NAI Global in the NEWS
Mar 19th, 2009|
David Berger, NAI Global Managing Director for Latin America & the Caribbean, was featured in two recent articles in Latin Business Chronicle. In Latin Real Estate Outlook Q&A, David discusses the overall commercial real estate market in Latin America. In the second article, Ivanka Trump: Panama Hottest Market, David supports Ivanka Trump’s theory of Panama.
Also featured in the Latin Business Chronicle is an outlook of the Latin American markets based on excerpts from NAI Global’s 2009 Global Market Report. |
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Latin Real Estate Outlook Q&A Latin Business Chronicle asks leading experts about Latin America’s real estate outlook in 2009 BY CHRONICLE STAFF
What is the outlook in general for real estate in Latin America this year? To what degree has the growing credit crisis affected the sector? To what degree will it affect the sector the rest of the year? What is the outlook for individual real estate markets like Brazil, Mexico, Panama and others? Latin Business Chronicle asked two leading experts: David L. Berger, managing director for Latin America and the Caribbean for NAI Global, and Edward de Valle, President of AMG Worldwide. Latin Business Chronicle: How do you view the outlook in general for real estate in Latin America this year?
De Valle: Good! I think that the outlook for Latin America will be good due to the fact that these economies are much more cash-based and less dependent on credit than most countries around the world. Additionally, real estate in this region is far more inexpensive for beachfront, jungle, and mountain living when compared to other global destinations. Remember that Latin American countries have been in economic turmoil since the beginning of time, so this economic slump is just another cold for them versus the flu we are feeling in the United States.
Berger: Overall good so far. However, it is still a bit too early to tell how deep the economic slowdown will affect Latin America and the Caribbean; we are still early in the cycle. The United States and Europe lead Latin America by several months. Nevertheless, overall real estate transaction volume will decline and property values will decrease slightly. As yields decompress in other major foreign markets to compete for capital, Latin America and Caribbean will need to remain competitive by raising their cap rates, however, most landlords probably will not, preferring to wait until the markets have turned round. The general feeling is, and current anecdotal evidence seems to indicate, that overall the negative impact upon Latin America and Caribbean will not be as deep as it has been in the past. Most Latin America and Caribbean countries have greater reserves and practice sounder fiscal policies than they have in the past. Their economies are stronger due to solid and practical growth over the last decade. That being said, many of the Latin America and Caribbean countries are heavily invested in highly cyclical industries such as commodities and resort/tourism. Those countries (like Chile, Peru, Argentina, Mexico) that benefited most when commodity prices were high, and countries (like Costa Rica, Panama, the Bahamas, other Caribbean countries) that rode high on the wave of global tourism and disposable incomes being left behind in their territories, will certainly receive an undesirable economic jolt. But the expectation is that except in a few cases, they will ride through the storm with relative ease. Nevertheless, an important factor is the length of this downturn. The longer it goes on the worse it will get for Latin America and Caribbean – the region is highly dependent upon cash flow from external sources. It is important to consider this on a country by country basis. Here is my crystal ball view for this last comment:
· Top-tier countries: Brazil, Chile, Panama, Mexico, Colombia and Peru. [They] should weather this situation the best. They have been either good at attracting investment capital and/or have developed enough of an internal economic engine/demand to keep the real estate sector moving forward. Choosing three countries that may weather the economic crisis the best in 2009, they would be Brazil, Chile and Panama.
· Middle-tier: Costa Rica, Jamaica, The Bahamas, Uruguay, Argentina [and] El Salvador … have real estate sectors that will probably feel the “hit” of the economic slowdown more deeply than the top tier, but not as badly as tier three. These are countries that have been moderately successful at attracting foreign investment, have institutionalized governmental systems and stable economic systems based upon pragmatic practices and/or have developed enough of an internal economic engine/demand to keep real estate demand moving, albeit at a slower rate.
· Bottom-tier: Venezuela, Ecuador, Bolivia, Nicaragua. Their real estate sectors will feel the brunt of the economic [slowdown] the worst. They have not been adept at attracting foreign investment and they have not developed enough of an internal economic engine/demand that would keep up demand in the real estate sector. The only exception to this list (for capital reasons) is Venezuela that still has a high amount of capital reserves, however, two things – the Venezuelan economy is highly dependent upon the sale of oil, if the price of oil continues to stay low through 2010, the government will then experience a serious shortfall of capital. Secondly, the consumer economy is already being hit due to the lack of investment in new business and business in general in Venezuela. Additionally, an inflation rate of no less than 22 percent is expected this year. The government claims that it will be 15 percent, but that is highly unlikely since it was 30 percent in 2008 and the authorities have not instituted any new practical policies or measures to reduce it for 2009.
Berger: In general, as I predicted in [the] fall [of] 2007, the credit crisis has not much directly affected Latin America and Caribbean, but what has affected it are the second-hand effects of decreased demand for products, commodities (and lower prices thereof), services, and tourism by foreigners. Latin America and Caribbean, for better in the current climate and worse for their future development, a) they do not have any major banks and institutions that practice the acquisition and disposition of sophisticated high risk and alternative investment vehicles and b) financing for real estate and personal consumption habits is not so widely available as in the United States and Western Europe so the impact has been negligent on the financial and governmental institutions. The crisis has created some liquidity issues for real estate (what little was available), greatly expanded the spread in bid to ask prices for properties, it made financing difficult (certainly more conservative and expensive for what little was available). Additionally, the impact on companies and the economies of the region will drive down operational performance of the properties, i.e. in some cases reducing rents and increasing vacancies in some markets. De Valle: Not much, again because these economies are mostly cash-based. In fact if you take a look at most purchases for high end real estate in the Caribbean and Latin America you will be able to pull a trend report that shows that over 70 percent of buyers pay cash for real estate.
To what degree will it affect the sector the rest of the year?
De Valle: I believe that economies that rely more on the U.S. economy will have a harder time. For instance Central America., i.e. Panama, will have a hard time closing all of the units they have sold to foreign buyers because they depend much more on credit than other Latin American economies. Mexico… will also feel major effects because they are also dependent on the U.S. buyers for second and third homes. Like the United States, they also depend on buyers and sellers being able to move real estate to make additional purchases.
Berger: I touched on that in the first question by breaking down Latin America and the Caribbean in to three tiers; I dislike generalizing for the entire region. If one utilizes my simple analysis of there being three “categories of pain” for countries in Latin America and Caribbean, here is my crystal ball prognosis: · Top tier: If the United States starts to see light at the end of the tunnel by mid-year 2009, these countries will experience a bit of a slowdown in real estate activity for all 2009 and the beginning of 2010, then in the second quarter 2010 the situation will look more optimistic. If the U.S. economic situation continues to deteriorate through 2009, there will be a steady slow decline in real estate activity and 2010 would be worse than in 2009. · Middle tier: If the United States starts to see light at the end of the tunnel by mid-year 2009, these countries will experience a marked slowdown in real estate activity for all 2009 and the beginning of 2010, then in the second to third quarter 2010 the situation will look more optimistic. If the U.S. economic situation continues to deteriorate through 2009, there will be a steady strong decline in real estate activity and 2010 would be much worse than 2009. · Bottom tier: If the United States starts to see light at the end of the tunnel by mid-year 2009, these countries will experience a strong slowdown in real estate activity for all 2009 and the beginning of 2010, then in the third quarter 2010 the situation will look more optimistic. In the case of Venezuela, given that their economy is almost entirely dependent upon sales of oil, as the U.S. economy recovers so will the fortunes of Venezuela. However, there will still be a lack of new construction and interest from foreign investors. If the U.S. economic situation continues to deteriorate through 2009, there will be a steady strong decline in real estate activity and 2010 would be considerably worse than in 2009.
How do you view the outlook for Brazil’s real estate sector specifically? De Valle: Not good. As we all know it is one of the BRIC countries and all of these are suffering with the exception of China. Brazil is too volatile both in its government and economic politics making it an unstable real estate investment. I would wait. I don’t think it is the time for real estate investors from the United States to dive into this market. The market nationally does great. That’s because they know how, what and where to buy locally. An American trying to do this can [get into] a nightmare. How do you view the outlook for Mexico’s real estate sector specifically? Berger: It could bear the brunt of the U.S. recession relatively well; however, the fear is that it will mirror the declines that occur in the United States. The drop in consumer spending with the drop in the price of oil has and will continue to hurt the economy and especially the government’s plans for major infrastructure projects. In regard to investment, cap rates were a 200 to 250 basis point spread over the US yield, as US cap rates increase 100 to 150 bps, the Mexican cap rates will no doubt follow suit at a slightly higher rate. By far the major market, Mexico City will see rent prices soften, although the ask rates will remain the same. Rental demand for office and industrial product will probably drop by about 15-20 percent over the previous year. Mexico has been fairly good at attracting foreign investment over the last ten years. Once the economy in the United States starts to stabilize, then investor concerns should be mollified and a new influx of capital investment should start anew. Additionally, Mexico has a solid institutionalized system and a strong enough internal economic engine and demand that should help it weather the economic storm, if it is not prolonged. How do you view the outlook for Mexico’s and Panama’s real estate sectors specifically?
De Valle: Not good. Until late 2010 they have some of the best projects in the world slated to come to market or in the market. They have the perfect set up for an American to buy lending wise. They are extremely friendly and enjoy having Americans investing in their country. But the bottom line is, there needs to be a price adjustment in places like Cancun and Panama City, where the market followed the pricing trends of the United States. How do you view the outlook in other key Latin American markets? Berger: These other markets will be hit the hardest. In the urban areas of the tier one countries, generally demand for office and industrial space should continue, not at the highs of 2007, but at a reasonable rate; perhaps our activity will fall by as much as 20 percent in the urban areas. The less urban areas will be hit like the middle tier urban areas, which means that there will be some demand, but activity will likely decrease by approximately 20-30 percent. For the lower tier countries the affect will likely be a decrease of 35 to 50 percent in activity.
De Valle: I think the Caribbean is the number one place to invest in 2010 and early 2011. There is no place like the Caribbean and if I were to invest in Latin America I would do it in Peru. If I were to invest in a not-so-hot Spanish-speaking market now, I would do Panama and Mexico. It’s a big risk. However [there are] huge returns, and you better know what you’re doing. |
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Ivanka Trump: Panama Hottest Market Ivanka Trump sees Panama’s real estate market as the hottest worldwide, with demand outstripping supply on the Trump tower there. BY JOACHIM BAMRUD
“I have projects all over the world [and] have a unique sense of the global real estate climate and submarkets,” she tells Latin Business Chronicle. “With great conviction, [I can say that] Panama is one of the strongest, if not the strongest, real estate market. Our biggest problem is not having enough inventory. We only have a small percent of the building left.”
ROBUST MARKET
The Trump success in Panama echoes the sentiments of other real estate experts. Property Frontiers recently named Panama as its top property hot spot for 2009, while David Berger, managing director for Latin America and the Caribbean for NAI Global, sees Panama as one two Latin American markets that will best weather the storm this year (the other being Brazil).
So what does Ivanka Trump see as the reasons for Panama’s success? “It’s got a great government that really supports developers,” she says. “I’m impressed with their forward thinking in bringing in new potential residents. I’m in New York and see as “escape to Panama”. I never saw that five years ago.” TAX INCENTIVES Panama also offers important tax incentives. “Some of the tax incentives are incredibly luring to international [investors], especially as we in America are being taxed to the hilt,” Trump says Meanwhile, the $5.2 billion expansion of the Panama Canal is also generating strong growth, helping drive demand for real estate and other services.
And then there’s Panama’s combination of urban modernity and rural beauty. “Panama is an exceptionally diverse and beautiful country, with an urban and well-established city in addition to gorgeous resort-type destinations,” she says. The three-year old Punta Pacifica Hospital, affiliated with Johns Hopkins Medicine International, is also a big draw, Trump points out. It is located only a few minutes away from the Trump Ocean Club. And it doesn’t have the hurricanes of South Florida, while offering prices that are less expensive. “Panama is attracting [a] lot of baby boomers priced out of South Florida,” she says. UNIQUE DESIGN The Trump Ocean is being constructed in a market with plenty of luxury condominium offers, but Ivanka Trump believes it has been able to stand out thanks to its unique design and amenities, which include a private beach club at Isla Saboga in the Pearl Islands (of Survivor fame). But the uniquely designed building is the main draw. “In terms of quality of construction it’s unlike anything Central America has seen,” she says. “It’s a beautiful building.” She especially singles out the pools and the large rooms and suites with all fixtures and amenities. “It’s a product that meets five star standard international levels,” Trump says. And it will be managed by the Trump Organization. “We’ll be in Panama for many years after the building is ready,” she says. |
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Latin Real Estate: Country Outlooks A country-by-country overview of the outlook for real estate in 2009 in seven major markets in Latin America and the Caribbean
What is the outlook for real estate in leading markets in Latin America and the Caribbean? The experts at NAI Global have provided Latin Business Chronicle with this exclusive analysis of Brazil, Mexico, Argentina, Panama, Chile, Venezuela and The Bahamas.
BRAZIL 2007 and 2008 were heady years for the Brazilian real estate market due to the economic growth of the country and the easy credit. Prices remained very high. However, a slight decrease in prices for 2009 is expected, as a consequence of the world crisis. The overall business consensus is that the property market will continue to grow, but at a slower rate, decreasing less than 10 percent. The increase in the availability of financing for residential real estate, the enlargement of the use of the “FGTS,” greater facilitation for payment and lower interest rates are measures instituted by the government to maintain growth in the market. Certainly the volume of unemployment will influence all sectors: residential, commercial and industrial. There may be some opportunities for businesses to look for new locations since the rate of absorption will slow down somewhat, at the same time that buildings are being completed. Compared to other markets, the vacancy is tight in Sao Paulo and Rio de Janeiro, but this should create some short-term relocation opportunities for the right companies. Additionally, it is important to highlight that Brazil has never in the past received so much external investment – 45.1 billion reales in 2008. Many companies in the construction sector that have not relied on financing for their operations have not yet felt a significant impact from the global economic slowdown and they continue with their projects. Regarding the real estate investment climate, cap rate expectations for investors have climbed 100 to 150 bps, but the local landlords will try to maintain their expectation of the cap rates achieved over the past two years. Competition from other investment markets (that are seeing their yields pressured) will cause the less stable property owners to readjust their cap rate expectations.
MEXICO
ARGENTINA Real estate in Argentina is not dependent on credit, so there has been no direct effect from the global credit crisis. However, the contraction in the credit markets will affect the economy, which will be felt in the real estate sector. We will see a more pronounced slowdown and softening toward the second half of 2009 due to global economic slowdown and the elections in October. The Argentine real estate sector will enter a downward cycle in general, largely because of the lower demand. For corporate real estate advisors there will be an opportunity to help companies lower their real estate costs.
So far the crisis has not affected real estate in Venezuela. However, there still is little real estate development in the office, industrial sectors and slowed development in the residential sector. In 2009 we believe that the government will continue with its populist policies, since it currently has enough reserves to support the current administration. We do not foresee a strong impact on real estate. However, if oil prices continue to remain in the $30/40 range or less than US$65 per barrel through to 2010, it will have a strong impact on the Venezuelan economy and in real estate since reserves will not be enough to continue the socialist/populist programmes carried by President Chavez, and strong political-social unrest may arise. Given the lack of new supply, we expect real estate lease rates in all sectors to remain stable and perhaps even increase as in the residential sector. Due to the government’s nationalisation of some real estate, many people prefer to rent and this has been a strain on supply, causing to rents to increase. Regarding the real estate investment market, we see no change in the short to medium term, that is to say that it practically will not exist.
PANAMA The banks in Panama are extremely liquid. Nevertheless, the local Panamanian and foreign banks have assumed a defensive posture as the foreign correspondent banks have cut the lines of credit to all the local banks. This has resulted in the continuation of real estate projects that had already started, but with more stringent credit policies. The developers have to obtain upfront their part of the investments and any cost overruns have to be met by the developer. A few projects in very early stages have been put on hold. On the other hand, all new projects, since September/October, have been put on hold until further notice. The exception to that rule are projects geared to the lower brackets in the local market, for example units that sell for US$100,000 or less.
Panama‘s economy enjoyed GDP growth of over 11 percent in 2007 and over 9 percent in 2008; the expected growth for 2009 is around 5 percent. Retail sales an d leasing in 2008 were at an all-time high. Currently the activity at street level is behaving normally – there is no sign of an economic recession and confidence continues strong. So far we observe that there is no inventory of unsold finished residential units, but recently some pressure on pricing has surged, especially on larger luxury units. It appears that some foreign clients have difficulty in closing the purchase now that their own home economies have slowed down. The drop in commodity prices over the last six months is helping the completion of many projects since it will require less capital (lower construction costs) to finish them than had been initially calculated in the pro formas. The expectation is that the lower asking prices for these new units will provoke another wave of buyers. In late 2009, if there is no sign of a clear stabilization or beginnings of a recovery in the US economy, there may begin to be a larger inventory of unsold luxury apartments. Office, industrial and retail lease rates are expected to remain stable with only a few potential isolated cases of decreased pricing.
Many tourism projects are expected to proceed with construction due to the continued strong tourist demand in spite of the worldwide recession. Additionally, there are also several global, midsize and smaller companies that are building their headquarters or regional service centres in Panama and some companies are opening offices there due to the various large infrastructure projects being built as part of the Panama Canal enlargement. For new project financing, the question of financing availability has begun to arise. Banks and financial institutions have now tightened their purse strings; they are scrutinizing projects more than ever before and are requiring higher capital investment or participation.
CHILE Until the fourth quarter of 2009, the market should remain stable. Vacancy should drop a bit, but not more than 5 percent compared to 2008 in the office sector and, perhaps, a negligible decrease in industrial occupancy. We expect that rent rates will not drop until new inventory is released onto the market, which will mainly occur during the last quarter of 2009. Retail will also remain stable in the short term, but if the U.S. and European economies do not start to stabilize or show signs of recovery by mid-2009, rent rates will begin to soften and vacancy will begin to increase slightly.
It is difficult to determine how the growing credit crisis will affect the Chile real estate sector. So far it has not affected it directly, just like in the other Latin America and Caribbean markets, we are being influenced by the general worldwide economic slowdown. In March – April will the full impact of the economic slowdown be appreciated in the market. At this point, only planned developments have been postponed as a precaution, but other than that there has so far been no other impact. Chile will take some time to adjust to the new global economic conditions. We forecast it will be a slow process of adjustment in supply and demand, and therefore in rents, pricing and CAP Rates. In the investment market, we are seeing mixed CAP rate expectations by foreign investors. Some are expecting the current global economic to affect the Chile market and they are adjusting their pricing targets downward. However, other foreign investors see the strength in our market (Santiago) and they maintain the CAP rate targets that were set over the last two years. As a side note, the drop in commodity prices will no doubt have some affect on the economy in 2009 (which would normally affect demand for real estate), but the government’s low debt and high currency levels will allow it to provide an economic stimulus package that should largely make up for that difference.
THE BAHAMAS The credit crisis has affected The Bahamas with the slowing of the tourist traffic and layoffs at the hotels and other tourism-related industries there has been an increase in foreclosures. People with money put aside are able to pick up properties for a reasonable price. The local banks and insurance companies have found that the applications for mortgages have slowed down and residential sales in the mid level market ($400,000.00 – $1,000,000.00) have really slowed down. There has been a slowdown in the real estate market but we are still having quite a few developers looking at Greenfield sites for large scale residential/resort/marina communities. In the last quarter of 2008 the property market was slowing down radically, but thus far in 2009 there have been a lot of inquiries from investors for office buildings as well as development property. If this trend continues, the market will start to improve, albeit slowly. The outlook will be for a slow market for the first half of 2009 with a slow increase in activity as people regain confidence. As investors find out how the economy will fare and how they are holding up in this recession, this will indicate how they will invest and in what kind of product. The second-home investments will be slow for 2009, but there should be growing developer interest in land that will become more available as the price points drop and they prepare for the economy to improve.
JAMAICA The credit crisis being suffered in the USA and Europe has had minimal direct affect on Jamaica. We expect rent rates for all property types to remain relatively stable; there has not been a strong build up of supply and the general economic and tourism activity still continue relatively healthy. In the latter half of the year, we may seem downward pressure on values as our economy begins to slow. Investment has already slowed somewhat and expectations are that it will slow further. Overall though the outlook real estate in all sectors for leasing and sales is positive. The residential market is expected to remain relatively stable with only a slight decrease in sales activity.
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