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Dec 18, 2017

House prices rising in Montevideo


 

Montevideo has been enjoying property price increases since the beginning of 2017, recovering from declines or stagnation in the previous two years. In Montevideo, house prices went up by 4.61%, to an average of US$ 2,612 per square metre (sq. m.) during the year to June 2017, based on data compiled by El Observador from a database of 20,000 condominiums. 

Real estate transactions in Uruguay are typically quoted in dollars because of a history of fluctuations in the value of the Uruguayan peso.

Among the seventeen Montevideo neighborhoods included in the survey, Aguada posted the sharpest house price hike of around 11.46% during the year to June 2017. It was followed by La Blanqueada (8.97%), Prado (7.47%), and Punta Carretas (7.30%).

Areas with meagre house price increases include Malvin (1.75%), Parque Rodo (1.68%), Carrasco (0.92%), and Tres Cruces (0.61%). In contrast, house prices in Jacinto Vera (-1.11%) and Union (-1.14%) contracted.

Carrasco, Montevideo’s most exclusive suburb, had an average price of US$ 3,390 per sq. m. in June 2017. Currently, a 65 sq. m. residential property in the area costs about US$ 220,325, according to El Observador.

In Punta Gorda, a beautifully restored historic district, a 65 sq. m. residential unit costs around US$ 223,173. In Punta Carretas, where the magnificent Rambla (seaside avenue) can be found, the same unit has an average price of US$ 218,643.

The selling price of a 65 sq. m. residential property are still quite high in the districts of MalvinPocitos, and Buceo, ranging from US$ 203,526 to US$ 186,957. In the districts of Parque Rodo, Parque Batlle, and Tres Cruces, the same property costs from US$ 173,027 to US$ 159,865.

Union has the most affordable housing in the capital city, with an average price of US$ 107,190 for a 65 sq. m. residential property.

Improved residential demand

Uruguay average house price

Real estate transactions in 2016 rose slightly, with US$ 1.432 billion-worth of transactions, up from US$ 1.430 billion in 2015, based on figures gathered by the General Directorate of Taxation (DGI) (the figures are probably lower than actual transactions).

The ITP does not include Social Interest Housing (VIS), which was tax-exempted on first sale. The commercialization of VIS in 2016 has raised real estate market expectations for 2017.

There was an improvement in real estate market fundamentals in 2016, according to El Observador real estate consultant Julio Villamide, due to:

  • low unemployment;
  • above-inflation consolidated household income; and
  • better economic outlook

The rise in sales was more evident during the first half of 2017, as total sales transactions in Montevideo rose by 21% to around 10,488 transactions, up from 8,657 in the same period last year, according to the Directorate General of Registries.

Stabilizing prices in struggling Punta del Este

The fashionable beach resort of Punta del Este had been struggling in recent years. In early 2016, residential property prices were estimated to have fallen by about 25% since 2011, according to Carlos Garcia Arocena of Bado & Perazzo Sotheby’s International Realty. Along with Montevideo, Punta del Este has dominated Uruguay’s property market for more than a decade.

Declining demand from Argentinians was the main culprit.  In order to stem capital flight from Argentina, its government imposed tighter currency controls by limiting dollar purchases.

A tax information exchange agreement between Uruguay and Argentina in 2012 has also affected Punta del Este, believes Alberto Prandi, Former Deputy Tourism minister and member of the Real Estate Association of Punta del Este, Adipe.

Germán Gómez Picasso, director of Reporte Inmobiliario consultancy firm, said that Punta del Este real estate market currently lacks sellers but prices remained relatively stable. The highest property prices in the area reach up to almost US$ 7,000 per sq. m. (offered in the "Mouette" building), followed by Trump Tower's US$ 6,000 per sq. m. apartments, according to Picasso. The cheapest new apartments offered in the area range from US$ 2,389 to US$ 6,912.  

Luxury homes in Punta del Este typically cost from US$2 million to US$5 million, says Catherine Lacroze of Los Robles Properties. Beachfront luxury homes command even higher prices, ranging from US$7 million to US$10 million.  

55 real estate offices have closed in and around Punta del Este over the past two years. About 85% of Punta del Este property owners are now renting their units through “informal channels” in order to reduce costs and avoid paying real estate commissions and taxes, according to the Chamber of Tourism.

Low foreign demand

Demand from foreign buyers remains weak. The real estate market in Uruguay, and particularly in its beach resorts, relies heacily on Argentina’s high-end buyers. Around 75% of foreign buyers in Uruguay have traditionally been Argentines, followed by Brazilians (another 20%) while the remaining 5% were buyers from other countries. Some European retirees are also drawn to Montevideo, especially writers and artists. However, the recent decline in demand from Argentinian buyers due to Argentina's economic turmoil and currency regulation changes have slowed the housing market, according to housing agents.

Although the share of foreign buyers in the overall housing market remains small, 360 Terra International Realty's managing partner, Sancho Pardo Santayana, says that some foreign sales are "growing steadily", including sales to buyers from the United States and Europe.    

Foreign buyers can buy both built properties and land in Uruguay. In November 2013, Congress prohibited ownership of productive land by corporations in which foreign countries are direct or indirect shareholders. But the bill does not affect individual foreign buyers, who can still purchase land.

Montevideo’s massive housing boom 1995-2000

Uruguay gdp per capita

Montevideo saw spectacular housing boom from 1995 to 2005, with prices of newly built houses surging by 198.6%, according to the Instituto Nacional de Estadistica’s (INE).

With increases in per capita income and robust demand from foreign homebuyers, house prices continued to rise in following years, albeit at a slower pace:

  • In 2006, the price index for new houses rose by 8.59% (2.07% inflation-adjusted) from a year earlier
  • In 2007, new house prices rose by 5.63% (-2.78% inflation-adjusted) from a year earlier
  • In 2008, new house prices rose by 19.45% (10.51% inflation-adjusted) from a year ago
  • In 2009, new house prices rose by 5.33% (-1.25% inflation-adjusted) from a year ago
  • In 2010, new house prices rose by 7.35% (0.69% inflation-adjusted) from a year ago
  • In 2011, new house prices rose by 11.44% (2.81% inflation-adjusted) from a year earlier
  • In 2012, new house prices rose by 15.57% (2.11% inflation-adjusted) from a year earlier

However, Montevideo’s housing market slowed sharply in 2013 and 2015. The housing market is now gradually improving, with modest house price increases.

Rental yields are moderate to good

Uruguay’s big city rental yields range from moderate to good, at around 5.5% to 7.5%.

In Montevideo, gross rental yields on 50 square metre (sq. m.) apartments are reasonable, at an average yield of 7.4%. Larger-sized apartments of around 245 sq. m. have lower yields averaging 5.5%, according to Global Property Guide research.

Houses in Montevideo also offer good rental yields. A 200 sq. m. house has an average yield of around 7.45% while a 500 sq. m. house yielded about 5.4% at end-2015.

Apartments in Montevideo cost around US$2,700 to US$3,000 per square metre (sq. m.) in 2015. Houses in Montevideo cost around US$2,000 per sq. m.

Rents have been rising recently. In 2015, average rents for new contracts increased 7.66%, and rose by 9.43% for existing contracts.

Interest rates almost same as last year's

Uruguay interest rate

Interest rates in Uruguay barely moved from the previous year. Banco Central del Uruguay’s (BCU) housing lending rate for indexed units (UI) remained at 6.9% in September 2017, same rate as that of same month last year, but up from 6.5% in September 2015.

The Indexed Unit, or Unidad Indexada (UI) in Uruguay, was created after Uruguay underwent a financial crisis in 2002. This unit is like Chile’s Unidad de Formento, which is adjusted with the CPI, and replaced the previous Unidad Reajustable (UR) which was adjusted according to a wage index. The index is calculated by Instituto Nacional de Estadistica’s (INE), and is subject to daily changes to reflect changes in the CPI. The indexing to the price level does not incur inflation risk since the real value of payments remains constant.

Uruguay housing loans

Uruguay’s mortgage market is highly concentrated, and is dominated by Banco Hipotecario del Uruguay (BHU) which accounts for 80% of all housing mortgage credits.

Housing loans in local currency rose by almost 35% to 191 million UI during the year to September 2017.

Favourable economic outlook in 2017, 2018

Uruguay gdp inflation

Uruguay's economy bounced back in 2016 with a GDP growth of 1.5% y-o-y, following a sharp slowdown the previous year, picking up especially in the second half of the year, mainly driven by the recovery of consumption and a larger decline in imports (-2.9% y-o-y) than in exports (-1.4% y-o-y).

This favourable growth continued in the first two quarters of 2017, with 2.8% growth during the year to Q2 2017.

Uruguay’s economy started to slow In 2014, with GDP growth of just 3.2%. It was followed by a 0.4% slowdown in 2015 as commodity prices slumped, and Uruguay's trade partners slowed.

This year, Uruguay's economy is expected to grow by 3.5%, and by 3.1% in 2018, based on IMF projections. In May 2017, credit rating agency Standard and Poor’s revised its outlook on Uruguay from negative to stable, citing its economy's resilience, and expects the government to continue implementing fiscal consolidation measures. Moody's Investors Service followed suit in July 2017, also revising its negative outlook to stable.

Uruguay is tagged as a “moderately free” and the world’s 38th freest economy in Heritage.org’s 2017 Index of Economic Freedom, up by three notches from the previous year. It ranks 5th out of 29 South and Central American countries. But in reality, the government’s continuing influence over economic activity hinders overall economic growth.

Uruguay exchange rate

The Uruguay peso (UYU) has weakened by 40.2% against the US dollar, from an average monthly exchange rate of UYU19.266 = USD1 in December 2012 to UYU 32.235 = USD 1 in March 2016, stoking inflationary pressures in recent years. The UYU has strengthened against the US dollar since then and has gained by 9.7% to an average monthly exchange rate of UYU 29.387 = USD 1 in October 2017.

The government’s fiscal deficit stood at around 3.9% of GPD in 2016, up from 3.6% in 2015, and way higher than the average deficit of 1.4% of GDP seen over the past decade. In 2017, the government intends to reduce deficit to only around 3% of GDP, and to 2.5% of GDP in 2019. To achieve these targets, the government is expected to implement higher public utility rates, an income tax hike, and a possible cut or delay in outlays. Uruguay’s gross public debt widened to 52.7% of GDP in 2016, up from 48% of GDP in the previous year.

One of Uruguay’s main risks was its high inflation. However, annual inflation rates has been on a declining trend since June 2016. Inflationary pressures were reduced due to the appreciation of the Uruguay peso and the higher interest rates.

In October 2017, Uruguay's annual inflation has increased for the third consecutive month at around 6%, up from 5.8% in September 2016 and 5.5% in August 2017. The recent price hike was still within the central bank's target of 3% to 7%. In 2016, inflation was at 9.6%, from 8.7% in 2015, from 8.9% in 2014, 8.6% in 2013, and 8.1% in 2011 and 2012, according to the IMF.

Uruguay’s unemployment rate slightly rose to 7.8% in August 2017, from 7.6% in the previous month, according to Instituto Nacional de Estadística. In 2016, nationwide jobless rate was at 7.9%, higher than the 7.3% from 2007 to 2015 but far lower than the average jobless rate of 14% from 2000 to 2006.






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