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Aug 22, 2016

President Macri has turned around Argentina's property market.


 

Argentina’s property market is now rapidly emerging from a prolonged and painful crisis.

The country is still struggling with inflation, and property buyers still find banks extremely reluctant to grant mortgages, but the new government is injecting optimism into the real estate market. Three months after being sworn in, President Mauricio Macri has already devalued the currency and lifted tight exchange controls – largely blamed for Argentina’s property market debacle.

House prices in Buenos Aires rose 14.5% in May 2016 compared to May 2015.

Looking at average prices in upscale Buenos Aires neighbourhoods during the year to May 2016:

The average price of new dwellings rose:

  • 5.2% in Palermo
  • 4.9% in Recolata
  • 6.7% in Belgrano
  • 7.1% in Núñez

The average price of old dwellings rose:

  • 14.5% in Palermo
  • 9.9% in Recolata
  • 11.3% in Belgrano
  • 12.0% in Núñez

Capital controls introduced in 2011 by then President Cristina Fernandez made it near impossible for most Argentines to acquire property. On the one hand, sellers demand to be paid in dollars, proven safer than the peso. On the other, buyers were prevented from acquiring these dollars by strict currency controls.

Coupled with high inflation, this caused the country’s real estate market to enter a three-year crisis.  In 2014, just 2,000 property sales per month were registered in Buenos Aires, a city of about 3 million people. That compares with 7,000 in 2010 and a historic average of 5,000, according to the Buenos Aires Notary College.

“The main issue in Argentina is that the real estate market has historically been transacted in dollars so when you make it impossible for people to source dollars liquidity gets disrupted,” says Bret Rosen, managing director of research at Jamestown Properties LLC in New York.

The three-year period from 2013 to 2015 was the worst stretch in history for new construction in Buenos Aires. In 2015, less than 30% of the historic average new construction was built in Buenos Aires, according to Reporte Inmobiliario. The total area of new construction fell from 24 million square feet in 2011 to less than 8 million in only two years.

But the new government has ushered in a dramatic recovery. A little more than four months since the change of government, agents have seen a surge in the number of requests for property quotes. “For the first time in years, homeowners want to exchange properties instead of sitting on their assets,” says Alejandra Bugna, a property lawyer at Baker & McKenzie.

Developers have also announced more than USD 1.2 billion in new construction of residential towers, offices and shopping centers in Buenos Aires. “Interest rates hovering around 38% do not help in getting investments, but at the same time there is an almost unanimous feeling in the market that the prospects for Argentina´s economy are very good, and that in the second half of the year we are going to start to see change, which explains the interest of local and international investors,” said Alberto Fernandez Prieto of big developer Vizora.

Property sales, which have contracted 50% since the controls were introduced, have inched up in recent months. Purchases in the capital rose 10.91% in 2015 to 37,381 total closings.

From the peak of 63,300 in 2011, transactions of residential real estate in Buenos Aires plummeted 26% to 46,630 in 2012, then nosedived another 23% to 35,906 in 2013, and slipped again another 6% to 33,690 in 2014.

A pickup in construction is reflected in official data. In the first five months of the year, sales of bricks, cement and paint were up 5.8%, 9.4% and 12.8% respectively compared with the same period last year.

President Macri has also ended Argentina’s 15-year long default status by repaying the so-called “vulture funds” that sued it over nine billion U.S. dollars in defaulted bonds. Putting an end to the debt saga to regain access to global credit markets was a key campaign promise in elections last year.

However, economists say much has to be done. A key problem is inflation, estimated close to 30%.

“Inflation is the big cancer of the real estate sector in Argentina because it does not allow the financing of mortgages like in any other country in the world where you buy a house over 30 years,” Nordelta Commercial Director Matias Terrizzano said.

Reporte Inmobiliario´s founder, Jose Rozados, says just 4% of property purchases in Argentina are facilitated by a mortgage, compared with 80% on average elsewhere.

Quelling inflation a priority

The Central Bank increased local interest rates to 38% earlier this year to combat inflation already running at more than 30%. According to Central Bank President Federico Sturzenegger, the central bank won’t lower the yields on its notes until there’s certainty that inflation rates are falling. The goal is to lower the annual inflation to 5% by the end of 2019.

Hot money, flowing from low interest rate yielding countries, has been piling into Argentine local currency bonds for the first time in many years after capital controls were removed in December. This surge of inflows strengthened the peso from almost 16 pesos to the dollar in March 2016 to 14 pesos in less than two months.

However, the stagnant economy, which Moody’s Investors Service predicts will shrink 1% this year, is fueling speculation that the central bank would have to lower interest rates sooner rather than later. “The high rates are not sustainable in the long term and are definitely having an impact on the level of economic activity,” said Juan Pablo Vera, the head analyst at Buenos Aires brokerage Tavelli & Cia.

Most expect the central bank’s aggressive monetary policy to lead to a sharp slowdown in inflation in the second half of the year, which would remove pressure from the exchange rate.

Government eyes inflation-linked mortgages

Argentina’s mortgage market, long stunted by soaring inflation and banks’ reluctance to lend, is set to boom under the new government.

Moving forward with President Mauricio Macri’s campaign promise to offer one million mortgages during his tenure, the government is endeavoring to implement an accounting unit tied to the consumer price index similar to the system used in Chile and Uruguay. The system would lead to cheaper installments and fewer requirements to obtain a loan, the main problem faced by those who want to buy property.

Under the scheme, real-estate prices either for rent or purchase would no longer be denominated in US dollars or in pesos but instead in an entirely different unit, representing the amount of currency units, or pesos, necessary for citizens to buy a representative basket of consumer goods.

In Chile, the unit is known as Unidad de Fomento, or UF. The amount of pesos in one UF, or the peso-to-UF exchange rate, would be calculated daily, and published on the Central Bank’s website.

The system guarantees that the transaction represents the same number of consumer price index baskets if, for example, there’s a tighter or looser monetary policy. Rent would be priced at the same amount of UF if the peso gets stronger or weaker. While the payment would be nominally higher with a devaluation, the payment’s UF value would remain constant.

“These measures in Argentina are going to be a revolution for the mortgage market,” according to Eduardo Elsztain, chairman of the country’s largest real estate firm IRSA and agricultural company Cresud SACIF. “There’s a big class of Argentines that hasn’t had access to mortgages for the last three decades. The room for growth in this market is enormous.”

However, it cannot succeed unless the inflation rate decreases. “It’s a very good initiative but it only makes sense if the government can control the inflation rate. The only way to offer more mortgages is by having a lower inflation rate,” according to Tomás Marolda, secretary at the Argentine Real-Estate Chamber (CIA).

“It’s a feasible alternative but the government needs a consumer price index and a low inflation to carry it out,” Germán Gómez Picasso, head of Reporte Inmobiliario. “Of the more than 58,000 deeds that were signed in Buenos Aires City last year, only 2,700 were done with mortgages,” Picasso said.

The number of new mortgages being issued in Argentina has slumped to its lowest level in 15 years, accounting for just 1.3% of the country’s total GDP – the lowest in Latin America, according to a recent report by the Housing Finance Information Network. The figure is a huge drop from 5.3% in 2000 – a drop that would have been considerably larger without the help of the government’s Procrear housing programme, according to a report by Ecolatina consultancy. The programme accounted for 0.3% of the country’s GDP in 2003 and reached 0.6% in 2015.

The consultancy linked the drop in private bank mortgages to higher inflation and fewer funds earmarked for fixed-rate deposits over the last decade. In 2003, fixed-rate deposits accounted for 18% of total deposits, while now they represent less than one percentage point. Such a drop makes it impossible for a private bank to give out long-term loans, according to the report.

Excellent yields on rental apartments

Renting is the only option for many who have no means of saving and buying property, owing to limited mortgage lending. As of March 2016, there was an increase of almost 32% in terms of two-room apartment rents compared to the same month in 2015, according to Reporte Inmobilario. Units range from USD 3,000 to USD 5,600 depending on location. San Isidro had the highest average value, while Merlo had the lowest average value. Lastly, the value below USD 3,000 was only found in 3 towns including Moron, Caseros, and La Plata.

Average apartment rental yields are around 7% to 8%, based on the latest Global Property Guide research.

Controlling inflation requires a negative shock to the economy

Argentina gdp inflation

Although Argentina´s economy defied expectations in the first quarter by growing 0.5% year-on-year, it likely contracted 0.9% in the second quarter from the same period in 2015 and 0.3% from the first quarter, according to Central Bank President Federico Sturzenegger.

Private economists and the International Monetary Fund (IMF) expect Argentina´s economy to shrink this year followed by modest growth in 2017. The government has not yet published an official gross domestic product forecast for 2016 or 2017.

Consumer price rises are expected to slow to 1.5% per month in the fourth quarter and annual inflation is expected to cool to 17% in 2017, the official inflation target.

“We´re maintaining our inflation targets for next year, and we´re very close to them,” Sturzenegger said.

President Mauricio Macri’s administration, elected four months ago, has begun to reverse the economic legacy of populist former president Cristina Fernández. The administration has removed subsidies on utilities and public transport, as Marci seeks to close the largest fiscal deficit in two decades, causing some bills to rise by as much as 300%.

The economic changes have coincided with an overhaul of the statistics agency, leading to the launch of new, more accurate economic series. In 2013, Argentina became the first country to be censured by the IMF for publishing inaccurate data.

The inaccuracies were most pronounced during years when, according to the new series, the economy had in fact contracted. For example in 2009 the revised calculations show that the economy contracted by 6% compared to an estimate of 0.1% growth under the previous government. The economy shrank 2.6% in 2014 even though the previous government said it grew 0.5%.

 





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