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Investors Getting Ready For Argentina’s Real Estate Resurrection
David Sutton isn’t going to wait for Cristina Kirchner to leave her pretty pink mansion in Buenos Aires. Despite an economic downturn, the Alvear Group’s CEO has been busy building up the new Puerto Madero section of the capital city more than any other developer. Sutton’s company – heavily invested in real estate and tourism — has been limping along thanks to president Kirchner’s restrictive dollar policies, but moving forward nonetheless. They bought a $40 million piece of land inside the new port district in 2010. Then the dollar market shut down. And then he rifled through another $130 million of the company’s own capital to build Alvear Tower, currently the tallest residential building project in South America with 54 floors towering 235 meters (770 feet) above the River Plate. It was supposed to be move-in ready by December 2015. It won’t be. We can blame politics for that.
Import delays caused by government restrictions means the tower won’t be done until June 2018. Doing business in Kirchner’s Argentina is not easy. Unlike Sutton, most real estate investors are waiting for her to go.
“There’s no recovery just yet,” says Damian Benavoli, a consultant with CBRE, a multinational real estate services firm with offices in Buenos Aires . “We think the market will remain stable until the elections in October. After that we are expecting a recovery.”
The market has sung Argentina’s swan song for the last two years. They had good reason. Kirchner has been commandeering a train wreck for the past eight. In one sector, real estate, South America was on a tear. The Paris of the South was burning by comparison, at least metaphorically. In 2011, Kirchner pulled out all the stops while investors pulled out their hair. Call it Act III in the Kirchner drama, el Presidenta put a limit on dollar transactions, making importing next to impossible. Foreign investors, especially Yankees with dollars, were not welcome by the Kirchner government.
Here’s the good news: Argentina has hit bottom and is now on pause. It doesn’t get worse from here. One of the key places Argentinians and foreigners are looking to invest now is real estate.
“There are several institutional investors analyzing diverse types of investments in different industries. The sector of most interest is real estate,” says Frederico Tomasevich, CEO of Puente, a $15 billion asset manager and Argentina’s biggest.
Inquiries have come from New York, London, China and Soros Fund Management.
In 2013, while real estate prices and deals were soaring in Rio, Santiago and even Bogotá, Buenos Aires sales prices declined for the first time since 2005. The biggest issue was the fact locals were hard pressed to get the dollars needed to buy homes. On the residential side, home shoppers pay cash and real estate priced in dollars is an inflation hedge. On the commercial side, there’s less building now than in 2007. For a city the size and stature of Buenos Aires, there’s currently around five projects in the works and two of them are Sutton’s.
Got Dollars? Argentine Real Estate is a Buy
For investors with strong dollar bills bulging through their wallets, there’s some good shopping to be had in Argentina. Commercial real estate prices are stable, but residential prices decreased 2,5% in Buenos Aires over the last year. CBRE says prices in other states have fallen even lower. This is discount shopping time in a country that has plenty of caché and potential.
Sutton told FORBES the real estate market is coming back to life. This is more hope than reality at the moment. The Group’s Alvear Tower is just 49% sold. Unsold units have risen pretty much with inflation, around 30% higher than their asking price back in 2011.
“Argentina’s future economic outlook is promising,” Sutton says. “Independent of the two undertakings we have in Puerto Madero, we are convinced this is an excellent time to invest in real estate in this country. Relative values of quality properties will see a significant appreciation in the next few years.”
The company is currently topping out the Alvear Icon in Puerto Madero, a hotel and luxury residence. Puerto Madero is where the more exciting real estate opportunities are in Buenos Aires. Downtown is seeing some revitalization as well with city funding trying to entice real estate developers and small business owners to build in the old financial district. It’s a slow process, but it is clear that work is ongoing as a number of old buildings are being gutted and restored.
Foreign investors will take their cue from deep pocket locals.
New York-based developer YoungWoo has a 2,000 acre real estate project in Mendoza called the Dragonback Estate. They bought acreage in northern Argentina wine country a few years ago with the idea to sell vineyard estates. They’re now considering expanding into hospitality. The bought out their local partner, Fiducia Capital Group, in 2013. Around 740 acres have been sold.
“I enjoy Buenos Aires and think there are a lot of opportunities there,” says Bryan Woo, the firm’s director of acquisitions and global project management. FORBES crashed a meeting he was having with local investors at Peugeot Lounge, a chic bar in Palermo, a few days before Christmas. “When Argentina figures itself out and there is more investor confidence…you will see real estate go through a prolonged series of appreciation. It’s still a difficult time to invest significant capital in construction in Argentina right now as a foreign firm. Importing commodities and building materials is challenging because of capital controls and you have to incorporate that into your time horizon and delivery,” he says. Sutton figured that out recently. Kirchner’s become a road block.
Her road blocking has made real estate affordable. A strong dollar helps, too.
Buenos Aires real estate prices are among the lowest in South America. According to a November study by the Buenos Aires College of Real Estate, the city’s average house in a middle class neighborhood sold for $181 per square foot. Only Lima was cheaper at $142. Rio de Janeiro averages $335 per square foot.
While Rio real estate is cooling, Buenos Aires real estate has hit the floor, according CBRE. Looking at rental prices for commercial properties in Latin America cities, Buenos Aires’ price trend points towards a drop in rental declines. If the cycle goes according to plan, higher rental and lease rates are coming, which is good for investors that bought in the crisis years.
The crisis years are winding down.
In fact, there is something celebratory in the air among the business elite in Buenos Aires. And it’s not just because it’s summer time. “We anticipate something to change for the better,” Woo says, as if he and his friends somehow know.
As blind faith has it, stabilization of the peso is expected next year. On the streets, the peso is worth 13 to 1. In the government, more like 9 to 1.
Despite the Argentine political dramas of the last 14 years, Kirchner at least managed to keep the country from complete destruction. Unlike rival Brazil, the crisis in Argentina has less visual impact. Working class neighborhoods like La Boca do not look as rundown as working class neighborhoods in comparable cities like Rio and Sao Paulo. When Brazil’s economy suffers, it’s unavoidable. It’s in the air you breathe. Poverty closes in fast.
The poverty level in Argentina has surely risen under Kirchner. No surprise, but since the 2001 debt default some 25% of the population is now considered poor by national standards, according to the Catholic University of Argentina in Buenos Aires. That’s created an uneven market, with new real estate projects geared towards wealthy buyers. In some sort of Argentine fantasy land, Puerto Madero is envisioned to be a bit like Abu Dhabi, complete with Guggenheims, fast cars and exclusive wine tastings at private tango shows. In reality, Puerto Madero represents the city’s potential for exciting new development. There’s space. And there’s money on the sidelines. It’ll happen.
In Buenos Aires, real estate and construction together account for roughly 20% of the city’s economy. As a stand-alone, real estate is the third most important economic sector of the city, following manufacturing and transportation. There is a risk that Argentina goes back to her old ways of boom and bust, meaning investors buying now may very well see their value erode with a new government four or eight years down the road. That’s the big picture risk. But with the dollar stronger than it has been in more than a decade, Buenos Aires looks like an off-radar opportunity. Where most offshore real estate money might head closer to home, savvy global money managers are looking closer to Antarctica.
The Buenos Aires skyline is void of cranes. Some of the biggest Argentine conglomerates, and foreign real estate investors, think that is about to change.
“There is no reason why Buenos Aires, in a relatively short time from now, will not reach real estate values comparable to the Brazilian market and even surpass them,” says Sutton, the Alvear CEO currently building the city’s tallest skyscraper. “Like everyone else in this business, we believe that a more realistic currency exchange will be an important incentive for our industry.”