Forward transactions in focus

Despite the global credit crisis, the market of forward transactions closed a very active year last year.
NAPI Online, 2008. május 26. hétfő, 23:58

In spite of the economic and liquidity difficulties, the Central and Eastern European real estate market still stands to see significant growth potential. At the same time, while most players on the Hungarian property market are taking to the sidelines at present, this tendency is not visible in relation to forward purchase transactions. One reason for this trend is that properties ready as "finished products" for investment purposes are becoming rarer on the Hungarian real estate market, so institutional investors have shifted toward the pre-purchase of property projects that often exist only on the drawing board.

According to the experience of legal experts at CMS Cameron McKenna, investors are willing to take on the higher risk that naturally comes from the project being in an early stage, in order to gain access to properties with good attributes and significant income-generating potential, and to avoid competition down the road by getting in the game early. Since years can pass between the signing of the contract and the project's actual completion, it is especially important that each detail of the contract be set down as precisely as possible. The most important means for mitigating risk are the stipulation of basic business elements, such as the preliminary definition of the property's technical specifi cations, the minimum lease percentage of the property, granting continuous control over the project to the institutional investor, and linking financial closing to the meeting of pre-determined conditions.

It is characteristic of forward transactions that developers do not have the necessary capital to complete the project, so instead of the developer having to take on the brunt of the risk connected to the project, the institutional investor also has to contribute some of the sources already at an early stage. This is also why trust between the seller and buyer is very important, in addition to the adequate legal background and regulation.