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Developers & Funds Team Up To Construct Homes

7 March 2016 – Finanzas

The crisis that has affected the real estate sector since 2007 has given rise to new alliances between the main players in the market, such as the unions between international funds and domestic property developers that have proliferated, particularly in last two years.

With the return of credit to the real estate sector….alliances have started form between international funds who want to expand beyond the tertiary sector and move their money into the segment for residential development, in the hope that the economic recovery will consolidate and demand will increase, and traditional developers, which have the know-how about the residential sector.

The President of the trade association for construction developers in Spain (APCE), Juan Antonio Gómez-Pintado, admits that the information available about these alliances is vague because the sector is still “not very transparent” and figures are scarce.

Data from the Ministry of Development indicates that the number of permits requested for the construction of new homes shot up by 42.5% last year, to reach 49,695 certificates in November. Nevertheless, although the data from 2015 is the best figure in the last five year, it still falls well short of the maximum reached in 2006, when 865,561 permits were requested.

In the midst of this opacity, Gómez-Pintado explains that all of this began when the funds, which manage “a lot money but have few employees”, decided to construct homes and “sought out developers with extensive knowledge of the area where they wanted to invest and with sophisticated (internal) structures”, to allow them to report on the status of expense accounts and construction work on a weekly basis and, above all, to work with players that display good practices and regulatory compliance.

Medium-sized and large developers

Thus, Gómez-Pintado says that the funds are interested in medium-sized and large development companies, whilst the CEO of Aelca, José Juan Martín, says that they are also keeping their eyes on those developers that have knowledge of micro-markets.

When it comes to launching an operation, the funds prefer to invest in new developments with their partner, right from the start. Again, the aversion to risk is there and so they prefer to team up with a developer from the get-go, i.e. to buy the plot of land. (…).

In terms of location, Mikel Echavarren, CEO of the financial consulting firm Irea, points to destinations such as Madrid, the Costa del Sol and the city of Málaga, the Balearic Islands, Barcelona and the surrounding area, and the Mediterranean Coast, as the most attractive areas for this type of partnership.

Great opportunity

The sources consulted agree that these partnerships represent a good opportunity for developers, especially those players that decreased in size during the crisis and now want to grow again.

To this end, the President of APCE believes that this is “a model that is here to stay”. “The funds have a time horizon of 5 to 7 years, over which they have to recover their investment, and if things go well then they will stay”, he adds.

In Martín’s opinion, “there are no long-term relationships at the moment, but that is something that is improving every day” because “bank financing is continuing to provide support, but there is an initial investment for projects that the banks will never finance”.

Henceforth, the CEO of Aleca believes that “long-lasting relationships” will also arise between property developers and funds, but he thinks that they will only happen in the case of those developers that have a vision of all or almost all of the domestic market. (…).

Original story: Finanzas

Translation: Carmel Drake