Latin America Real Estate: Continued Growth - Monday, January 15, 2007

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US baby boomers and European investors are helping spur the market. But growth and prices are slowing down.
BY CHRONICLE STAFF

Despite growing political tension in some countries, the real estate sector in Latin America continues to see strong growth.

"The fundamentals of the region continue to be sound, despite some concern on the potential collateral effect of the slowdown in the U.S. real estate market in other regions of the globe," says Rogerio Basso, an analyst at Ernst & Young's real estate advisory services. "The baby boomer generation will continue to retire in large numbers in the next coming years and they will have a substantial amount of disposable income available to them. Many of these individuals are looking for opportunities to purchase second homes that they can use either for vacation or retirement purposes, and as such Latin America will continue to be an attractive proposition."

Apart from the real estate brokers, title insurance companies like First American are also seeing strong growth. "We issued more than twice as many title insurance policies in 2006 compared to 2005 and the insured amount tripled in value," says Turalu Brady Murdock, vice president at U.S.-based First American Title Insurance Company.

BETTER THAN U.S.

Basso expects a reduced rate of appreciation in second-home prices in the year ahead relative to 2006, but it should still be superior to the United States, thereby attracting baby boomers wishing to make investments in second homes in Latin America. "Though we should also anticipate a slow down in sales pace, this will be short lived, and will mostly impact the upper-end of the market," he says.

In general, there will continue to be a high level of interest for highly-amenitized, branded, beach-front developments, according to Basso.

Mexico and Costa Rica are expected to be the main drivers behind the growth, due to its proximity to the United States, Basso says. "Given that a substantial amount of demand in the second-home market is driven by US buyers, there should be continued interest in coastal locations within proximity to the US," he says. "Mexico and Costa Rica should continue to be in the real estate forefront, along with other markets in the Caribbean such as Bahamas and the Turks and Caicos. South America has yet to explode as a vibrant real estate market as a result of its distance to the main source market, the US." Mexico is the top Latin American market for First American, according to Murdock.

PANAMA AND NICARAGUA

In Central America, Panama, Guatemala and Nicaragua are seeing increased real estate activity, Basso points out. "However, the volumes are still relatively small to make them significant players in the region," he says. Nicaragua and Panama are the two fastest-growing markets in Latin America outside of Mexico for First American.

In the Caribbean, the Dominican Republic is developing several projects that are anchored by upscale lodging brands (Westin Rokoki and Cap Cana), and is a place to watch, according to Basso.

The northeast coast of Brazil (Bahia, Pernambuco), which features some of the most beautiful beaches in South America, has seen an increased level of interest from Spanish and Portuguese developers to develop mixed-use projects, mainly focusing on a European-based buyer.

Murdock expects Brazil, along with Nicaragua and Panama, to account for her company's strongest growth in the region this year.

Destinations that do not offer convenient access to the United States, both in terms of availability of flights and flight length, will not expand their secondary real estate markets, he warns. Countries that already lack a vibrant second home market to begin with - for example Ecuador and Bolivia - will be affected by the slowdown in the United States and increasing competition elsewhere, he adds.

DECREASED PRICE AND SALES GROWTH

Overall, he doesn't expect any declines in the top markets, but a decrease in appreciation rate and sales pace.

"Given the significant appreciation in land prices in the past three years, profit margins are reducing," Basso says. "Buying land now is significantly more expensive than before...As such, the same project that made sense five years ago may not pencil out today."

Meanwhile, the development quality is also changing. "Developers are being forced to offer highly-amenitized branded projects to differentiate themselves from the competition," Basso says. "Although there are significant benefits to this strategy (marketing, quality of finishes, awareness, etc) it also increases development costs. Projects that do not feature these characteristics will be at a disadvantage."



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