Peru enacted a law this week which widens home rental and mortgage options in an effort to stimulate its slowing construction industry.
Peru’s “Home Rental Promotion Law” specifies three new types of contracts for real estate property to be used as a home: rental contracts, rental contracts with the option to buy and rent-to-own contracts.
The latter two establish a price for the property in a rental contract in which, upon completion, the renter will have the option to buy at the established price. The rent-to-own law, also known as “leasing,” allows real estate companies to finance mortgages.
“This law restores the ability to property owners, using the mechanisms specified in the legislation, to make effective and much safer use of the home which they have to rent out,” said housing minister Francisco Dumler. “We estimate for the most optimistic and pessimistic scenarios that the supply will come to move between 30,000 and 50,000 homes in 2016.”
Dumler highlighted parts of the law which will remove risk for businesses looking to rent real estate. In Lima especially, there is excess supply in for-sale markets while rental markets are lacking. Industry leaders have long called for better protections for property owners whose renters stop paying.
Collins Salvador, a real estate lawyer with Corporacion Peruana de Abogados, told Peru Reports that evicting a delinquent tenant takes a minimum of two years and as many as five.
The new regulation shortens the eviction process for delinquent tenants to just one month. Salvador explains that the law also creates a public registry of rental contracts so property owners can check the rental histories of prospective tenants.
The lower risk of delinquent tenants refusing to leave an apartment will drive the rental market, Dumler says, which in turn will put downward pressure on interest rates for mortgages, which will further drive demand for homes.
“The attitude among the real estate industry is very positive about the new law,” Salvador said. “Plus, the new eviction rules is not the only improvement. There are new ways to do business now.”
“Renting with the option to buy is an ideal option for those who cannot qualify for a bank loan because they have irregular or informal income,” Salvador says. At least three out of every four Peruvian workers are employed outside the formal economy. “The options contract will demonstrate his ability to pay during the lease and help him qualify for a mortgage.”
Under the leasing option, Salvador explains that the property owner finances the down payment with the renter’s monthly payments. If the renter chooses to purchase the property at the end of the rental contract, the price is effectively lower.
After more than a decade of red-hot growth, Peru’s economy is slowing with falling commodity prices. An extraordinary El Niño summer is further expected to damper GDP. The government is looking to revitalize an industry which saw home sales fall 40% from 2013 to 2014.
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