By Mariano Capellino, CEO of INMSA

Recently, real estate exhibitions from many countries of the region were attended by an important number of developers and brokers promoting under-construction condo projects in Miami, Brickell, or locations by the beach. Some of them have participated as speakers in panels as well.

Whether you intend to acquire a luxury condo unit to enjoy it as your home or for investment purposes, it is time to understand where you are placing your money. And especially in Miami, Brickell, and locations by the beach, which are normally known by foreign investors as the under-construction luxury condo market in Miami.

There is some controversy in the sector as to whether such areas are a bubble or not. And this is understandable because even when there is no interest in that market, real estate business operations in Miami are affected. But it should also be understood, in support of investors, that as we have been anticipating for several years in INMSA’s real estate reports, data reflect a very complex situation which will significantly get worse in the coming years.

In the USA, it is possible to have access to reliable data enabling to analyse the situation of the real estate market. These data show that we are experiencing a turning point and perceiving the end of the expansion phase and the beginning of the price correction phase:

  • Between 2012 and 2016 more than 3000 units have been built, distributed in more than a dozen of towers which have already been completed. Out of the units available for sale, only a small number has been sold, according to the information provided by the MLS system. When projecting this situation, it is possible to assume that it would take 10 years to sell the current stock, at the same pace and price.
  • The problem is that there are more than 10,000 units under construction in similar condos distributed in approximately 40 towers which will be completed in the next 2 years. If only 30% of such units are made available for sale – as estimated by the analysts of the sector- in addition to the current ones which remain unsold, many many years will be necessary to absorb all the supply.
  • The thing is that many buyers of under-construction units paid prices significantly higher than the current market prices for condos of similar characteristics already finished.

With this situation, there are already buyers of under-construction units ready to assume losses to exit their units. But, even so, there is very little interest in the market to acquire those condos and demand is slowing down because of the additional units that are arriving to the market.

Considering a delay of 50 years to sell the oversupply of property is unthinkable, so it is logical to assume that the prices of this type of property will come down. Based on our analysis, the strong decline will take place by the end of 2018 when the stock levels reach their maximum figure due to the arrival of a large number of units which are today under construction process.

After a strong decline in prices, as usual, the absorption of property stock will begin and sales will be accelerated. But the sale price must be much lower than the one paid by investors during the last 3 years, as it happened between 2009 and 2012.

Thus, buyers who paid more than US$ 5000 per square meter in the period between 2013 and 2016 in Brickell – Downtown area and want to sell their units upon delivery in 2018 or 2019, will unfortunately suffer a loss of more than 50% of the amount paid.

Many investors will think that waiting until a better value can be obtained is the best option. But, is this possible? Let´s take a look at history. During 2004 and 2005 many investors bought the idea that the best business deal was to buy property in the best location, Brickell, and they paid about U$S 5000 per square meter for housing units under construction process. In 2008, when they were delivered their finished units and in view of the collapse in prices at that moment, U$2500 per square meter, many investors decided to keep the asset thinking that a good location would soon recover the value and would allow them to obtain good profitability.

But in 2014, 10 years after acquisition and when the market was at its peak as no new stock was available, and with an upward tendency of prices, the average values had only reached U$S4500 per square meter, i.e. less than the amount originally paid.

This posed a dilemma. If they had sold at that moment, a lot of money would have been lost.

For that reason, an important number of investors preferred to maintain their assets because at that moment units under construction process were being sold at about U$S 6000 per square meter.

But this decision was wrong. Now, they will have to wait until 2024 to see peak figures again, therefore, if God helps, 20 years after they would be able to end in a tie. And if we consider the average 3% inflation in the USA, even selling at the original price, they would have lost about 50% of their capital because of the impact of inflation.

This business has been successful for large developers, making them reach the list of billionaires in the USA and allowing them to multiply their assets in the last years, but this business also led thousands of Latin American and other foreign buyers to lose huge amounts of money.

For that reason, think twice before making an investment. If you are willing to pay any price, at the expense of losing money, you can do it and probably you will have one of the best assets in the world with a fantastic view. But, if you are an investor, be careful. Glamour, speeches, good stands, art, showrooms, brochures and videos are very tempting but the price to be paid can be too high.