By Mariano Capellino, CEO of INMSA
During the recent years, real estate fairs and exhibitions both in Argentina and in the region were visited by a large number of developers and brokers promoting under-construction condos projects in Miami, in Brickell zone or areas facing the beach. Even more, some of them have the privilege of participating in boards or as speakers. Many of these players are also developing luxury towers in Buenos Aires today, based on the same successful concept used in Miami.
If you wish to acquire a luxury condo to live in or for investment purposes, it is time for someone to tell you not to go wrong. As an example, you can have a look at the off-plan luxury condos market in Miami which is becoming a big bubble. As we have anticipated several years ago in our reports on real estate scenario, data show that the situation is very complex and it will get worse in the next years.
In the United States, you can access reliable data thus making it possible to analyze the situation of the real estate market. And these data show that we are in a turning point and we are starting to perceive the end of the expansion phase and the beginning of the price correction stage:
- Between 2012 and 2015 a number of 3200 units were built in 15 towers already finished. A number of 680 units were offered for sale and, during the first 6 months, only 34 were sold according to the MLS system. If that volume of sales is maintained, this year, 68 units will be sold. Therefore, at this pace and if no new units are offered for sale, it would take 10 years to sell the units currently in stock.
- The problem is that there are 11,000 units under construction process in similar condos distributed in 37 towers which will be finished in the next 30 months. If only 30% of such units are offered for sale, i.e. 3300 – as estimated by analysts of the sector – plus the 646 units being offered but still unsold, the stock would reach the number of 3946. If this sales pace is maintained, it will take 58 years to absorb the entire offer.
- The problem is that many buyers of off-plan units paid prices quite higher than the current values in the market for condos of similar characteristics and already finished.
In view of this situation, there are already buyers of units on an off-plan basis ready to bear losses in order to exit their units. But, even so, there is very little interest in the market to acquire these condos and the demand is slowing down due to the additional units that will be made available in the market.
As it is impossible to think that 58 years will be necessary to sell the oversupply of real estate, it is reasonable that the prices for these types of property will suffer further decline in the short term. Based on our analysis, the strong decline will take place by the end of 2018 when the inventory level reaches its maximum values due to the completion of the units now being under construction.
After a strong decline in prices, as it usually happens, the stock will start being absorbed and sales will be accelerated. But the selling price must be much lower than the amount paid by investors during these last 3 years, as it happened in the period 2009-2012.
Thus, those buyers who paid more than US$ 5000 in the period between 2013 and 2016 in Brickell-Downtown area and want to sell their units when they receive it in 2018 or 2019, will unfortunately bear losses which might exceed 50%.
Many investors will think that the best option is not to sell and wait until they can obtain a better value. But, is it possible? Let´s go back over history. During 2004 and 2005, many investors were led to believe that buying in the best location, Brickell, was the best business deal, and they paid near USD 5000 per square meter on an off-plan basis. In 2008, when property was finished, and due to the collapse of the prices at that moment, reaching USD2500 per square meter, many investors decided to maintain their property thinking that they would soon recover the value and would obtain solid income because of the good location. But, in 2014, after 10 years of acquisition, and when the market was booming because no new inventory had been made available, with an upward pressure on prices, the average values had only reached USD 4500 per square meter, i.e. less than the amount originally invested.
This generated a dilemma. If they had sold at that moment, they would have lost a lot of money.
For that reason, an important number of investors preferred to keep their assets as, by then, units were being sold at USD 6000 per square on an off-plan basis.
But the decision was wrong. Now, they will have to wait until 2024 to see peak values again. So, if God helps them, after 20 years, they will be tied. And if we consider USA’s average annual 3% inflation, even selling their unit at the same price as acquired, they would have lost 50% of their capital due to inflation impact.
Today, with the arrival of Miami developers to Puerto Madero, it seems that the same story will be repeated. Driven by the marketing force of developers, property is being sold at prices even higher than those situated in the best locations in Miami which still remain unsold.
The transactions that were so successful for developers, who become billionaires in USA and were able to double their assets in the last years, and which made thousands of Latin American investors who placed their trust in them lose lot of money; seem to be happening in Argentina as well.
For that reason, don´t be tempted. Glamour, speech, good stands, art, showrooms, brochures and videos are very attractive but they can cost you a lot, really a lot of money.