Argentina Real Estate Booming, and Nearly Bubble-Free

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THE WALL STREET JOURNAL 

September 7, 2006

By Serena Saitto

 

BUENOS AIRES (Dow Jones)--Perhaps the most tangible sign of Argentina's economic recovery is its booming real estate market, which has transformed Buenos Aires, the capital, into an open-air construction site.

In July, Argentina's construction activity grew at a record annual rate of 27.9%, making the industry a major driver of the extended economic rebound after the 2001-2002 economic bust. Economic growth for 2006 is expected to exceed 8% for the fourth consecutive year. And yet the risk of a housing slowdown, such as that currently sparking fears in the U.S. of deteriorating credit quality, is muted here. The reason is that there is virtually no mortgage market behind the property boom.

"Most of our sales happen in cash," says Marcelo Cusmai, the partner of Dypsa International, a real estate company developing three towers in Buenos Aires' former port, Puerto Madero. Cusmai's comments can be taken quite literally. Typically, a home purchase is settled in a secured location, where the buying party will count through stacks of hundred dollar notes before pushing them across the table to have the other side recount them.  This seemingly archaic system does not seem to be reflected in the many ambitious property developments seen around Buenos Aires. 

The Puerto Madero area is a case in point. It is being renovated along the model of other major port developments, such as the Docklands in London, and is becoming one of the hottest zones in this metropolis of 13 million. It boasts 170 hectares of underdeveloped land in walking distance from the financial district and an open view to the Rio de la Plata, the wide river that separates Argentina and Uruguay. 

Philippe Stark's award winning design of the Puerto Madero's Faena Hotel certified the area as the most hip and expensive in town, selling at about $3,000 per square meter. Still, this price looks like a bargain for buyers from the U.S. and Europe, where per-meter price-tags can run as high as EUR20,000 ($15,600). "Fifty percent of our buyers are foreigners attracted by the projected 10% annual return of this investment and by the beauty of the project," said Cusmai.

The rush to buy properties started in 2002, just after Argentina defaulted on its debt. At that time, those who had escaped the meltdown of Argentina's banking system bought into real estate, which suddenly looked like the safest investment.

The trend has continued ever since. That's mostly because the rest of the world has also continued with its housing boom, keeping Argentina's properties comparatively cheap even as they have grown by an average of 50% since 2002, according to Argentina's Real Estate Chamber.

Federico Weil, the founder of TGLT Real Estate, also ruled out a credit bubble risk in Argentina, noting that all of his $100 million investment group's transactions are in cash. "The dynamic of a bubble has a lot to do with the market's leverage; where there's no debt, there's no exposure to interest rate movements," says Weil, 33, who is a Wharton MBA graduate. Like Cusmai and other real estate developers, Weil - who projects a 50% annual return for his real estate investments - sees property demand running upward thanks also to measures that the Argentine government is trying to implement to boost the mortgage market. 

In an effort to transform tenants into home owners the administration of President Nestor Kirchner wants stamped into law recent measures that extend the maximum term for mortgage loans to 30 years from 20 years and halve interest rates to 7.5%.

Bankers still doubt the feasibility of these measures without government subsidies.

Some worry about political resistance to home foreclosures, which has made debt collection difficult. Others note that the existing payment system, in which the legally declared value is often fixed lower than the actual transaction price to facilitate tax avoidance, creates inconsistent title deeds. That, in turn, inhibits the creation of a mortgage-backed securities market into which banks could offload risk and obtain fresh liquidity for new lending.

Even so, economists and other industry representatives believe that the mere prospect of opening up the market to those who don't currently have the cash to operate in it creates the promise of continued growth.  They also believe that the cash factor eases the bubble risk, but they are cautious not to rule it out.  "It's true the bubble scenario in Argentina is very unlikely because the market's leverage here is very low; this risk exists when people are forced to sell assets to repay debts especially when interest rates start increasing like in the U.S.," said Esteban Fernandez Medrano, an economist with local research company Macrovision. 

However, he didn't exclude the possibility that a financial crisis, even one imported from abroad, could depress property prices or put rent payments at risk.

"Even though Argentina is far from the U.S., there's a relative effect of what happens in the rest of the world, given that foreign buyers are coming to Argentina," he said. Nonetheless, he predicted that this relationship will continue to be a positive one and that the real estate market will keep its upward trend, based on projected economic growth. 

Moreover, Nestor Walenten, secretary of Argentina's Real Estate Chamber, distinguished between the construction industry and the real estate market.

"Construction is booming and the industry's activity is 10% above levels seen in the late 1990s before of the crisis, whereas the existing housing's market is still down by 15% to 20% compared to those years," said Walenten, who also runs a real estate business. 

Yet Walenten reckoned that real estate prices have peaked, hitting a point "where they are going to stay in the medium term, unless the government is seriously able to implement the credit-boosting measures it just approved."

   

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