Downturn in real estate market and new development regulations have national and local developers worried

The construction industry says changes in market conditions and new government requirements for condominiums and housing projects are putting a major squeeze on the bottom line for builders.

National and local builders and construction trade organizations say the changes, which require large developers to have financing and permits in place before accepting money from buyers, put a burden on the industry at a time when real estate sales are slowing down — dramatically, in some places, including Cuenca.

Pedro Medina, President of the Chamber of Construction of Cuenca, says the new Superintendency of Companies regulations could add as much as 3% to 4% to the cost of housing. “This is a burden that property buyers will have to pay and this will be difficult at a time when there is downward pressure on sales and prices,” he said. Medina says that permits for new construction in Cuenca and Azuay Provinces have dropped sharply within the last six months.

According to real estate agents, sales in Cuenca are down 30% to 40% from 18 months ago, with a record inventory of properties on the market.

The new rules, according to the Superintendency of Companies, are aimed at providing more security to buyers. The rules were imposed following several high-profile project failures in Quito and Guayaauil. Currently, according to the Superintendency, many developers take a “pay as you go” approach, often accepting money from buyers before they have ownership of the land they plan to build on.

Gustavo Neira, vice president of the Cuenca Real Estate Brokers Assocation, says the rules will hit small developers hardest. “Big contractors won’t have trouble arranging financing but small developers rely a number of financing options, including multiple partners, and it will be more difficult for them to build under the new rules.” He added: “The little contractors do not have $2 million their pockets that they can apply to projects; they rely on pre-sales to proceed with construction.”

The national real estate agents association says a slow-down in sales is affecting the entire country. In Cuenca, where the decline of sales is more pronounced, realtors worry that the market could get worse due to the new regulations.

“We have seen 50% and 60% appreciation in property prices in the last five years here and the market is looking for moderation,” says Neira. “I don’t think buyers are willing to assume the old rate of appreciation. Something will have to give.”

Several Cuenca realtors say that the slowdown in sales and prices is due primarily to fewer sales to Ecuadorians who are returning from working and living overseas, particularly in the U.S. and Spain. Paúl Castro, a real estate agency owner, says he believes that sales to returning Ecuadorians has fallen by about 50%. “It is very hard to get an accurate number but all the agents I know say that these buyers are accounting for fewer sales.”

Sales to North Americans, says Castro, have fallen even more. “The land registry office tells us that the gringos are buying 60% to 70% fewer properties than they were three years ago.” In terms of overall sales volume and affect on the market, Castro says gringos have not been a major factor in price appreciation.

Photo captions: Builders and real estate agents say that housing development and condominium construction will decling in coming years.