Florida Condos Bet on Americans Making 50% Down Payments

By John Gittelsohn

Source: Auberge Beach Residences and Spa Fort Lauderdale via Bloomberg

The Auberge Beach Residences and Spa Fort Lauderdale.

Jorge Perez crashed along with the real estate market, then regained his crown as Florida’s “Condo King” by building new projects with 50 percent deposits from foreign buyers. Now, for his next development, he’s looking to wealthy Americans.
In December, he’ll begin marketing the Auberge Beach Residences and Spa Fort Lauderdale, a $500 million oceanfront project 35 miles (56 kilometers) north of Miami. He expects as many as two-thirds of the buyers to come from the U.S. or Canada. All future owners must pay hefty deposits to finance construction by Perez’s Related Group, Fortune International Group and Fairwinds Group in a partnership that the companies plan to announce tomorrow.
“The U.S. buyers have made up an increasing share of luxury
beachfront condominiums and, like our foreign buyers, they have shown little resistance to larger deposits,” Perez said in an e-mail. “Most feel that if they can’t put a 50 percent down payment, they probably should not be buying.”
South Florida condo builders are turning to U.S. clients as development moves north from Miami, a city attractive to Latin American buyers, whose purchasing power has weakened as their currencies sag against the dollar. Even as the U.S. economy strengthens, those who come south for the winter from northern states and Canada are a harder sell because they’re accustomed to smaller down payments and may be concerned that Florida’s condo market will crash again, said Peter Zalewski, principal of Condo Vultures LLC, a Miami-based real estate consulting firm.
“A 50 percent deposit is something domestic buyers and especially Canadians aren’t comfortable with,” Zalewski said in a telephone interview. “The biggest challenge isn’t the product. It’s not the pricing. It’s the risk of your money being used to construct this tower and something goes wrong.”

Foreign Buyers

Buyers from Latin American and other regions abroad have been purchasing about three-quarters of the condos sold in top Miami-area locations such as South Beach, where oceanfront units command $3,000 a square foot, or as much as luxury Manhattan real estate, according to Zalewski. Overseas clients are willing to put cash up front because they can’t get U.S. financing or want to move money to a haven safe from social, political and economic instability, he said.
“Miami is all Latin American flight capital,” said Jack McCabe, a real estate consultant in Deerfield Beach, Florida. The projects being built north of the city are of less interest to Latin American buyers, he said. “They really want to be in Miami. They don’t want to be 35 or 40 minutes away. It’s a different world.”

Condo King

Perez’s company built about 18,000 condo units in South Florida from 2003 to 2008, earning the 65-year-old his Condo King title as prices doubled and tripled, fueled by speculators trading properties like stock. When easy credit dried up, Miami-area values plunged 51 percent and buyers walked away from 20 percent deposits on real estate worth less than they expected. Related Group was forced to restructure $1.5 billion in debt in 2010 while losing four condo projects to foreclosure.
South Florida’s recovery began that year, fueled by money from Latin American countries such as Brazil, with buyers seeing American real estate as inexpensive when compared with properties in Rio de Janeiro or Sao Paulo. Those deals are now gone. Miami-area prices are up 37 percent since a post-crash low of April 2011, according to the S&P/Case-Shiller index. The dollar has gained about 60 percent against the Brazilian real in the past three years.
Related Group has announced plans for or begun construction of almost 4,000 condo units at 18 South Florida towers since the crash. Initial financing has come from buyers rather than bankers.

Reserving Space

Construction usually starts only after 80 percent of the units are pre-sold with buyers depositing 10 percent of the condo’s cost to reserve a space and then committing to add installments in 10 percent increments as the project meets benchmarks such as groundbreaking and tower-topping, according to Carlos Rosso, president of condominium development for Related Group.
“The process is a little bit more complicated, but it’s good because it insulates us from a potential crash,” Rosso said in a telephone interview. “You’re finding real buyers and not the flippers and the speculators that we had in the past.”
While some buyers may have access to financing, all of them must have the wherewithal to pay cash, according to Edgardo Defortuna, chief executive officer of Fortune International. That’s not a foreign concept for U.S. homebuyers: All-cash deals accounted for 24 percent of existing-home sales in September, according to the National Association of Realtors.

Hollywood Project

Related Group and Fortune International have been moving north from Miami, where space for large developments is limited and oceanfront land is expensive. This year, they jointly broke ground on the Hyde Resort & Residences, a 407-unit beachfront project in Hollywood, 10 miles south of Fort Lauderdale, that’s 95 percent pre-sold, Rosso said. On a per-square-foot basis, condos in Hollywood and Fort Lauderdale sell for about half of Miami Beach’s prices, he said.
Overseas buyers are likely to make up about a third of the Fort Lauderdale condo owners, compared with as much as 80 percent for Fortune International projects farther south, said Defortuna, whose company has four South Florida towers under development, including the Hyde property and the $850 million Jade Signature in Sunny Isles.

Downsizing Residents

In Fort Lauderdale, most of the buyers are expected to consist of part-time residents from elsewhere in North America and current South Florida homeowners who want to downsize and live on the beach. While it will probably take longer to find buyers in Fort Lauderdale, developers need to stretch their range if they expect to continue growing, Defortuna said.
“It’s very important for us as developers to start creating new markets because, as you may be aware, Miami oceanfront sites are very hard to come by,” he said in a telephone interview. “The tendency is going north and we’re going to try to use this as a stepping stone.”
The 171 units at the Auberge Beach will range in price from $1.5 million to $8 million, or about $1,000 a square foot, Rosso said. The units will have ocean-facing terraces, some of which will include swimming pools.
The two-tower complex will stand atop a spa and restaurant open to the public and run by Mill Valley, California-based Auberge Resorts Collection, an operator of boutique resorts in ski areas, tropical beaches and California’s wine country.
“The positioning of this thing is about casual but sophisticated,” said Fairwinds Group CEO Andy Mitchell, who assembled the 4.6-acre (1.9-hectare) site and got the project approved by local authorities. Mitchell’s wife’s family owned Ireland’s Inn Beach Resort, a pink, S-shaped hotel on the site of the new project that was built in 1965, when Fort Lauderdale was best known as a magnet for college students on spring break.
“Fort Lauderdale has a lot to offer,” Perez said. “And this is just the beginning.”