder of Drooms, said: “Investment professionals need to understand the broader context of a property deal, such as whether the area housing a property is likely to see an influx of businesses or tenants in the future, what potential environmental factors may have an impact and whether new infrastructure is planned for the area. Our research serves to build a picture of complexity in real estate transactions that is increasingly difficult to manage using non-specific cloud services.
“The growing number of moving parts, including legacy liabilities and tax issues, mean that a different approach is required. Real estate investment professionals are looking for ways to reduce manual processes and use technologies such as machine learning to identify key terms and red flags, rather than physically plough through paper documents.”
Respondents endorsed this view. When asked which technological development will bring the biggest benefits to real estate due diligence in the next decade, more than two thirds (68%) of real estate professionals said it would be automated document analysis software.
The second highest response was for smart data rooms (56%), which would use technology such as machine learning to reduce the need for manual processes in due diligence. This was followed by artificial intelligence technology replacing manual due diligence work (40%), business intelligence software (40%) and technology for monitoring development of real estate projects (24%).
Drooms recently launched the Drooms NXG Findings Manager in response to growing customer demand for technology that can help speed up the due diligence process in real estate transactions. Drooms has partnered with a selection of real estate dealmakers to build a unique set of predefined categories relevant to conducting transactions. When users search their VDR for terms chosen from the categories listed by the Drooms NXG Findings Manager, the system returns a ‘Suggested Findings’ list including links to each incidence.