A risky combo: off-plan investment + non-local developers

Every time I read about British buyers being creamed by this or that real-estate fiasco somewhere around the globe (more often than not in Spain, or at the hand of Spanish developers), somewhere in the first or second quote from the hapless buyer is a mention of "dreams destroyed". But beyond the archetypical fleeced Briton, and considering our real-estate universe here in Punta, the subject of off-plan, or pre-construction sales is worth contemplating carefully.

In the land of no-credit-no-mortgage, off-plan is the status quo, more or less the only way to develop, and a way to ease the pain of having to pay for a property in cash.

The way it works is the buyer signs a purchase commitment with about 10% to 20% down, proceeds to pay monthly installments for some 18 to 24 months for about 30% to 50% of the value until completion and possession of the unit, at which point the buyer either pays the balance or takes on vendor credit at a moderate interest rate --compared with bank rates-- for one or two years. There are variations to this schedule depending on when the buyer comes in.

The attraction is the prospect of "built-in" price appreciation, knowing that as construction and sales go forward, the developers steadily raise the price of the remaining units, with anywhere between 15% to 20% appreciation being standard during normal times, and up to 100% value increase in the crazy times we're living. Not to mention the "forced savings" aspect of this scheme, whereby buyers undertake a commitment to pay off a property in a couple of years, while they earn or put some other property up for sale, while locking in the price of their purchase.

But of course there's always the risk of the building never reaching completion, and even, as mentioned in the article in The Times linked above, a very real risk of the project never breaking ground, regardless of economic or global financial conditions. Our Roosevelt Ave. still shows a few decades-old carcasses of past busts. The wonderful Acqua building was built on the site of a failed hotel, the Yoo tower is basically frosting on an "antique" concrete skeleton.

In the case of Spain, countless developers went broke, went to jail or pulled back from their plans as the market turned bad, leaving tens of thousands of "broken dreams". In Dubai, $24 billion worth of projects was cancelled or "put on hold."

But in Brazil and even in Uruguay, there is a pattern of foreign developers being the ones who stumbled and even failed in the recent downturn, and there may be a cautionary tale in this.

To begin with, the absence of legal requirements such as a bond guaranteeing the completion of the project means that once the foreign developer goes belly-up or simply packs up his tent and hops on the next flight out, aggrieved buyers have little to go against in trying to recover their money. It's lost.

But also, from a common sense stand-point, those developers are less likely than local ones to pull those projects to fruition when the going gets rough. They are less likely to have access to lifeline credit locally, due to their lack of commercial standing, and at home they might find their financiers less excited about a venture that is encountering difficulties in some third world country. "But my project is located in the most premium spot!!!" Well, that may mean nothing a few time zones and a hemisphere away.

In addition, the foreign developer often designs for foreigners, in effect shutting out the natural pool of buyers, i.e. locals. So they are faced with selling not a property, but a country first, then a development, and lastly a particular property, a much tougher and costlier proposition than just looking around at what sells locally, and aiming for that constituency.

I'd like to clarify that in Uruguay, "local" includes developers from Argentina, Brazil and Chile. Their background can be checked locally if they have a history in development, or in its absence, in their native countries, as "everyone knows everyone" here, and we can easily run a "creditworthiness check" from someone in Rosario, Argentina, or Porto Alegre, Brazil.

Difficulties are not limited to liquidity or finances, but also come into play in the operational sphere. Does your developer know the intricacies of the local approvals process? Or is he or she going to be doing time in bureaucratic purgatory, resulting in bankruptcy when the project runs out of cash and cannot generate sales due to missing approvals? Is your developer working with a well established local construction company with solid relationships that will ensure the project will not encounter labor troubles? (SUNCA, the construction union, seems to be particularly fond of striking or occupying sites owned by non-local developers).

In sum, the warning is that the attraction of buying from developers who "speak your language" may provide a false sense of security. You may want to make sure that they speak the local language even better.