Investment in development projects: step-by-step guide
Investments in development projects abroad bring 7-12 % per annum. At the same time, the rental yield of real estate in Europe is 3-4 %, and the yield on Eurobonds and deposits in European banks is declining. Therefore, now investors are planning to invest in development projects. Although back in 2014, most investors did not consider this option.
Elena Milishenkova, Tranio’s investment product Manager, explains how to make money on development projects abroad.
1. Choose a strategyIn a project of any scale: renovation of a small apartment or construction of a multi-storey complex, I recommend choosing an investment strategy first, and then a specific project.
Depending on the investor’s capabilities, risk appetite, and overall strategy, the consultant helps you choose a project based on six criteria:
project type — land development, construction, renovation, optimization of rental flow;
release dates — sale immediately after the completion of the work, renting for a few years and then sell;
form of participation-independent project management, ownership of shares of the project company or mezzanine loan;
location-a market with the prospect of rapid price growth (for example, Greece, especially Athens) or a more stable market (for example, Germany, growing cities with populations of 500 thousand or more).
investment volume – from 100 thousand to several million euros;
number of participants — a collective investment or project for a single investor.
To invest in a project that really suits you, you need to study examples of similar projects that have already been invested. It is desirable to indicate the upper and lower limits of your criteria: for example, the expected yield is 8-10 %, the budget is from two to five million euros.
Also, an investor can simultaneously consider different options: for example, land development projects for which he has a yield criterion of 15 % per annum, and construction projects for which he wants a yield of 10% per annum.
To avoid misunderstandings with the investment adviser, it is better to record all the criteria in writing.
2. Determine the legal and tax structure of the transaction
As with the usual purchase of real estate, investment in a development project can be issued to an individual or legal entity. For legal entities, there are nuances: sometimes you need to choose the type of company, sometimes-several interconnected companies. The more expensive the project, the more likely it is that the cost of a complex structure will be justified.
To make the right choice, you need to assess the tax consequences. A competent tax consultant will help you figure this out. You also need to consider how many projects there will be in total:
For example, there are investors who have invested in the renovation of five or seven apartments in Athens. In Greece, there is a rule: an individual investor can not pay capital gains tax when selling no more than two such projects within two years. Therefore, it is better to immediately use a legal entity for registration, so that you do not have to pay tax.
3. Create the necessary infrastructure
Before choosing a specific project, the investor needs to create conditions in which he can quickly respond to favorable offers. To do this, you need to open an account in a European Bank and make an investment amount on it. To open an account, the investor must provide the Bank with income documents.
Depending on the chosen strategy, the investor will also need:
the team that will do everything — lawyer, tax specialist, proven developer, management company.
4. To respond quickly to the best deals
When an investment consultant brings a profitable project, you need to act quickly. It often happens that the investor needs a few hours to make sure that the project meets its criteria. Many investors in such cases do not spend time visiting the object and buy remotely, by proxy.
In large projects for five to ten million euros, additional documents are required from the investor: proof of funds, a non-disclosure agreement (NDA) and a letter of intent (LOI). When the seller receives these documents, it gives the investor detailed information about the object.
5. To Conduct Due Diligence
In large development projects, specialists perform Due Diligence before signing the final version of the contract. This is a check that protects the investor from risks and helps to secure the investment.
Due Diligence includes: legal, technical, financial and tax expertise; assessment of the potential of the lease price; assessment of transaction risks. For example, we check the ownership of an object, the contract for the sale of land and buildings, and the tax consequences of the transaction.
6. Apply to the Bank for a loan
The investor can get a new loan or take over the existing encumbrance of the object. In both cases, the Bank primarily considers the investor’s solvency and project risks.
For a major construction project in Germany, banks lend up to 80 % of the budget at a rate of about 2 % per annum. For a small renovation project, banks can also give a loan, but it does not always justify itself on a short project.
7. Sign the necessary documents to start the project
If during the check, the experts did not find any reasons for rejecting the transaction, the investor signs the following documents: an agreement with the developer and a contract for the purchase and sale of the object, if the investor will own it directly. Signed documents indicate the beginning of the project.
8. To view reports on the progress of the project
When the project is launched, the active participation of the investor is not required. At the same time, the investor regularly (for example, once a quarter) receives information about the project: reports on the flow of funds, photos and videos from the object.
If the project involves a quick exit through sale, rather than ownership and leasing, the developer sells the object without the participation of the investor. In large construction projects, sales usually start at an early stage. With a successful scenario, all apartments can be sold before the construction is completed.
9. To make a profit
The profit from the project is distributed in two ways:
The developer pays the investor a fixed percentage on the invested capital or a share of the profit. This happens when the project is registered with the developer’s legal entity.
The investor pays the developer Commission, and takes the remaining profit for himself. This happens when the project is registered as a legal entity of the investor.
Investors dispose of development projects in different ways: some keep the object for themselves. This is how they get rental returns and often benefit from the increase in the value of the asset, because in a few years the price of the object can grow. Other investors immediately reinvest the proceeds in a new project.