Investment approach
Residential development phases: where the investor’s risk lies
An investor entering at the pre-sales stage takes on very different risks from one entering when land is acquired, even if the eventual project is the same.
One project, three distinct risk periods
A ground-up development project passes through phases with very different types of risk. Investors entering at different stages are effectively taking different positions, even when the property is the same. The discussion below covers three phases—land and permits, construction, and sales—and what specifically changes for the investor in each.
Land and permits: the greatest uncertainty
At this stage, the asset is essentially land and rights over it, rather than a constructed property. Permits have not yet been obtained and the final design has not been approved. Uncertainty about timing and final parameters is greatest here. This is the stage at which Barcelona’s mandatory 30% protected-housing quota for new developments must be incorporated into the calculation. It affects the area available for sale and rental from day one, and must be reflected in the assessment when acquiring land rather than reconsidered during construction.
Construction: capital committed to an approved design
Risk now shifts from planning uncertainty to execution. Capital is deployed against an approved technical design, and the main threats are cost overruns and delays. The question is no longer whether the project can happen, but whether it will remain within the limits recorded on paper. Our article on the full project budget examines this in detail.
Sales: different cash flows at different times
Pre-selling units during construction and selling only on completion create two different cash-flow profiles and different buyer protections. Where units are pre-sold before completion, buyer payments into the developer’s account require a specific repayment guarantee. This is discussed separately in our article on guarantees for buyers’ advance payments. The choice affects both how quickly capital returns to the project and which obligations towards buyers the developer assumes in advance.
What it means for an investor joining later
An investor joining at the pre-sales stage takes on execution and sales risk but avoids the planning and permitting phase, the period of greatest uncertainty. An investor entering at the land stage accepts the whole journey, including the possibility that the project changes or is delayed during approvals, together with all the potential upside from that early entry point. There are intermediate entry points too: for example, at the start of construction after permits have been obtained but before pre-sales begin. Each needs its own risk assessment rather than an average of the two extremes.
Conclusion
Understanding exactly when capital enters matters more than a project’s general appeal. The same transaction under a development strategy represents different investments depending on the entry point. They should be assessed separately, not treated as a single asset with a single risk profile.
Questions and answers
At which development phase is investor risk highest?
At land acquisition and permitting. At that stage the asset consists almost entirely of rights and expectations rather than constructed value, and uncertainty about timing and final parameters is highest.
Must the protected-housing quota be considered when entering a project later?
The quota is established at land acquisition and incorporated into project parameters by construction and sales. At later stages it needs to be understood, rather than calculated afresh.
How do pre-sales differ from sales on completion in terms of investor risk?
Pre-sales bring money in earlier but require guarantees for repayment of buyers’ advances if the project is not completed. Sales on completion generate cash later, without that additional obligation towards advance-paying buyers.