The Real Estate Market

January, 2013

2012 has, undoubtedly, been the worst year in real estate activity since 2002. Unable to purchase dollars with which to pay willing sellers, combined with uncertainty regarding the devaluation of the peso, sales volume dropped in excess of 40% in November 2012 compared to the same period the previous year. Pricing, though, did not drop much, with closings approximately 15% less in US dollars than 2011. Pricing throughout 2013 will be strongly dependant on the rate of depreciation of the Argentine currency with an incline towards peso priced transactions.

With a soft depreciation of the peso, pricing throughout 2013 will likely be flat and continue its downward trend if depreciation exceeds the rate of inflation. In this case, it will be more advantageous to build than pay for property that maintains its original US dollar asking price.

Crisis trained, Argentines tend to quickly find solutions to our daily challenges. The most obvious direction taken to counter the clamp on dollar purchases has been to offer real estate in argentine pesos. Such is the case of pre-construction listings which have, almost overnight, been offered in pesos. Given the effect of inflation, though, it is almost impossible to find listings without some form of price adjustment. The most commonly offered solutions involve real estate trusts that adjust pricing by the argentine construction chamber derived index. Fewer, though, are factoring in inflation into pricing and taking a larger piece of the pie. In this case, serious consideration should be given to the developer's background in order to avoid inflationary shortfalls.

In the absence of reliable investment vehicles and a clear shortage of homes, real estate continues to be the lead choice. A clear indicator of the former is increased demand for residential rental properties. The vacancy rate at the lower tier is almost nil which means owners can expect almost a 6% return on their investment. At Reynolds we advocate a 10% contingency for eventual refurbishing and income tax allocations at one's personal marginal income tax bracket if an individual.

Given the less attractive exchange rate, international tourism has shown a decline. The latter, combined with higher operating and maintenance costs in US dollar terms have caused lower returns on what used to be a classic following the 2002 peso devaluation: short term rentals. Ironically, though, a new segment is catching on nicely with local investors. Condo Hotel projects that cater to local tourism derived from government action that benefits this segment. All in all, real estate options are clearly present. One must, though be selective and careful in the selection of choice.

Paul A. Reynolds
Managing Director
Reynolds Propiedades S.A.