Investment Funds as a financing alternative in the real estate sector
One of the main challenges of the real estate market is to obtain economic resources for the promotion and development of real estate projects. High interest rates in our country have traditionally been the biggest obstacle that ultimately negatively impacts the end user and impedes the ability to purchase housing.
It is for this reason that, in Ecuador, the need to return to look at other alternatives is becoming more and more necessary. In this article we propose investment funds as a new option for financing real estate projects.
Among the traditional forms of financing for housing is the recent initiative of the Ministry of Urban Development and Housing (MIDUVI) called “Housing Solutions for Poor and Vulnerable Households”. This project has the financial backing of the Inter-American Development Bank, which expands the range of credit programs offered by financial institutions. These projects seek to adjust to the market and facilitate access to financing for low-income housing. However, despite government efforts to provide affordable credit, a significant housing deficit persists. This raises the question of the extent to which conventional methods are really accessible and beneficial for the Ecuadorian population.
Article 87 of the Securities Market Law allows the funds’ resources to be invested in real estate within the country. Investment funds seek to become one of the most innovative financial instruments for this sector and thus counteract the current housing deficit. These funds pool money from multiple investors to invest in assets permitted by law, with the expectation of generating returns through interest. Investors sign a contract with the fund and contribute capital as an investment, either in cash, check or wire transfer, which entitles them to receive periodic interest payments, making them extremely attractive to investors.
The advantages of these funds include minimum contribution amounts and, therefore, lower and controlled risk, high liquidity, periodic contributions adapted to savings capacity and profitable returns. In addition, unlike the traditional Real Estate Trust, the investment fund does not incur the same expenses.
In Ecuador, investment funds are regulated by the Organic Monetary and Financial Code, Book II of the Securities Market Law, its Regulations and the Superintendency of Companies, Securities and Insurance, through the National Securities Market Intendancy.
It is important to note that, beyond the alternative proposed in this article, there are multiple non-conventional options for real estate financing, such as thematic bonds, mortgage securitization and public-private partnerships known as PPPs. Each seeks to eliminate barriers to entry into the residential construction and purchase market, especially for small and medium-sized developers, thus addressing the housing shortage.
Authors:
Mauricio Subía – Partner HEKA
Mateo Sanchez – HEKA Associate
