The sale of property under construction, an alternative to the crisis

Since the 1990’s, the Spanish real estate and construction sectors used to be very dynamic and undoubtedly they used to constitute one of the pillars of the Spanish economy.

As a matter of fact, they used to actively participate in the economic growth of the country. For example, in 2007 these sectors amounted to between 12% and 17% of the country’s GDP, about twice the European average.

The Spanish housing market increased by 150% from 1997, so much that the real estate and construction sectors used to employ almost 10% of the Spanish working population, which is a huge number. Hence, real estate promotion used to be a key activity for the Spanish economy, allowing real estate promoters to benefit from the financial support of big national banks.

However, the economic and financial crisis affected national banks and because of it the real estate market has sharply declined, due in particular to the lack of liquidity of the banking entities and their unwillingness to provide loans. Selling promoters had to find alternative funding sources in order to carry out their activities and to allow investors to allocate their funds. This is why we can say that the sale of property under construction constitutes an alternative to the economic crisis.

In fact, purchase and rental transactions or such transactions of future properties are more and more frequent for a large number of investors. Purchasing a future property clearly involves risks and related uncertainties (lack of confidence caused by the financial and real estate crisis), but it also has substantial benefits for the parties (interesting investment opportunities for future gains, a chance to combine future gains and short terms revenues via rents, etc.).

This allows a buyer to obtain an attractive price and highest profitability, but it also allows the buyer to participate in the installation of a building and to adapt the building to the buyer’s needs. The benefit for the promoting seller is that this technique facilitates the funding of the construction. In fact, on one hand the buyer can advance (as we have seen with the technique of forward funding for example), but at the same time the certainty of having a buyer means that banks, having a guarantee, will be more willing to provide funds. Furthermore, the risks in this type of transaction are diminished by the possible guarantees in this type of sale.

Cécile Proust & Clément-Henri Girardot

This article is not considered as legal advice

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