CHILE: An Introduction to Real Estate
The real estate market in Chile has not been immune to the effects caused by the COVID-19 pandemic, which continue to impact the majority of markets worldwide. One of its main detrimental consequences has been a sharp increase in inflation in many countries, and Chile is no exception. This surge has significantly impacted the Chilean real estate market, as the Central Bank has attempted to curb the rise through an increase in interest rates, which has been detrimental to both real estate developers and end consumers, who nostalgically remember the financing conditions that existed in Chile before the pandemic.
However, thanks to the steadfastness of the Central Bank’s monetary policy, there has been a slight improvement in the general conditions of the Chilean market in recent months, which could potentially lead to a future decrease in interest rates. This development has provided a breath of fresh air for companies dedicated to the real estate sector, as they perceive it as a sign that the market is heading in an upward direction, albeit they do so with the caution learned during the pandemic.
Thus, in recent months, the real estate market has shown signs of recovery, closely aligned with the government’s decisions to seek ways to reactivate this sector, understanding its significance as one of the primary drivers of the Chilean economy.
Real Estate Companies
Despite the recent recovery experienced in the real estate sector, several construction and real estate companies were heavily impacted by adverse economic conditions, resulting in significant increases in construction costs and drastic reductions in profit margins for projects. Additionally, the mentioned tighter financing restrictions further exacerbated the challenges. Throughout 2022 and early 2023, some companies in the industry had to seek reorganisation or, in the worst cases, face liquidation due to insolvency situations. Surprisingly, even long-standing, industry-leading companies struggled to overcome these economic challenges.
As a consequence, companies related to the real estate world have become more cautious in designing their growth projections, aiming for greater liquidity and reduced structural debt. From a positive perspective, this shift should result in “healthier” companies, better prepared to face market stresses and uncertainties.
The Beneficiaries and New Trends
Nonetheless, some real estate developers also found good opportunities. One such case was the development of warehouse and/or logistics centres. The explosive and rapid growth of e-commerce led companies to seek strategic locations in which to store their products in order to meet the agile demands of online shopping. As a result, the warehouse market experienced a decline in vacancy rates, being lower than 1%. Naturally, this led to an increase in the prices of these properties, and many companies decided to invest in the development of such projects. It is expected that by early 2024, the warehouse and logistics centre market will grow by 250,000 square meters. This surge in supply and demand is likely to have significant effects on prices and has generated high expectations within the sector.
Another real estate product that benefited during the pandemic was multi-family buildings, due to the difficulty consumers faced in accessing credit for home purchases. This led many people to opt for renting instead of buying. The number of multi-family projects in Chile has increased approximately 25% since 2021, and it is expected to reach a 50% increase by the end of 2023, compared to the same date. This trend has allowed real estate companies to continue developing projects, despite the decrease in final buyers. Additionally, other companies whose core business was not real estate development have joined in, recognising the potential of their land to generate returns through multi-family real estate projects developed in partnership with investment funds and real estate developers.
On the other hand, the significant shift in working patterns caused by the pandemic, with companies adopting permanent or hybrid home office policies, has given rise to a new trend: the reconversion of office buildings into residential or mixed-use projects.
Normative Context
Despite certain segments of the real estate market benefiting, the entire industry has had to contend with delays caused by public entities struggling to meet delivery deadlines. These difficulties are a consequence of the implementation of new regulations that have come into effect in recent years. Some of these regulations include the Public Space Contributions Law, the Ducts Law, the Urban Wetlands Law, and the New Real Estate Co-ownership Law. Additionally, there have been tax changes affecting companies in the real estate industry, such as the gradual loss of the Special Credit for Construction Companies.
This has been one of the main challenges for real estate development in recent years, prompting companies in the sector to establish technical-legal teams to adapt to the normative context and continue with their projects within the established timelines.
Both the government and the legislative power have attempted to improve this situation through different strategies. These include delaying the entry into force of some norms, implementing greater regulation gradually, and enacting regulations that exempt certain real estate projects from certain procedures, especially those where the State subsidises part of the housing acquisition price. The aim is also to provide developers with greater certainty to avoid delays in procedures that could lead to interpretative issues with the norms. Some of these measures have already been effective, while others are still being discussed, aiming to effectively boost the real estate market in Chile.
The Challenge
The challenge for all stakeholders in the real estate industry is to evaluate projects with constant monitoring of the normative context. Currently, real estate development demands that all professionals involved stay updated on regulations, requirements, and new trends. Additionally, companies must have the proper support of competent legal teams. Much of the success of a real estate project’s development and execution in the Chilean market depends on this. The ability to adapt swiftly and efficiently to the normative context is essential to maintaining a solid and growing industry.