Resurgence in Real Estate: Why Businessmen Are Snapping Up Stalled Construction Projects
As summer approaches, real estate developers anticipate a surge in demand to help clear their property inventories. However, a notable trend has emerged where savvy investors are capitalizing on developers' misfortunes by purchasing halted construction projects at bargain prices. These investors aim to revitalize these stagnant ventures into profitable enterprises.
This burgeoning business model is particularly gaining momentum in Casablanca. Here, businesspeople meticulously monitor project stoppages, promptly contacting owning companies to negotiate the acquisition of both fixed and movable assets, as well as existing debts to suppliers and, occasionally, banks.
According to Bank Al-Maghrib, total real estate loans saw a 1.1% increase by the end of April, reaching 304.4 billion MAD. Of this amount, loans to real estate developers stood at 54.3 billion MAD, reflecting a 4% rise from the previous year. However, these figures mask underlying financial strains affecting construction and public works companies, leading to the halting and freezing of numerous projects.
Financial Strain and Project Stagnation
The primary reason for these project freezes is financial strain. Developers, especially larger ones, often subcontract work to other companies, but various issues disrupt progress. Projects can stall due to construction work failing to meet required specifications, preventing the necessary compliance and occupancy permits. Additionally, developers' inability to repay bank loans, disputes with project owners, or bankruptcies caused by soaring construction material costs, labor expenses, and equipment rentals further contribute to halts.
New investors in these stagnant projects turn to accounting and audit firms to assess the true financial status before making purchase decisions. They exploit the sellers' financial distress to negotiate favorable prices, securing substantial returns on investment. Buyers also negotiate with project creditors whether banks, suppliers, or handling companies to settle debts, often obtaining discounts on original amounts and associated late fees.
Beyond Profit: Restoring Confidence
Younes Taouil, a real estate developer, emphasized that acquiring stalled projects is not solely about profit. It also serves to restore confidence in the sector and its stakeholders. In a statement, Taouil highlighted that a halted project represents a loss not only for the owners and companies involved but also for the state's treasury and, most significantly, for customers who risk losing substantial down payments.
Taouil pointed out the current practice of not recognizing "Vente en l'état futur d'achèvement" (VEFA) contracts, which are agreements for the sale of off-plan properties. This forces homebuyers to make significant financial down payments, sometimes up to a third of the property's value, in exchange for a mere receipt.
Some owners of stalled projects have taken steps to compensate their customers, demolishing existing buildings and converting project designations from residential to commercial, constructing office, business, and hotel spaces. Taouil stressed the need for sector regulation and a specific law governing real estate developers to prevent issues undermining stakeholder interests, particularly banks, and depriving the state treasury of substantial tax revenues.
Legal and Procedural Safeguards
The debt architecture for investors acquiring stalled projects involves a set of legal provisions, procedural measures, and negotiation strategies designed to ensure transparency and security in financial transactions. Mechanisms such as share purchases, asset exits, installment payments of debt amounts, and guarantee bills play a crucial role in protecting creditors and buyers. Specialized accounting and consulting firms often guide investors through these complex transactions, safeguarding their interests and maximizing investment returns while avoiding potential legal disputes.
Banking Sector Concerns
Salim Chahabi, a financial and banking consultant, noted that risk management departments in banks have raised concerns about the growing volume of defaults on loans owed by real estate developers. This has led to a significant accumulation of illiquid real estate assets, particularly in a market characterized by declining demand. Chahabi emphasized that debt architecture remains a strategic option for credit institutions to ensure effective debt recovery. He noted that past attempts by banks to partner in real estate projects as part of restructuring plans have been unsuccessful, given that real estate development is not a core competency for banks.
Adopting Global Best Practices
Zineb Sariji, a real estate management architect, confirmed that banks' involvement in real estate revival is fraught with risks. She stressed that foreign credit institutions, which have preceded their Moroccan counterparts, often seek the help of specialized real estate management companies. Sariji highlighted the importance of risk management in financial difficulties, advocating for the adoption of the leading American approach. This strategy allows investors to buy shares and debts in troubled projects, create joint leadership, and guide the projects out of crisis to achieve their goals, eventually sharing profits based on contribution value.
In summary, the trend of purchasing and revamping stalled real estate projects is reshaping the sector, offering both challenges and opportunities. With strategic investments, regulatory reforms, and a focus on restoring confidence, the real estate market could see a significant transformation in the coming years.