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Oct 12, 2010


Lima boom continues. House price rises of 8% expected in 2010


The Peruvian housing market has emerged from the global crisis quickly, as has the economy.  In July 2010, GDP was up 9.05% from the same period last year, according to the Central Reserve Bank of Peru (BCRP).
Lima (pop. 8.2 million) has seen an explosion of construction of new apartment buildings in residential areas, new shops, new buildings, over the past 5 years. Prices of residences have risen rapidly.  And growth continues - the average sales price of homes is projected to rise by up to 8% in 2010, according to research by BBVA Research Peru.

In the second quarter of 2010, the average price of homes sold in Lima Metropolitan Area was up by 4.4% on the quarter, to PEN 293,585 (US$105,228), according to the consultancy Peru Tinsa.

Despite a sharp slowdown in sales and property transactions in the first half of 2009, property prices still managed to rise last year. In Lima apartment prices rose by 10% to PEN 2,271 (US$814) per sq. m. in 2009, according to Banco Bilbao Vizcaya Argentaria (BBVA) Research.

In the first quarter of 2010, land prices rose by 8% from a year earlier, according to the Peruvian Chamber of Construction (CAPECO).

Land prices in Lima have soared in the past five years, according to local real estate agents:

  • In the seaside areas of the districts of Miraflores, Barranco and Chorrillos, land prices skyrocketed by about 200%.
  • Further from the centre, the Surco area has a large number of good-quality apartment blocks. In areas around Golf Los Incas in the district of Surco, land prices rose by more than 130%.
  • In La Molina district, one of Lima’s upscale neighbourhoods, prices of land rose by about 105%.
  • In La Estancia, land prices increased by 120%.
  • In La Pradera, the Payet Park, the Pio XII Park and the Santa Margarita Park, land prices rose by around 150%.

Sales of existing homes are predicted to continue to rise in the coming months, supported by robust economic growth, rising employment, and recovery of private investment.

Supply and demand

The recovery in home sales has been led by the high-end residential market, while middle to low-income house sales are stable.   In the second quarter of 2010, homes sales in Metropolitan Lima rose 30.7% to 3,475 on the previous year, according to Peru Tinsa. More growth is expected in 2H.

The ratio of units sold to units entering the market, was 1.20 in Q2 2010, as compared to 0.51 in Q2 2009, i.e., more housing units were sold than entered the market, returning the market to its pre-crisis state.

In the first quarter of 2010, the housing inventory placed in the market was at relatively low levels, at 8.6 months of sales. On average, housing inventory was been than 12 months of sales in the last three years.

Key residential areas

For the elite, the Miraflores area has high priced apartments with magnificent sea views. For the most exclusive buyers, there is the San Isidro district. There is also Barranco in the Los Malecones area.

Further from the centre, the Surco area has a large number of good-quality apartment blocks, and is well-administered so that values tend to be well-maintained. Within Surco, agreeable areas are Las Casuarinas, Chacarilla del Estanque, San Jorge, Santa Teresa and parts of Valle Hermoso. For detached housing Surco is also interesting, as is San Borja.

Housing demand is expected to grow in the medium term, as income rises, mortgage financing becomes more available, and the middle-aged population (30 to 40 years) continues to expand.

The Garcia boom

Peru has enjoyed spectacular economic growth during these past few years, with 9.8% growth in 2008, after 8.9% GDP growth in 2007, and 7.7% growth in 2006.  In 2009 growth was just 0.9% due to the global crisis. Growth in 2010 is expected to be 8%. Combined with other good economic news, this has had a miraculous effect on Peruvian property values.

The good news includes more private investment (growing at 20% a year), and a new willingness to save (now 24% of GDP). And consumer confidence, higher than it has been for decades.

Before 2006, residential prices had been static for 6 years, partly because  the shock of the scandals, corruption, human rights abuses, and political unrest surrounding the end of the Fujimori presidency (1990-2000), which undid much of Fujimori’s achievement of macro-economic stabilization and lower inflation.

The pivotal year was 2006

2006 was a pivotal year.  The economic performance of the government of Alejandro Toledo (2001-2006) was in reality good, and laid the foundations for what followed.

However confidence was low in anticipation of the return to power of Alan Garcia, who had presided over a directionless and high-spending leftist government during his first term as president (1985-1990).

However, when Garcia returned in July 2006 he seemed a reformed man, determined not to repeat the mistakes of his first administration.

Fiscal rectitude became the government’s No 1 priority. Garcia saw how Chile’s restrained state spending won it lower credit costs from the international lenders, and followed the same route.  The overall surplus of Peru’s non-financial public sector jumped to 3.1% of GDP in 2007, up from 2.1% of GDP in 2006 – the biggest budget surplus for 30 years.

Savings began to rise.  As the economy improved, the international credit rating agencies upped their ratings and the cost of Peru’s debt-service dropped. In April 2008 Fitch Ratings gave Peru a rating of BBB-, the only Latin county aside from Chile and Mexico to have an investment grade rating, allowing more pension funds and insurers to buy Peru´s debt, driving spreads down to record lows.

In March 2008 the country bought back US$838 million in Brady bonds, and also announced that it would pay $1.1 billion in World Bank and Inter-American Development Bank loans ahead of schedule.  The current account and the trade account are both in healthy surplus.  Remittances are strong.  Finally, Garcia has made Peru the first Andean country to secure a free trade agreement with the United States  He has also signed free trade agreements with Canada and Singapore.

Garcia became strikingly unpopular despite his economic success, because of the perception that the government was auctioning off swathes of the Amazon to oil and gas companies. In October 2008, the entire cabinet resigned in a corruption scandal over the allocation of oil contracts.

In an effort to restore public confidence, Garcia appointed Yehude Simon, a leftist regional governor from outside Apra, as the new prime minister. But less than a year on, Mr Simon himself resigned partly in protest at the government´s handling of an strike by indigenous people in the Amazon against new land laws - quickly repealed - which would have opened up the area´s resources to foreigners.  So Garcia appointed Javier Velasquez Quesquen - an Apra insider - as his new PM.  But he has faced a series of leftist and indigenous protests against his free-trade policies.  The general elections take place on April 10, 2011, and will determine the successor to Garcia.

Interest rates

Peru’s spectacular growth has forced the authorities to raise the key interest rate several times this year. In September 2010 the key rate was raised again by 50 basis points, to 3%, pushing the average lending rate to 11.25% for loans denominated in Peruvian New Sol (PEN) and to 9.28% for foreign currency loans.

The past few years had seen dramatic interest rate falls (see chart), reflecting the tight money policies of the Garcia government.  In 2009 there was a recession-related dip, with the average lending rate on national currency-denominated loans at 7.01%, down from 12.93% in 2008, and the average foreign currency-denominated loan rate at 8.68%, down from 12.33% the previous year.

Spectacular yields, high vacancy rates

Gross rental yields in Peru were between 9.5% and 13.5% in September 2009, according to the latest Global Property Guide research. In Lima, a 180 sq. m. apartment has average rental yields of about 10.5% while smaller apartments produce higher yields of up to 13.5%.

In Peru rental prices are usually set in US dollars. Rents are expected to rise in the medium term to avoid a loss of value (measured in domestic currency) of rental property, as the Peruvian Nuevo Sol (PEN) continues to appreciate.

In the last quarter of 2009, small apartments (75 sq. m.) located in Lima had an average rent of PEN 2,243 (US$804) per month. Large apartments (370 sq. m.) had an average rent of PEN 10,859 (US$3,892) per month.

In 2009, the vacancy rate rose to about 9%, up from just 1% in 2008.

Construction sector flourishing

The property sector is now one growth engine of the Peruvian economy. In 2010, the construction sector in Peru is expected to grow by 14.4%. From 2011 to 2012, the sector is projected to continue to expand by an average of 8.7% per year, according to the consulting firm Maximize.

From 2003 to 2007, building of residential units rose by 67% in Metropolitan Lima, fuelled by a significant increase in mortgages, with the value of total outstanding mortgage loans rising by 81.4% from 2003 to 2007.

Social housing

In 2009, Peru’s housing shortage was estimated at about 300,000 dwellings, according to BBVA Research Peru. To reduce the housing deficit, the government has long provided financial aids and direct subsidies, such as the MiCasa, MiVivienda, Techo Proprio, and MiCasita schemes.

MiVivienda, established in 1999, provides housing loans for the middle and upper class levels (A, B and C). MiVivienda provides mortgages up to US$30,000.

MiCasita, on the other hand, targets middle to low-income segments. It is a full service mortgage financing company catering to first-time borrowers.

Techo Propio is a program directed at family groups who do not have their own houses and have never received State support to build or buy one. The total income a household earns should not be more than 1,450 Peruvian Nuevo Sols (PEN) (classes D and E).  Techo Propio offers loans for purchasing houses up to US$12,000.

Micasa provides loans for the renovation of specific segments of the house such as converting wooden walls to brick, replacing zinc roofs or adding additional rooms, one at a time.

The mortgage market

Peru’s mortgage market is still relatively small, at around 3.44% of GDP in 2009. In April 2010, the total amount of outstanding mortgage loans rose by 15% from the previous year, based on the latest figures from Superintendency of Banking and Insurance (SBS).

In 2009, total outstanding mortgage loans were about PEN 13.15 billion (US$4.7 billion), up 9.4% from a year earlier.

Economic growth continues

In July 2010, GDP was up 9.05% from the same period last year, according to the Central Reserve Bank of Peru (BCRP). Over the said period, manufacturing grew by 17.24%; construction by 12.33%; finance and insurance by 12.08%; and electricity and water output by 10.65%.

The Peruvian economy is projected to expand by 8% in 2010, according to Central Bank of Peru. In 2009, the economy barely grew, with GDP growth rate at just 0.9% due to the global crisis. The country’s GDP per capita is around US$4,356 in 2009, according to the IMF.

In 2010, inflation is expected to be within the central bank’s target range, at around 2% to 3%.

    





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