Investment opportunities in construction developments in Spain

Introduction

"The latest forecast from FEDUR (Federacion Andaluza de Urbanizadores y Turismo Residential), an estimated 800,000 European families will buy a home in Spain over the next 5 years; other analysts are predicting as many as 2 million."

The reasons so many foreigners are choosing Spain for their permanent or holiday home is not just the sun (although the climate in itself might be worth the move).
Take the following into consideration:

1. Pensions in Northern European countries are getting less, not only the amount of Pounds, Euros or Kroner pensioners are actually getting but because of ever raising prices there is even less they can buy with.

2. More than half of endowment policies are now showing shortfalls, according to the latest figures in May 2002.

3. Stock market is on an ever low (almost!)

On the positive side.

1. It is extremely easy to get loans with low interest rates.

2. High prices for houses in Northern Europe and abundant possibilities to get a second mortgage, if necessary. House owners are sitting on a gold mine but while staying in their country of residence they are unable to profit from it.

People are searching solutions for all the negative aspects as mentioned above. People are, or will be, loosing their existing living standard, in other words they'll have to think twice before treating themselves to a cup of coffee in a café (£ 1.50) or buying a new pair of pants (£ 125.00).

Solution

Houses are worth a lot of money, so much money that they can easily finance an apartment, townhouse or villa in Spain. Why Spain………..

Spain is one of the cheapest countries (coffee: 060 €) in Europe with an extremely high living standard. Everything is organized as it is at home, infrastructure is perfect, running water, electricity, the supermarkets are selling a wide range of products including English (pair of pants: 25 €), Danish and German specialties. On top of this, from Malaga or Alicante it is just a 3-hour flight to every major city in Europe.

To cut things short

Residents of most European countries
are better of in Spain.

Worst case; they'll considerably improve the
living standard they had in their country of residence,

Best case; they'll live
the live of their dreams.

 

Plenty of investment opportunities you would say and ……YES……….have a closer look at this:

A construction company has found a plot of land (preferably in the province of Malaga or Alicante) with the permission to build, say, 200 apartments. After his calculations and careful planning he considers the project profitable and starts talking to real estate agents about selling prices, commissions, time span etc.

1. If a real estate agent is interested he will tell the builder that it's all fine and beautiful and that by the time he has the brochures and the actual prices he should call for an appointment and bring a commission letter.

2. If a real estate agent is extremely interested, because of:……

-Price (between 80.000 and 150.000 € selling price which will guarantee the biggest share of the property seekers market and thus the highest turnover)

-Mortgage arrangements (an as easy payment schedule as possible, bank accept 20% down payment and an offers an 80% mortgage)

-location (not in the middle of nowhere, area has to offer something)

-builder is granting resell right of owner deeds. In general builders are not very happy to do this because of the extra work involved for which they are not getting paid.

……he will try to get this property exclusive.
Exclusivity for a real estate agent is interesting because they, obviously, do not have to share the available apartments with other real estate agents, apartments he knows he will sell in the shortest possible time. There is a risk as well of course; the builder would like to know in how many months (weeks) he would sell his apartments and will ask the real estate agent to part finance his project.

If it comes to an agreement between the builder and the real estate agent, the builder is likely to offer during the negotiations a better price for the apartments than he initially wished to sell for. He might offer the apartments for, 10% less than the initial selling price. Although the builder is getting less money, he keeps his cash flow, has an easy mind on the payments he agreed upon with the owner of the land and can start searching for other projects.

The real estate agent is happy with the deal as well, besides the sales exclusivity of the total complex they'll get the apartments for a better price that the actual selling price. The only worry the real estate agent has is the bi-monthly payments to the builder.
To reduce this cash flow risk the real estate agent does not mind selling the apartments for cheaper than the initial selling price, because he is getting them with a discount from the builder.

As mentioned above, the real estate agent has checked different criteria with the builder to make sure investors are interested and that there will be a high turnover in sales.
One of the criteria was mortgage arrangements. The deal the potential buyers are getting is a 20% down payment (= option) and an 80% mortgage as soon as the apartment is finished and the key is handed over. No mortgage payments will be made during the construction period.

The real estate agents is starting to look around for investors willing to buy options for his apartments on the, discounted, pre- promotion rate. He is offering the apartments to investors not for the public selling price of 93.157 € (I'm using the figures for a project called "Mirador de las Palmeras, see sample underneath), but for 83.841 €. Investors are paying 20% of 93.157 € = 18.631 € for the option. On this sum IVA (7%) has to be paid (no other cost like solicitors fees etc). All the deposits received are placed in a bond account in the bank, which is guaranteeing the building credit. The sooner the bond account is up to the required level the sooner the builder got the green light from the bank to start construction.

While the real estate agent is searching the investors, the sale to the public of the individual apartments for the normal selling price starts as well.

The investor has 2 choices:

1. The Real estate agent is putting his apartments immediately for sale to the public for the initial selling price (93.157 €).

The investor is getting his paid option back (inclusive of IVA) and the price difference between his preferential, investors, price and the actual selling price (18.631 € (+ IVA) + 9.316 €).
This immediate (within 6 months) sales results in a 47% return (6 months!).

2. If the investor is willing to wait a little longer he will profit from the price increase (valuation according to the market price) of the apartments as it is getting nearer completion (increase 20% a year on average). After 18 months the apartment is worth 122.000.

As above the investor is getting his initial payment back, the difference between the preferential selling price and the actual selling price (38.159) and the increase between the initial selling price and the value when the apartments are nearing completion. This sample results on an ROI in 18 months of 191%.

Lets have a look at one of the newer projects on sale at the moment and use their figures as samples:

 

…cut out of Investors information sheet…..

 

Mirador de las Palmeras - Alicante

First and second floor apartments

All prices in Euros

Selling price 93.157
Investors discount 10% - -9.316
Investors price 83.841

Investors pays 20% down payment on the initial selling price 18.631
Plus IVA 7% +1.305
Total deposit per apartment 19.936

As soon as the apartment is sold to the end user (who will pay exactly the same deposit as the investor), the investor receives back his deposit plus IVA and the difference between the discounted price and the actual selling price.
In this case:

Sample 1: 6 months

Initial deposit 19.936
Buying - selling price difference (profit) +9.316
Total 29.252

Return on investment 47% (in 6 months)

 

Sample 2: 18 months

Initial deposit 19.936
Buying - selling price difference (profit) +9.316
Increase in value +28.843
Total 58.095

Return on investment 191 % (in 18 months)

PS 1 the first 40 apartments/penthouses sold will get a free parking space.

PS 2 the real estate agent won't charge a sales commission (5%) on the resale in this case.

PS 3 to qualify as an investor, options for a minimum of 10 apartments or penthouses should be guaranteed

….end…..

For more information contact:

Frank Janmaat
Property@cybdigital.com
Telephone: (0034) 952 562 137)
Fax: (0034) 952 562 382
Mobile: (0034) 679 389 817

Conclusion

The investment opportunity as described above is an extremely lucrative deal for all parties involved:

-The builder has no finance and payment worries because he is getting his money in time and improves his cash flow for other projects he has.

-The real estate agent got the exclusivity, high sales turnover of apartments they are sure they'll sell quickly and peace of mind because they know they can pay the builder in time.

-The investor is happy because of the more than reasonable return on his investment.

PS All figures mentioned are samples. Percentages actual numbers etc differ from project to project. The number of units bought to qualify as an investor (and a discounted rate) differ from project to project.

Notes:

The apartments have to be sold to the public before the construction is finished and the mortgage payments starts with the handing over keys and signing the title deeds.

This is a type of investment is only to be done with a real estate agent with a proven sales record and experience in the construction area.

Most projects are sold fully furnished which include a fully fitted kitchen and electrical goods and furniture, communal pool and gardens.

Mirador de las Palmeras is a low rise build close to all amenities and designed to make this complex and price attractive to the end user.

 

contact us by email