Should I buy a property now or should I wait? This is one of the main concerns of those having liquidity within a context of high inflation. Is there any margin for price decline? It is usually hard to predict the future, even more in a country like Argentina; some people think that property prices in US dollars are higher than ever. “Since 2011, Argentina has started to adjust value and it was no longer good business. This moment of the cycle is not the right time to invest. Prices in dollars are high and there is no margin for further increase”, states Mariano Capellino, one of the founders and CEO of INMSA, a company engaged in the management of real estate assets.
The specialist states that “near the year 2020, the country will return to the values experienced in 2010, therefore, those who apply the traditional passive way of buying and keeping the asset to preserve value would have lost 10 years of profit and the opportunity cost because of the near-to-zero or negative interest rate involved. Even more, if a minimum annual 3% inflation rate in hard currency is applied, this would cause 30% lost in capital”.
In real estate as well as in most investment business processes there are no magical formulas, the key is the timing. That means, knowing the right moment to access and exit your real estate investment. “It is assumed that investing in real estate means to preserve value and that´s not always the case. Actually, it involves having a short-term and mid-term strategy, based on the cycles undergone by the different markets and types of assets”, as analyzed by Capellino. In other words, it is not always good business to focus on location, location, location. “It is not about buying the best apartment in a posh neighborhood but acting in the right moment of the cycle. The only way of making money on a sustained basis and with high returns is by not repeating the scheme”, affirms the expert. And he said a controversial phrase: “Some people paid US$5000 per square meter in Puerto Madero, in the year 2010, and today they cannot sell at US$3000 per square meter. The last cycle started in 2003 and finished in 2010, investors who did not exit at that moment will have to wait until 2020”. He also makes it clear that, in the event of a crisis, premium property can recover its value more quickly.
In general, in the event of a crisis, those units under US$3000 per square meter will delay their sale. Furthermore, as the square meter price is declined, the apartments are more subject to credit availability. “Those who have liquidity will still have it during crisis periods and they always prefer apartments with some value added because they generate more rental profitability”, adds Capellino. Regarding prices, the only variables which could cause prices to shoot up is a demand which is no longer segmented in the investor and which can be extended to end users, this being only possible through the reactivation of mortgage loans. Only with that promise, developers will start creating products for families rather than “shoe boxes” for investors. “With 2% rental and 30% financing rate, loans are not feasible. The countries which were able to develop a good financing system have these two percentages well balanced. One case is Spain, with 4% asset return and with a financing cost of 2.5%, while in the United States that ratio is 5.5 per cent and 4 percent respectively”, says Capellino and he also affirms that the reactivation of the market in the country would only be possible with credits involving 11% rates. Where to invest? It is not possible to keep or increase prices if people cannot have access to homes and the investor cannot make money. Quite the contrary, capital formation has been discouraged for 5 years and almost null rental profits have been obtained”, he adds. Based on concrete data, the net rental income is at its lowest level: during the nineties, profits were about 6 percent but, in the last year, they barely reached 4.5 percent and today, you are lucky if you get 2 percent annually. For instance, a property that is worth between US$300,000 and US$350,000 provides a rental income of US$300 and US$350.
In view of these figures, Capellino anticipates that the opportunities for investing in property are present in other cities of the world. “Today, it is an excellent business to analyze assets in neighborhoods or locations far from Miami beach, such as Kendall or Naples, as well as Georgia or Atlanta. Also Detroit which is undergoing recovery from the worst cycle in its history. With a proper strategy and knowledge of the market, it is possible to close sales operations of class B assets – which are inhabited by most people in USA, with values between US$600 and US$1000 per square meter, with good rental potential and revaluation before their sale”, he details and makes it clear that investing in Brickell or beach condominiums is no longer a good deal. “Those are good for wealthy people who can go twice a year on holidays, bearing the expenses involved to enjoy it, but that´s not business. Today the magic of developers´ marketing makes it possible to sell on an off-plan basis at US$6000/square meter, much higher than the amount offered for a finished brand-new building, US$4000 per square meter, which is being so hard to sell. If the investor that accessed in 2014 implements the exit today, money will be lost”, he analyzes. Anyway, it should be pointed out that those who invested between 2009 and 2013, period during which the amount of US$2300/square meter was paid, did good business. “Today local brokers are still offering projects on an off-plan basis as they get 6 and 12 percent of commission”, he states.
Is the off-plan system still good business? Investing or not through this method entails further discussion. Gone are the days when investors could obtain 40% revaluations during the construction process. Today Capellino warns about the risk that a finished property may end up with a value lower than that invested. “This is a business operation tied to the value of the exchange rate; therefore you are always tied to the risk of devaluation”. “If some correction takes place during the construction process, you lose money”, he explains. Historically, the construction cost in the country was between US$300 and US$1000 depending on the moment of the cycle. “The only scenario for safe investment is a construction cost between US$300 and US$500, with those values you are protected in the event of possible jolts”, he advises. In the mid-term, the evolution of the prices will depend a lot on the dollar value. “If the dollar is higher than inflation, the values in the Province of Buenos Aires will be more adjusted than in the Capital City because the construction cost will drop and land incidence is quite lower in the province of Buenos Aires”, he says, “the recovery of the sector in the mid-term will be closely related to the access to mortgage loans, the value of the asset versus the income and attractiveness for the investor as to the appreciation and rental of the asset.
Under the current circumstances, if no important changes are made to decrease inflation, these conditions cannot be fulfilled and the market will continue performing poorly. And those willing to sell their property will have to do so at a price that is under the market value”. Regarding the opportunities provided by neighborhoods nearby top places will depend on the possibility of lowering the construction costs in US dollars. “When you buy lands with lower impact, a lower construction cost gives some margin to increase or decrease prices”, he analyzes. As tips for the future, today it is clear that a decrease in the prices of land is not expected. For that reason, it is a good moment to do land banking, especially in consolidated zones or areas nearby premium ones, he ends.
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