OpEd: Not Infrastructure but Real Estate

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  Space News Business

OpEd: Not Infrastructure but Real Estate

By PARTICK M. FRENCH

posted: 09 June 2008
01:29 pm ET





I
n the last year, satellite operators have been drawing parallels ever more regularly between themselves and classic infrastructure industries, especially transportation, as a way to model and illustrate their financial potential in the eyes of the investment community. Northern Sky Research (NSR) certainly agrees that there are many points in common between the infrastructure and satellite sectors, such as large upfront investments, revenue models that look somewhat like toll charges on roads and bridges, the critical nature of the infrastructure to the greater economy as a whole, and the support the infrastructure provides to many other industries that would not be possible without the satellite highways through space.

 

This being said, NSR also has
looked in recent months for other models for the satellite industry that could offer insight into the dynamics of the market. Using different models to assess the industry is an essential aspect of NSR’s work in studies like its Global Assessment of Satellite Demand report and helps both those inside and outside the industry better understand the functioning of the market. In particular, NSR has assessed models that more accurately incorporate the oversupply and undersupply cycles seen in the commercial satellite sector that
are
�not adequately captured in
infrastructure industry comparison. One sector that has topped NSR’s list is the real estate market,
specifically the type of large condo and apartment development projects that are so common in many major metropolitan centers around the world
.

 

The parallels between the satellite industry and real estate development, while not perfect, are uncanny. First, real estate developers are always on the lookout for hot new markets. We all know the axiom in the real estate industry that the key is
: location, location,
location. This also applies
�to the satellite industry –
the orbital slot is
�equivalent to the location. Video hotspots are
parallel to
high rent districts –
the satellite equivalent of the Upper East Side in New York, Knightsbridge in London
�or Orchard Road in Singapore.
Just as it is not easy to create a new high rent district in a city,
�it is hard to create a new video hot spot in the satellite market. It is something that takes true effort, and success is not guaranteed.

When new projects are envisaged, developers typically look to build near where there is already a strong existing real estate market (e.g. hot video or direct-to-home
�markets). They will start their project, which usually entail large capital outlays upfront for construction, and then begin their sales efforts to pre-sell as many units (e.g. transponders) as possible. Buyers of the units tend to fall into two large groups: those who really plan to live in the unit (e.g. real end users) and those who see the project simply as an investment opportunity (e.g. capacity resellers) and hope to either resell the unit when the project is complete or to rent out the unit while the value of the property appreciates (e.g. capacity pricing goes up).

 

When things work to the advantage of the property developer and reseller, the value of
their new project increases
�and
existing projects in the surrounding area (e.g. well established orbit locations)
will
see a
rise in demand and pricing as strong demand floats all boats. This
situation
now is occurring in the satellite sector in the
South Asian and African markets. Conversely,
too many projects or satellites can be built for a specific market leading to oversupply and declining prices. The real estate market is replete with examples of overbuilding;
�in the satellite industry, this was the
case for the Latin American market several years ago, which
only now is beginning to work through its glut of capacity.

 

When it comes to buying capacity
, ideally the buyer of the unit (e.g. transponder) can select among several options to find a good match to their needs at a price that is within their budget. But when supply is tight, finding the right unit is more difficult due to competition with other buyers. The situation can become untenable when a project nears the point of selling out and competition increases for the last few remaining units.

 

However
,
just because a real estate developer says a project is “sold out,”
�often
someone may still be able to
rent or buy a
�unit in a specific project (e.g. satellite). The real estate developer may validly claim a project is essentially sold out or nearly full, but this merely means that the units they have put on the market are sold out. An end user looking for capacity in a “full” project often only needs to turn to the investor community (e.g. resellers) to
�find what they need –
�albeit for an additional cost.
�Claims of “sold out” or “nearly sold out” need to be carefully examined;
this could simply be
�the point of view of just one player
and not necessarily representative of the true market situation
.

 

It is true that in some cases an end user
truly cannot obtain any accommodation at any price
. In the satellite industry, there have been repeated claims that this is the current situation in the African market and in
some ocean regions
. But
it is rare both in the real estate market and the satellite world that no capacity is available at all. More often the situation is that the buyer cannot find a unit
that suits their needs
such as number of bedrooms and high floor city view (e.g. desired amount of megahertz
�to lease and right beam coverage). Perhaps
such a unit is available but the owner (e.g. capacity reseller or satellite operator) is asking for a price that is higher than the buyer
�can
afford
. When an end user finds themselves in this situation, they too may over simplify the state of the market by complaining that there is “no capacity available.”

In the real estate world perception of demand is as important as the real demand
because
perception
can influence pricing both for the good and the bad. A perception of high demand
leads to

pricing increases in order to get the most money possible out of the end client
. Conversely, perception of low demand can encourage end users to insist on pricing that truly is below the market value
and lead to a loss for the developer or reseller (e.g. below replacement cost of a satellite).

 

The supply situation can get even worse
�when there is a satellite failure, such as
�the SES New Skies NSS-8 satellite, which was lost during launch when the Zenit 3SL rocket crashed back down onto Sea Launch’s floating Odyssey platform
�in January
�2007. Just as in the real estate market, a sudden supply shortage can send a shock through the system:
existing projects that might have had some units for sale all of a sudden see a surge in demand and, in a classic supply versus demand situation, unit prices
jump rapidly. Sometimes the situation becomes even worse
�as short-term speculators get into the market to try to make a quick buck. One does not like to think of this happening in the satellite industry, but it is a reality of the market on occasion.

The supply shortage
will not ease until new capacity is built. However,
construction
takes time, and there is no way to ease the pain in the market in the short
�term for those who are most impacted by the higher costs. Sellers keep the prices high in the hopes of locking in a deal with someone who has little choice but to pay, while other end users will delay their capacity purchase until the market comes back down again, which
�leads to slower overall growth for everyone.

 

Another interesting parallel between the two industries
�is that it can be
critical to know who to go to when seeking to purchase a unit (e.g. transponder capacity)
�or what is negotiable in putting together a deal. The list price for satellite capacity, just as in the real estate market, certainly does not mean there is no room for negotiation.
If one developer or reseller says a project is sold out, that does not mean that if you have the right relationships you can’t
find a unit (e.g. capacity)
. Not all units in projects are immediately sold, and some may
�be held aside for certain reasons. For example, the real estate developer may decide to set aside some units
because they are targeting a specific big client, or
a large investor may have placed an option on certain units for future purchase (e.g. transponders pulled from the commercial market with the expectation they will be sold for specific future applications or clients). Having these relationships in the satellite industry can be critical, especially in markets like the Middle East, Latin America and parts of Asia, where what is officially for sale may not fully represent
what is truly available for purchase.

 

NSR will readily admit that no single model for the satellite industry is perfect, and there are as many weaknesses to this comparison
as there are
�advantages. Still, it offers an alternate mode of thinking about the satellite sector
and
helps to see through a number of misperceptions that are being put forward
about
this industry
. Understanding issues behind true supply and demand in the satellite market are critical, and one must never forget that statements about satellites being “sold out” or nearly “full” can simply reflect the view of one player in the chain who may be as much reporting a true situation as they are attempting to influence pricing in the market. The vast majority of transactions in the satellite industry, as in the real estate market, are completely fair and above board with both the end user and seller equally satisfied. But, just as in the real estate industry, the end goal is to drive up capacity prices to make the most money in good times and to unload
capacity as fast as possible in down markets.

 

As they say in the real estate market, “caveat emptor!”

 

Patrick M. French is a
senior
analyst
and
head
�of the Singapore
office for NSR
�LLC.