The time for Preferred Capital has come.

Blog Frontal / 29-09-2020

The real estate sector has been one of the hardest hit by the Coronavirus pandemic. But there seems to be light at the end of the tunnel. Recently, 287 housing construction projects, involving 27,260 units, resumed their works, according to a cadastre drawn up by the Chilean Construction Chamber. And although there are 624 other housing projects, which consider 91,333 units, still paralyzed by being in communes under lockdowns, everything indicates that we are entering the right path towards a reactivation.

Perhaps that is why in recent days I have received so many calls from real estate, financial advisors, and investors. And everyone is asking the same: Is there the possibility of obtaining financing via preferential capital?

By way of introduction, a real estate project is generally financed by a portion of bank debt, a part of pre-sales, and another part financed by the real estate partners. When the summation of these three sources of financing fails to reach 100% of the required investment, real estate partners must seek investors who contribute the remaining balance. This search is not simple, since partnering with a third party has never been easy: you must live with this new actor throughout the life of the project until all units are sold. There is no chance of “divorcing” along the way.

That is why the preferred capital alternative is so attractive, as it brings together the best of both worlds: a fresh capital contribution to the project combined with a passive partner who will not “pound the table” as the project moves forward as budgeted.

From the investor’s point of view, preferential capital is a type of alternative real estate investment backed by two sources of payment: (a) the units of the real estate project itself, and (b) faithful execution policies, thus generating an adequate risk/return relationship.

As to the first source of payment, the investor pledges units of the project in question with an attractive discount. This lower price value is intended to mitigate the risk of any economic shock that may impact project sales. Secondly, to mitigate the uncertainty associated with real estate assets, an insurance policy is contracted which guarantees the above-mentioned promise. This second source of payment is very relevant since it is a payer outside the real estate company.

In addition, it is very important to know the real estate experience in the market in which it seeks to develop its respective project, as well as to know the history of this, its partners, its main executives, and its track record of success in previous years. This is the cornerstone on which preferential capital is built.

Finally, the investor will wonder what the return this structure brings to him and in what period. Typically, the return of capital is between 2 and 3 years from the investment date and its expected return is between UF + 5.5% to UF + 6.5%.

Because of the times we are living, it would be useful to analyze this tool.