Argentina Real Estate Trusts - Investments in Construction at Cost in Argentina
In a world with basically no available credit, buyers are having to find alternative means to acquiring the home they are looking for. While there are numerous options available, trusts are one option, in which multiple individuals share the risks, while the method remains a useful financial tool within today’s current context.
For over a decade, a massive organization of consortiums in Argentina has come together to promote investment in construction at cost, as a way to facilitate investment as a form of protection of one’s money. To acquire legal protection, however, many of these consortiums have adopted the legal title of trusts.
Investment in real estate has long been a popular way to protect and save money, staying out of the more complex financial markets, while maintaining an ideal balance between profitability, liquidity and risk for those involved in the trusts.
In this particular setup, consortiums invest in the buildings from the very beginning, funding the construction. In this way, each individual takes the form of investor through their participation rate.
There are two ways to go about this: In one, the consortium hires a developer that addresses the project, and subcontracts a construction company. In the second model, the developer organizes the entire project, and then seeks out a consortium for funding.
Trusts are a safe way to develop, fund and market construction projects at various stages. They may be a fixed price, or fluctuate with the actual costs. In the former, the property under construction is sold at a fixed price that will not change during the course of the work. In the latter, the buyer agrees to support the cost of the evolving project, in relation to the proportion that represents their share of the entire building. In this last case, the price is undefined, or open, until the very last day of project completion. In terms of profitability, one can normally calculate between 10 and 20 percent annually, depending on the individual project.
One of the functions of a trust is to protect the trust property against the actions of third parties. When investing at cost, as discussed above, the final cost also depends on the dollar, and the stability of the peso. The property is bought completely at a certain price, which is then frozen. Then, the cost of the work is adjusted monthly depending on the fluctuations in construction costs. So the final cost then depends on how the dollar has advanced over the course of the project; between 2005 and 2008, the cost climbed quite a bit compared to a stable dollar. In 2009, it remained relatively steady, so cost only rose slightly above the dollar. When the property is sold at a fixed price, these problems are built into the price. Neither system is better than the other; it just depends on the seller and the buyer, and the risks they are both willing to take.
Most developers tend to work with a variety of trusts, with a solid mix of open- and fixed-price projects. In this way, they can develop a variety of projects all over the city, diversifying their portfolio.
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