July 20, 2022
Real estate development is an activity that drives various sectors of the economy of cities, their regions and therefore the country. Economic activities such as construction, purchase and sale of materials and services are the sectors directly related to the evolution of a real estate business. In it, groups of working population are hired from; ranging from primary and qualified labor, to technical specialists in various areas. The gross domestic product (GDP) of the construction sector in Mexico was around 1.01 trillion Mexican pesos in 2020 (Statista Research Department, 2021).
Likewise, real estate development satisfies the need for housing, commercial space, offices, industrial facilities, hotels, among other buildings necessary for the growth and consolidation of the urban population. Due to the services, growth opportunities and amenities offered by living in a city, the number of inhabitants has increased significantly in recent decades, with a tendency to continue increasing in the coming years. In 1950, in Mexico, 43% of the population lived in urban areas; by 2020, the figure increased to 79% (INEGI, n.d.).
However, it is worrying that within the real estate sector there are agents with limited capacity and experience, as well as others who promote unfair practices in the professional field. Real estate projects that lack technical, commercial, legal and/or financial feasibility are products in which there is a high risk of not achieving the benefits and expectations agreed upon at the beginning of the operation.
Nowadays, it is common practice to start building developments without meeting all the requirements established by the authority through guidelines and/or applicable laws. Compliance with all of them results in the correct assignment and monitoring of construction, demolition and habitation licenses and/or permits.
Successful real estate developments are based on professional financial and market studies, with sufficient criteria to determine the market conditions in which the project is absorbed. A poor financial projection will lead to execution problems, overestimated rates of return and contractual problems between participants.
These bad practices are passed on to different actors involved in the operation, from the designers, technical specialists, builders, suppliers, to the investors and end customers of the property. This is how the latter parties put their assets at risk by investing their resources in a project lacking the business, administrative, legal and technical capacity of the developers. The projects that are built and add value to the urbanization in which they are located are those developments consolidated by agents committed to the improvement of each of these areas.
The real estate market is growing rapidly. However, the sector still lacks regulations that guarantee the quality of the products sold.
The private scheme described here arises as a regulation interested in solving these problems that have been established in various economic sectors. Thus, a structure is proposed that delimits the criteria and indicators that define a successful real estate project through the pronunciation of good professional practices.
The purpose of this private scheme is to establish the requirements, provisions and indicators that determine the level of compliance of a real estate project in accordance with four main areas: business, legal, technical and financial.
The implementation of this private scheme will encourage the development companies and their respective projects to maintain a timely order in each of the planning and execution stages, thus reducing the commercial risk of said product.
Having said this, the present private scheme will help:
- Reduce operational risk by reviewing and analyzing the development company, its partners, clients, suppliers and history of executed projects.
- Reduce the risk of execution by technically qualifying the real estate development individually at each of its stages.
- Promote the labour and professional integration of the actors involved by reducing contractual abuse of minor agents, suppliers of materials and services.
- Protect the assets of interested parties when purchasing a certified product.
- Increase commercial confidence in the market by justifiably supporting a product offered.
- Promote punctual monitoring of urban guidelines established by the competent authority.
- Obtaining construction, demolition and habitation permits and/or licenses in a timely manner.
- Reduce the possibility of acts of corruption in procedures and requests for public services.
- Promote the planning and design of real estate projects towards a vision of environmental, social and governance (ESG) responsibility.
- Recover and maintain the trust of professional collaboration between developer, supplier and investor in the real estate sector.
By Hugo Landeros
Contact: h.landeros@kartensoll.com