Winning with pre-construction investment

Last month we started to explore property from an investment perspective.  Over the next three editions we'll focus on the three ways of investing in residential property: purchase of a property in construction, an existing property and lastly the purchase of a property for refurbishment.

Buying a property that is in construction has been a very popular way of investing in Spain and the returns, historically, have been good.  Although pre-construction prices are invariably advantageous, some people will understandably shy away from this form of investment as they are nervous about buying something they cannot see, or have difficulty in visualizing the final result from a set of plans.  Another downside is that there will be no rental income or rental saving until completion.  But despite this, investment returns have been staggering in the buoyant market that has existed in the last few years. 

If you keep in mind the basic rules of selecting a property investment, you really can't go wrong buying pre-construction.  Make sure the location has the potential to be popular with tourists, the complex will be built to a good standard, and don't expect a fast buck.  You need somewhere that will be rentable and that you will be able to resell.  So long as you are investing money that you won't need to touch for a few years, your investment return will be good.

Unfortunately, sometimes greed can get the better of us, and this normally safe investment can turn into a nightmare.  The problem is often created by unscrupulous agents leading their clients to make unreasonable expectations.  The media too is also partly to blame as they paint pictures in their articles of overnight property millionaires.  Here's how it works.  The agent encourages the client to reserve a unit in a complex before construction on the basis that the client can sell on that contract before completion and make a staggering profit.  They may even promise to sell that contract on for you at a reduced, or zero, commission.  But do you really expect a salesman working for that company in two years from now, whose livelihood depends on their commission, to sell your contract on for you?  Of course not, he's going to sell something he gets commission from.  Some contracts do not even have a clause allowing it to be sold on before completion anyway.  And if there is another phase being released, your contract is in competition with all those units that the developer is selling, so what sort of capital growth are you going to get in the unlikely event that you do sell it on?  Well, if the developer is selling units at the same price, the answer is zero or less than zero.  And even if they're not, if the agent sold to you on the basis of reselling the contract, then they did the same to everyone else.  So when you come to sell, you'll be in a competitive market and that will force the price down. 

I'm on my high horse about this, because here in Tenerife this misrepresentation has happened and is still happening.  The rules are simple: don't go for a development that is too big, as the developer may still be releasing units when you want to sell.  Make sure the development does not have too many properties identical to yours, buyers will not pay a premium for yours if there are many more just the same about to be released.  Buy front line.  If you buy four lines back and the view is wonderful, what is going to happen to the value of your property when another developer (or the same one) builds a huge complex in front of you? 

So what should you look for?  Well, make sure the contract can be sold on.  If the market conditions are right, then you should have that option.  Ensure that the developers have structured price rises.  For instance, someone buying a unit now will pay less than someone buying a unit in a year's time.  Developer prices define what you can sell your unit for.  Then make sure you have everything promised in writing, believe only what you can read.  Stick to these basic rules, keep your expectations realistic and your returns will be healthy.

For eighteen years Tenerife Property Shop S.L. have helped property buyers and sellers in the south of Tenerife, winning numerous awards for their service and quality.  You can contact them on 922 714 700 or visit their website at www.tenerifepropertyshop.com