A few year back, investing in pre-construction properties was extremely profitable, but that was brought to a halt by the global real estate downturn, and those investors who came to the party late lost a lot of money. While good pre-construction investments are few and far between these days, Northeast Brazil may be an exception. See the following article from International Living for more on this.
After years of thinking that investing in overseas property through “pre-construction” deals was a one way bet, investors have almost completely withdrawn. Many are nursing a major hangover. For some, the pain has yet to be felt—this will happen when their unit is delivered and they close on their contract. Many will lose all the money they have invested…and maybe more.
Of course, today we know investing pre-construction (also known as “off plan) was never a one-way bet. This was always a party that could get out of control.
This type of real estate investing is inherently risky. Essentially, you’re making a leveraged bet—like trading options on a stock. In a fast-rising liquid market you can do very well.
The pre-construction party was so good it attracted more and more revelers. An increase in the number and projects and the number of salesman and sales ploys ensured greed overruled good sense.
Then, supply outpaced demand…banks tightened their lending policies…and, most importantly, everyone coped on that the case from Dubai to Bulgaria simply didn’t stack up. You only made money if you got your timing right or got lucky and “found a bigger fool”.
The party was over before the current financial and economic crisis hit. The crisis made sure that the last few stragglers were shown the door.
Today, it doesn’t make sense for investors to invest pre-construction in markets they have been traditionally attracted to. I’m talking about the UK, Spain, Portugal, Central and Eastern Europe, Dubai, and Panama. No sales volume in these places means the risk of the developer running out of money—and the project failing—is great.
But—that doesn’t mean there aren’t opportunities
Developers have been left with unsold units. Banks are looking to recoup what they can. There are deals to be done. There is an extremely active rental market in places that have shown relative employment stability.
Places like Panama and some UK cities. In some cases, yields are higher than they have been for decades. The opportunities in these markets are from distressed sales. Not distressed “pre-construction” sales though. You don’t want to run the risk that the developer or builder will go bust. Only buy completed units.
In some case you can buy quality for 40 cents on the dollar. However, you need to be careful and always follow my three golden rules of crisis investing:
1. Buy quality (location, construction, amenities and fit-out)
2. Don’t take on any construction risk…buy completed units
3. Don’t take on any project risk…make sure the condominium is functioning
That’s what you do if you’re interested in crisis investing—but where in the world should you look if you want the strong terms offered by good pre-construction deals?
The world is a big place and there’s always a party to be found somewhere. The best party in the world today is in North-East Brazil. Could you think of a better place for a party?
Brazil is booming and is now an investment grade middle class country. As soon as Brazilians can afford to, they want to visit the beaches around Fortaleza—Brazil’s #1 domestic tourism destination.
Soccer’s Confederations Cup comes here in 2013 followed by the World Cup the following year—$5.5 billion will be spent improving infrastructure and tourism amenities in the lead up to 2014.
There’s oil offshore—bringing revenues and high-paying jobs.
Best of all, there is a hotel and condo shortage in the area where visitors want to stay. Here you can buy pre-construction with as little as 1% down. Prices have been appreciating by 20%-30% for the last couple of years. Buying pre-construction here, you should look for:
- An appreciating market in the early to mid stages of growth
- A developer with a strong track record who is financially stable
- Supply constraints…like a lack of developable land
- A market with an abundant supply of end users
It’s happening in North-East Brazil. A relatively small number of U.S. and European investors are active here. More are starting to come. The party is getting started.
This article has been republished from International Living.