Alzas y Bajas magazine, in its issue number 152, published an article written by Mariano Capellino about lands in some zones in Argentina which are currently constituting a big opportunity for real estate investors. This important magazine has been informing for 25 years on real estate market and, in this occasion, Mariano Capellino was invited to give his opinion on this matter especially focused on Argentina.
The full text of the article:
Where is the only chance to invest in real estate in Argentina?
By Mariano Capellino, founder and CEO of INMSA
There is nothing new. We, Argentine people, consider real property as one of the safest investments which will eventually allow you to make a profit, as my grandpa used to say. We believe that bricks represent safety and guaranteed profitability.
The crisis suffered in 2001 helped consolidate this idea. For more than 8 years, from 2002 to 2010, we lived in what we, investment experts at global level, call Phase of Recovery and Expansion of the cycle.
During the first 4 years, Premium real estate whose values had dropped 35% on average were recovered rapidly and they continued to grow for the subsequent 4 years as there were no other low-risk alternatives available for investors.
Also, from 2005, a five-year recovery and expansion process took place but, in this case, in class B and C assets, where middle-class people live in peripheral areas, first in the city of Buenos Aires and then in the Province of Buenos Aires as well as in the most important cities in the interior of the country.
Based on this experience, it was generally assumed that you always make money. And, even though investing your money in property is very good business, the fact that you always make a profit is quite far from reality.
Large real estate investment funds worldwide create investment portfolios by evaluating and selecting the most convenient market (country, city, neighborhood), type of asset (residential property, office, retail, urban lands, etc.) and class of asset (A, B, C) to invest in. Generally, small and medium-size investors buy in the same country and, many times, in the same neighborhood.
Instead, large investment funds are willing to move from one market to the other, for one single reason: the cycle of the markets.
The cycle of the markets controls this business as the rate of return, after a phase of recovery and expansion of the cycle, will tend to drop or it may even become negative in the correction and recession phases. It has been proved that it is very difficult to repeat in the near future a successful result recently achieved in one market and with a certain class of asset.
Markets have the so-called window of opportunity which are usually five years maximum. It is necessary to enter at the right moment when the value of the property is very low and there is evidence that the recovery phase is starting, which usually takes place after an economic or real estate crisis.
And exit when approaching the peak price, i.e. at the end of the expansion phase when the rate of appreciation starts decreasing. Many investors feel tempted as they think that the property will continue to increase its value at the same pace but that is not the case.
That situation happened in Argentina. At that moment, it was good business to buy a certain type of asset and then sell it to subsequently acquire another one in a different location. But most investors didn´t go through this process. So, what they recovered at the beginning with the recovery process, was then mostly lost because they maintained the asset during a long period of time without important appreciation in value and without a reasonable rental income. In Argentina only a 2% net value annually can be obtained today.
Let´s have a look at the numbers: professional sophisticated investors arrived in Argentina in 2003 and left in 2008/9 obtaining an average 18% return yearly. Then, in 2009 they jumped to USA, Miami and other cities, taking advantage of the profound crisis produced in Miami Beach and Brickell and after 4 years, they sold and obtained more than 15% annually in US dollars. Then they acquired middle-class homes in areas where residents of the South of Florida live, class B assets, to exit four years later in 2017 and 2018, obtaining annual returns higher than 25%. Now they are investing in other markets such as Detroit or Spain, the big stars in real estate business today.
This result which was 8 times their initial investment in less than 15 years would not have been possible if instead of using an active strategy they would have maintained the asset acquired in Argentina. Those who maintained the asset passively in Argentina were able to obtain returns equivalent to one third of the amount achieved through the active strategy.
And this is not just a problem in Argentina. Today, the Miami Brickell-Downtown zone which was big business in 2009, is already going through the correction phase of the cycle, those owners who had acquired assets under construction process since 2013 are currently having difficulties as they are receiving their units and they can only sell at values lower than the prices originally paid.
Even those investors who acquired units in the best moment in 2009 at an average price of $2,300 per square meter and could have exited in 2014 approximately at 4,500 US dollars, today they can barely obtain $3000 and it is estimated that values will continue to go down at least for 3 more years due to the excess of supply, currently under construction process, and which will be delivered in the next years.
In other words, nothing is totally sure. In order to make money with real estate investments, it is necessary to consider the cycle of the markets.
Today, Argentina is facing a big challenge in terms of real estate investments. It is going through the Expansion phase for premium assets, so, values are not expected to continue to grow at a great pace. They only go up because of the constant increase in construction costs but at a slower pace, otherwise, real estate would reach values impossible to afford. Today the construction cost has reached record values of 1,500 US dollars per square meter, practically twice its value three years ago as the cost in US dollars increased 100%. Still, values have risen only 30% on average in the same period. Therefore, the possibility of strong value increase is blocked except that the exchange rate continues to increase.
But the sector has regained vitality due to the appearance of mortgage loans. This will allow to revitalize a market whose activity was poor as middle-class people could not afford a property, i.e. the market of second-hand and middle-class oriented homes. Furthermore, a new offer of developments will be generated to be constructed in peripheral areas in the city of Buenos Aires and in the interior of the country as well.
From Palermo to La Boca district, from Belgrano to Barracas neighborhood. This new situation will generate an important change for investors. In the past, acquiring property on an off-plan basis was good business and as Argentina was going through a cycle of Recovery and Expansion within a context of strong appreciation of the peso currency, time generated good results. That is a thing of the past and today that type of acquisition is no longer profitable. Still, the market will continue operating as buyers will be loan borrowers without needing an investor as an intermediary who will be replaced by banks and end users.
In this new context, there is an option for investors. The best business, already targeted by investment funds companies and family offices, is to acquire lands suitable for the construction of residential units in no-premium zones of the City of Buenos Aires (CABA), in the Province of Buenos Aires and the interior of the country, to be subsequently sold or gr
anted to developers when demand rises. The locations with Metrobus transport system or with other good public transport options would be the areas where people will want to acquire property as their prices are more convenient than in traditional zones of the city. For instance, San Martín railways passage whose electrification will be done soon. These zones were not on the radar of developers as there was no solid market for that. And that affects the price. For instance, a plot of land in peripheral areas but with good potential today has a value equivalent to a quarter of that in Palermo and Belgrano neighborhoods. And less than half of the value in consolidated zones such as Caballito, Núñez or Urquiza neighborhoods.
Higher demand in those zones will generate big opportunities for those having lands suitable for construction.
As mortgage loans become more consolidated, demand will grow and these lands which today can be acquired at very convenient prices will experience a strong increment in their value. At INMSA, our projection for these types of lands is that they will generate approximately 45% returns within a 3-year period.
And lands with a construction capacity of 5 and 10 thousand square meters will become even more attractive. Those lands can be acquired at a lower value per square meter but as soon as the demand rises, their value will go up as developers will be benefited from the economy of scale at the time of construction.
And even when there is a latent risk of devaluation which strongly impacts the real estate business, the value of the land is usually the least affected one as the most important effect in these types of developments is in the cost of construction. In general, when there is demand and, we understand that it will grow in the next years, even with a devaluation situation, lands will be the best option to invest in.
On a global basis, the big opportunity in real estate business is in cities with high revaluation potential and good returns such as Detroit, Madrid and other cities in Spain. In Argentina, only lands in the suburbs of Buenos Aires and locations away from their center in the interior of the country are the opportunity for real estate investors. Investment that can generate 50% returns in US dollar within a maximum period of 3 years. As this is a middle-class market which is still going through an expansion process, it is a unique chance.