By Dr. Rainer Zitelmann

This year, crisis communication will substantially gain in importance in the real estate business. For there is hardly a real estate company that is not wrestling with sizeable problems:
All market players are suffering from the repercussions of the financial crisis, particularly from the drastically deteriorated financing conditions.
Then as now, a number of open-ended real estate funds remain closed, that is, they have temporarily suspended the redemption of shares. These are the ramifications of the investors’ mass flight from investment funds in the wake of the Lehman bankruptcy. Even funds that were not forced to closed live in fear of renewed cash drains, in some cases possibly in response to a poorer performance.
Listed real estate companies are suffering not just from the general consequences of the financial crisis, but also from the fact that previously inflated stock quotes caved in during the past year – sometimes plummeting by more than 90 percent compared to their erstwhile high-water marks. Capital increases are virtually out of the question, given the current stock market environment.
Initiators of closed-end real estate funds are suffering from more than one problem: Since the fourth quarter 2008, the placement of funds has been sluggish, causing some initiators to experience problems with their equity bridge-over financing. Moreover, almost all initiators are facing fund problems this year as their returns lag behind expectations, sometimes considerably so.

How are companies to behave in such crisis situations – and what are the communicative tasks in this context?
For one thing, companies ought to be aware that in many cases it is impossible to prevent media coverage a critical bias. And this is as it should be. It is the very mission of the media to report critically when there are critical events to report. In fact, the question in many instances is not whether a given coverage is critical or not. Rather, it is of the essence that such coverage conducts itself in a professional, well-informed, and objective manner. Any company that considers itself able to use its PR activities to suppress bad news has got the wrong idea.
Experience shows that many companies in crisis situations act helplessly and less than professional, actually exacerbating the situation by resorting to the following patterns:
The media are informed late or not at all – journalist learn about the trouble from other sources (the “hush-up strategy”).
Bad news are glossed and played down (the “sugar-coating strategy”).
This is where the job of a professional consultancy – advising on crisis communication – comes in.

One of the principal mistakes you can make is to inform the press late or not at all. Frequently, a company will simply hope that the media will fail to learn about the company’s negative developments, and accordingly refrain from reporting them. Occasionally, a company will get away with this, but more often than not, the “keeping-mum strategy” will have the effect that the media coverage, when it does come, will be much harsher than it would have been had the information been provided early on.
The fund industry is a good case in point. Whenever funds experience problems because they fail to achieve the distributions promised in the prospectuses initiators often hope that the media will overlook the fact and fail to cover it. Underlying this attitude is the fear of general image problems or specific difficulties with the placement of a recently introduced product if reports on non-performing funds are being published.
However, the “hush-up strategy” rarely works. It works least of all if a well-known initiator and a major fund are involved. For one thing, sales partners and investors will have to be briefed sooner or later anyway. These notifications are frequently forwarded to specialist journalists. Once a journalist gathers from such a letter that the respective fund is in trouble, he will report more critically than he would have had he been approached actively by the company. Journalists tend to reward a well-timed, straight-forward information policy. Overwhelmingly, it has been our experience in the course of our consultancy work that it makes perfect sense for companies to approach journalists early in the game and to brief them on ill-guided developments. Inversely, journalists respond suspiciously and peevishly if you inform them vociferously of positive developments, but have them find out about your trouble from secondary sources. In such cases, the task of professional crisis communication is above all, to dictate a precise time management and to enforce it. For even though it is meet, for said reasons, to inform journalists as early as possible, it would, of course, not do to have investors and sales organisations learn about the problems of a given fund through the press. Here, it is of the essence to observe a strict schedule that solves this “circle problem”: On the one hand, journalists are not supposed to learn through circulating correspondence with sales organisations and investors about a certain issue, whereas, on the other hand, investors and sales organisation should not read in the paper what the initiator is supposed to tell them.
But when exactly is the right time to inform investors, sales organisations, and the media, respectively? Companies usually cite all sorts of reasons why “it isn’t quite the right time yet” to break the news. More often than not, these reasons are contrived and fail to stand scrutiny. This may be illustrated by a positive example: In 2002, our client Jamestown told its investors that, for the first time, a certain fund would distribute a lesser amount than forecast. Admittedly, the distribution for 2003 and the years thereafter had to be cut by just 1.5 percent (from 8% annually to 6.5%), which would seem to make it rather a matter of pampered investors in the eyes of many other initiators. For an initiator whose funds all used to distribute as forecast or even above the forecast, it was a problem nonetheless. Jamestown could have come up with sound reasons for withholding the news until the time the reduced distribution was disbursed, that is, a year and a half later – not least because the distribution was bolstered by the initiator in the first year. However, Jamestown decided to communicate this intelligence at the earliest opportunity, meaning, directly after the company itself had learned of the problem.
The second time there was reason to worry that a fund might fail to realise the projected returns, Jamestown behaved similarly. This second time, the fund at issue was the “Co-Invest 4.” Since this was a fund with current distributions, Jamestown could have found any number of reasons to “wait for a while" in the – not altogether unreasonable – hope that the situation might turn around and the predicted profits materialise after all. In this, as in the first, case, Jamestown decided – unlike other initiators – to approach investors, sales organisation, and the media as soon as the evidence suggested that the return expectations might not be met.
Someone might raise the objection that for an initiator who has an unrivalled track record of great returns it is easier to pursue an active and straightforward communication policy than it would be for others. On the one hand, this may be so. On the other hand, the good image of this company was not just the result of the great returns that its funds yielded, but was to a large extent owing to a rather transparent and credible communication. Another instance demonstrating that open communication pays off was our recent experience with HGA Capital. When it became apparent that two United States funds would not perform as projected, and a shift in trend seemed unlikely, the investors were notified swiftly. At the same time, a solution was developed that enabled investors to sell their shares without material damage. In a parallel move, the initiator contacted fund analysts and specialist journalists to inform them, too, and to discuss the planned solution with them.

Companies often make themselves believe that glossing bad news is a particularly nifty move. It works like this: You send out a press release that starts out by elaborating at length about all sorts of good things and includes a “hidden” piece of bad news – the actually interesting information – toward the end. Especially listed companies, which are compelled by law (duty of ad hoc notification) to communicate their negative news, frequently resort to this sugar-coating strategy.
As the “hush-up” strategy discussed above is not an option for these companies without running considerable legal risks, they tend to qualify, downplay and contextualise bad tidings by juxtaposing them with positive ones. However, the target audience of such communications, namely journalists and analysts, is actually familiar with this game of hide-and-seek and takes it as an attempt to make it look the fool. Yet they are perfectly able to “retaliate” by striking a harsher note in their coverage than they would have if the company had not tried to hide the negative news. Also, journalists are very sensitive in terms of register. They find it annoying – and rightfully so – if things are not called by their proper names but are euphemised instead.
It is worse yet – in fact, absolutely unpardonable – to feed lies to the press. Even so-called “white lies” in regard to “minor” details are never well received, nor should they be. Once a journalist uncovers such a lie, he will distrust anything the company might choose to communicate in the future. And he will begin to do his own research in order to make sure there is no other dirty laundry that might be worth writing up.
The most important aspect in communicating with the media is credibility. Building up credibility can take a very long time – often months, sometimes even years. Gambling your credibility away, by contrast, is a matter of hours. It rarely takes a sophisticated communications strategy to handle a crisis situation. The key maxim in communications, and above all in crisis communications, should be this: “There is no trick like the truth.” Here, the term “truth” means to communicate proactively, promptly, and unequivocally. While this strategy may not always be able to prevent a negative press, whatever press it gets is bound to be more objective and more sympathetic.

This article was published in the magazine „Immobilienwirtschaft“, issue 04/2009