Is Buying Off-Plan ('En Proyectos') in Arequipa a Good Investment for Expats? Pros and Cons.

As a licensed Peruvian real estate broker specializing in Arequipa, I frequently encounter foreign investors and expats intrigued by the prospect of buying property 'en proyectos' – what is commonly known as off-plan in other markets. This strategy, while potentially offering significant advantages, carries a unique set of risks and requires meticulous due diligence, especially within the Peruvian legal and real estate landscape. This article will provide a detailed, experience-driven analysis to help you navigate this complex, yet potentially rewarding, investment path in Arequipa.

Understanding "Off-Plan" in the Peruvian Context ('En Proyectos')

In Peru, buying "off-plan" typically refers to purchasing a property (apartment, house, commercial unit) directly from a developer before its construction is completed, or sometimes even before it has begun. The transaction is based on architectural plans, renders, and a promise of future delivery. This method is popular with developers to secure financing and gauge market demand, often offering buyers a lower initial price compared to completed units.

However, it's crucial to understand that the legal framework for off-plan purchases in Peru differs significantly from more regulated markets like North America or Europe. Buyer protections, such as mandatory escrow accounts or comprehensive developer insurance, are not as robust or universally enforced. This places a greater burden on the buyer for rigorous due diligence and demands an even higher level of caution.

The Potential Upsides: Pros of Buying Off-Plan in Arequipa for Expats

When executed correctly, an off-plan purchase in Arequipa can present several compelling advantages:

Potential for Capital Appreciation: One of the primary drivers for off-plan investment is the potential for the property's value to increase between the initial purchase agreement and its completion. Developers often offer an attractive initial price to secure early buyers. As construction progresses and the project nears completion, market values can rise, especially in desirable Arequipa neighborhoods known for their development and infrastructure growth.
Early-Bird Pricing and Discounts: Developers are keen to secure initial sales to fund construction and demonstrate market confidence. This often translates into more competitive pricing, exclusive promotions, or favorable payment terms for early buyers compared to those purchasing a completed unit.
Customization and Modern Amenities: Being an early buyer can sometimes allow for minor customizations to finishes, colors, or materials, within the developer's pre-approved options. Furthermore, new developments typically feature modern designs, efficient layouts, earthquake-resistant construction techniques (a vital consideration in Arequipa, a city located in a seismic zone), and contemporary amenities like gyms, pools, or co-working spaces that older properties may lack.
Flexible Payment Structures: Off-plan purchases usually involve a staged payment plan. This might include an initial down payment (e.g., 10-30%), followed by incremental payments tied to construction milestones over the project's duration, with the final balance due upon completion and handover. This can make the investment more manageable for some buyers, avoiding a single large lump-sum payment upfront.
Exemption from Alcabala (Transfer Tax) on New Construction: A significant financial benefit for buyers of new, off-plan properties in Peru is the exemption from Alcabala, or property transfer tax. This tax (currently 3% of the sales price exceeding 10 Unidades Impositivas Tributarias - UIT, which is S/51,500 in 2024 given UIT value of S/5,150) is typically applied to resale properties. However, the first sale of a property directly from a registered developer/constructor is generally exempt from Alcabala, as the developer is already subject to IGV (Impuesto General a las Ventas - General Sales Tax) on the sale. This represents a substantial saving compared to buying a pre-owned property.

The Significant Risks: Cons of Buying Off-Plan in Arequipa for Expats

Despite the advantages, off-plan buying in Arequipa carries substantial risks that demand careful consideration:

Developer Risk & Project Non-Completion: This is the most critical risk. A developer might face financial difficulties, abandon the project, declare bankruptcy, or experience severe delays. Unlike some countries, Peru does not have universal, mandatory developer insurance or robust escrow systems to protect buyers' funds in such scenarios. Recouping your investment can be a long, arduous, and often unsuccessful legal battle, as your funds may not be segregated.
Construction Delays and Quality Issues: It's common for projects to experience delays beyond the promised completion date, sometimes extending for months or even years. Furthermore, the final construction quality might not meet expectations or the exact standards promised in marketing materials and renders. Correcting deficiencies post-handover can be challenging and costly.
Legal & Contractual Ambiguity: Peruvian purchase contracts for off-plan properties (often termed Minuta de Compraventa de Bien Futuro or a similar promise-to-sell agreement) may not always be as comprehensive or protective of the buyer as desired. Ambiguous clauses regarding delays, quality, termination conditions, and refund policies are common, potentially leaving the buyer vulnerable.
Lack of Tangible Asset & Security: You are essentially buying a promise or a future good. Until the property is physically built, the Declaratoria de Fábrica (declaration of construction) is formally registered, and the individual unit's property deed is issued and registered at S.U.N.A.R.P. (National Superintendency of Public Registries), you do not hold a fully registered, tangible asset. Your investment is largely unsecured until the final registration processes are complete.
Market Fluctuations: While appreciation is possible, market conditions can also change. If the real estate market in Arequipa stagnates or declines, the property's value upon completion might be lower than anticipated, or even lower than your initial purchase price.
Financing Challenges: Obtaining a traditional mortgage from a Peruvian bank for an off-plan property is typically difficult. Banks usually only finance completed and fully registered properties that can serve as immediate collateral. This means you must have the liquidity to make all staged payments or secure alternative, often more expensive, financing options.
Permitting and Licensing Issues: Some developers, unfortunately, might begin sales or even preliminary construction before securing all necessary municipal permits (Licencia de Edificación - Construction License). If permits are denied, delayed, or found to be non-compliant, the project can stall indefinitely, or even face demolition orders, jeopardizing your investment.

Critical Due Diligence Steps for Expats Buying Off-Plan in Arequipa

Given the elevated risks, meticulous due diligence is not optional; it is paramount.

Engage Independent Legal Counsel (Non-Negotiable): This is the single most important step. Do NOT rely on the developer's legal team, as their primary duty is to protect the developer's interests. Hire an independent, experienced Peruvian real estate lawyer who specializes in property law and ideally has experience assisting foreign investors. They will review all contracts, verify permits, and conduct thorough title searches.
Thorough Developer Background Check:
- Track Record: Investigate previous projects completed by the developer. Visit these completed projects, speak to residents if possible, and assess the quality of construction, adherence to plans, and timeliness of delivery.
- Financial Stability: While difficult for an outsider, your lawyer can conduct basic searches for any bankruptcy filings, significant legal disputes, or outstanding debts against the developer or its principals.
- Reputation: Search online for news, reviews, or complaints regarding the developer or their past projects. Look for consistency in delivery and client satisfaction.
Verify Land Title & Permits at S.U.N.A.R.P. and Municipalidad:
- S.U.N.A.R.P. (National Superintendency of Public Registries): Your lawyer must perform a detailed Búsqueda Registral (registry search) on the land where the project will be built. This verifies the developer's clear ownership of the land, checks for any liens, encumbrances (e.g., mortgages), or legal disputes that could affect the project.
- Municipalidad: Crucially, verify that the developer has obtained the Licencia de Edificación (Construction License) from the relevant district municipality (e.g., Yanahuara, Cayma, Cerro Colorado, Sachaca, José Luis Bustamante y Rivero). Without this, construction is illegal and highly risky. Also, check zoning regulations to ensure the planned use (residential, commercial) and density are compliant with local urban planning.
Scrutinize the Purchase Agreement (Minuta de Compraventa de Bien Futuro):
- Payment Schedule: Ensure absolute clarity on all payment milestones, amounts, and due dates.
- Completion Date & Penalties: Demand a clear, firm completion date and robust penalty clauses for significant delays. Be aware, however, that the enforceability of these clauses can be challenging in Peru.
- Quality Specifications: The contract should clearly define the quality of materials, finishes, and construction standards, ideally referencing specific brands or technical specifications.
- Termination Clauses: Understand the conditions under which you or the developer can terminate the contract and the associated penalties or refund policies. Be aware that recovering funds in Peru can be a protracted legal process.
- Guarantees: Does the developer offer any bank guarantees (fianza bancaria) or other forms of security to protect your payments in case of non-completion? This is rare but would be an ideal layer of protection.
Understand Registration Process: Clarify exactly how and when your individual unit will be registered at S.U.N.A.R.P. after completion. The full process involves the developer registering the Declaratoria de Fábrica (declaration of construction) for the entire building, followed by the Independización (individualization) of each unit. Only then can your Escritura Pública (Public Deed) for your specific unit be fully registered in your name, providing you with your own Partida Registral (property file) and full legal title. Your lawyer will oversee this final crucial step.
Notary Public Role: The Notary Public in Peru formalizes legal documents by elevating private agreements (Minutas) to Escrituras Públicas. While crucial for legal validity, a notary’s role is primarily formal; they verify identities and the legality of the document's form, but they do not typically conduct investigative due diligence on the developer's solvency or the project's viability. Your independent lawyer performs this critical investigative work.

Local Context and Warnings Specific to Arequipa

S.U.N.A.R.P. Registration is Key: In Peru, true, unencumbered property ownership is established by registration at S.U.N.A.R.P. For off-plan, your purchase agreement secures your claim, but full legal ownership is only achieved once the building is complete, legally declared (Declaratoria de Fábrica), and your specific unit is individualized and registered in your name. This process can take significant time even after physical completion.
Earthquake Resistance: Arequipa is situated in a high seismic risk zone. New constructions must adhere to stringent earthquake-resistant building codes, typically outlined by the Ministerio de Vivienda, Construcción y Saneamiento (Ministry of Housing, Construction and Sanitation). Ensure the developer's plans and construction methods explicitly comply with the latest regulations, and seek confirmation from structural engineers if necessary.
Desirable Neighborhoods for New Developments: While traditional upscale areas like Yanahuara and Cayma remain highly sought after for their prestige and established amenities, new off-plan apartment projects are also popular and expanding rapidly in zones like Cerro Colorado, Sachaca, and parts of José Luis Bustamante y Rivero. These areas offer modern infrastructure, good connectivity, and often more accessible pricing. Thoroughly research the specific micro-location for future value, access to services, and community feel.
Currency Conversion and Economic Stability: Expats often deal in USD. While Peruvian contracts may be drafted in Soles (PEN) or linked to the USD, be mindful of currency fluctuations if your income or primary funds are in a different currency. Peru has demonstrated relatively stable economic growth in recent decades, but global economic factors can always influence it.
Typical Tax Rates: Beyond the Alcabala exemption for new construction (as explained above), you'll encounter annual Impuesto Predial (property tax, ~0.2-1% of the property's assessed value, paid to the municipality) and Arbitrios Municipales (municipal service fees for waste collection, parks, etc.). If you rent out the property, rental income is subject to Peruvian income tax (e.g., for individuals, a 5% rate applied to a fictitious net income of 80% of the gross rent).

Step-by-Step Guide to Buying Off-Plan (Safely, as much as possible)

Initial Research & Developer Selection: Identify reputable developers with a proven, strong track record of successful and timely project completions in Arequipa.
Engage Independent Peruvian Legal Counsel: This is your first and most critical investment. Retain a specialized lawyer before signing any documents.
Preliminary Due Diligence (Lawyer's Role): Your lawyer thoroughly verifies the developer's legal standing, land ownership via S.U.N.A.R.P., and confirms that all necessary municipal construction permits (Licencia de Edificación) have been obtained.
Review and Negotiate the Purchase Agreement (Minuta): With your lawyer, meticulously review every clause of the pre-purchase agreement. Insist on protective language for potential delays, quality standards, and clear refund or termination policies.
Formalize with a Notary Public: Once the Minuta is agreed upon, it is elevated to an Escritura Pública (Public Deed) before a Notary Public. This makes it a public instrument and provides greater legal weight, ensuring its registration at S.U.N.A.R.P. in due course.
Adhere to Payment Schedule: Make payments strictly according to the notarized agreement. Keep meticulous records of all transactions, including bank transfers and receipts.
Monitor Construction Progress: Request regular updates, photos, or even conduct site visits (if permitted by the developer and safety regulations) to track progress against the agreed-upon timeline.
Final Inspection & Handover (Acta de Entrega): Before accepting the property, conduct a thorough inspection for defects, unfinished items, or deviations from plans. Document everything, preferably with photos. Do not sign the Acta de Entrega (Handover Act) until you are satisfied, or ensure all pending issues are clearly listed and agreed upon for rectification.
Registration of Your Property: After construction is complete, the developer must register the Declaratoria de Fábrica and Independización of individual units at S.U.N.A.R.P. Only then can your Escritura Pública for your specific unit be fully registered in your name, providing you with your own Partida Registral (property file) and full legal title. Your lawyer will oversee this final crucial step, ensuring your property is correctly recorded and protected.

Conclusion

Buying off-plan ('en proyectos') in Arequipa can be an attractive investment strategy for expats, offering potential capital gains and the benefits of modern construction in a dynamic city. However, it is an investment fraught with significant risks due to the unique regulatory environment in Peru. Success hinges entirely on robust, independent legal due diligence, selecting a highly reputable developer with a proven track record, and a clear understanding of the local legal and administrative processes. For those willing to invest the time and secure expert local advice, it can yield substantial rewards in the thriving Arequipa real estate market.