Puerto Rico’s housing market continues to strengthen, after several years of house price falls, thanks to surging demand. During the year to Q2 2021, the seasonally-adjusted purchase-only house price index surged 15.4% (12.4% inflation-adjusted), a sharp acceleration from the previous year’s minuscule growth of 0.2%, according to the Federal Housing Finance Agency (FHFA). It was the second highest y-o-y growth ever recorded since FHFA started publishing data in 1995.

During the latest quarter, house prices increased slightly by 0.9% in Q2 2021, almost unchanged when adjusted for inflation.

Source: Federal Housing Finance Agency

“There is no inventory to supply the demand, which makes prices soar,” said Francisco Díaz Fournier, owner of Luxury Collection Real State. He noted that residential prices in Puerto Rico have reached more than US$1,000 per square foot, almost similar to Miami, New York and San Francisco.

Demand is rising strongly, mainly driven by wealthy Americans attracted with Puerto Rico’s tax haven status. In the first half of 2021, the houses sold total soared 84% y-o-y to 6,593 units, following an 8.3% fall during 2020 due to the pandemic, according to the Office of the Commissioner of Financial Institutions. Existing houses, which accounted for 92% of the total number of houses sold, saw a 91.4% y-o-y increase in sales in H1 2021 while sales of newly built houses rose by 26.1%.

Yet construction activity remains weak, with the total value of housing construction in the islands falling by 3% to US$516 million in 2020 from a year earlier, following a 9.4% increase in 2019, according to Puerto Rico Planning Board.

During the past decade the island has experienced a prolonged economic crisis, massive debt, high unemployment and continuing population loss. With US$70 billion in debt and US$50 billion in pension liabilities, Puerto Rico´s bankruptcy filing in May 2017 was the biggest in the history of the United States.

After expanding by 1.2% in 2019, Puerto Rico’s economy contracted again by 7.5% during 2020, mainly due to the pandemic as well as regular earthquakes. The economy slumped by 4.7% in 2018, 2.9% in 2017, 1.3% in 2016, 1% in 2015, 1.2% in 2014, and 0.3% in 2013. The economy is expected to remain volatile, with projected GDP growth of just 2.5% this year and 0.7% in 2022, according to the latest projections released by the International Monetary Fund (IMF).

Foreigners can freely buy property in Puerto Rico. It is important to hire a real estate agent as knowledge of Spanish is essential. A foreigner can alternatively buy through a corporation (US$300 for Corporate Resolution). Registering a property by a corporation can be completed in around 15 days.

Demand is surging

Houses sold soared more than 84% y-o-y to 6,593 units in the first half of 2021, following an 8.3% fall during 2020 due to the pandemic, according to the Office of the Commissioner of Financial Institutions.

• For existing houses, which accounted for 92% of total demand, sales climbed 91.4% y-o-y to 6,091 units in H1 2021, after falling by 11.2% during 2020.
• For newly built houses, sales rose by 26.1% y-o-y to 502 units in H1 2021, following a 36% growth last year.

Landed residential properties for sale in areas such as Guaynabo, San Juan and Río Piedras do not last a day in the market once they are listed, according to Marixa S. Álvarez, president of the Bayamón Board of Realtors®. Many of these transactions are made in cash.

“The areas of Dorado, Condado, Isla Verde, Ocean Park, Rincón, Isabela, Cabo Rojo, Humacao-Palmas del Mar and Río Grande continue to be favorites to buy. It is worth mentioning that many of these sales correspond to the so-called luxury properties (over $500,000),” said Álvarez.

On the other hand, in the Caguas area “2021 has not been as busy as 2020, due to the low inventory of properties and the high volume of prospective buyers,” according to Carlos Javier Ortiz, president of the Caguas District.

Rental yields are good, but rental market remains volatile

Rental yields in Puerto Rico remain good, according to the Global Property Guide research. Average rental yields on 2 bedroom apartments in San Juan stood at 7.1% while it was slightly higher at 7.3% for 3-bedroom apartments.

There was insufficient data on apartments in coastal areas of Puerto Rico such as Condado, Miramar and Dorado, but two years ago they had much lower rental returns at 3.8%.

Despite good yields, Puerto Rico’s rental market has been paralyzed by the pandemic. But even before the global health crisis, the islands’ rental market had already been weak with a vacancy rate of about 12.8%, up from 10% in 2010 and 7.4% in 2000, mainly due to continued population loss, according to the U.S. Department of Housing and Urban Development (HUD).

“Continued population loss in Puerto Rico has led to increasingly soft rental market conditions and rising vacancy rates,” said HUD.

San Juan metro area’s average monthly rent for 2-bedroom apartments amounted to about US$720 while the average rent on 3-bedroom apartments was US$850 per month.

Round trip transaction costs, i.e., the costs of buying and selling a property, are very low in Puerto Rico.

Tourism improving

Tourism has been improving this year. In July 2021, arrivals rose by 39.7% from a year earlier, making Puerto Rico the second top performer among Caribbean destinations, according to Vanessa Ledesma of the Caribbean Hotel & Tourism Association (CHTA). Up to July 2021, Puerto Rico had the second highest occupancy rate in the region next to Aruba, at 81.2%, according to travel analytics firm STR.

During 2020, tourist arrivals plummeted by 21.3% y-o-y to 3.88 million people, in stark contrast to the annual growth of 15.7% in 2019, according to the Puerto Rico Planning Board.

• Stay-over visitors fell by 17.7% y-o-y to 2.62 million people, following a 3.6% increase a year ago
• Excursionists were down 27.8% y-o-y to 1.26 million people, in contrast to a 47% growth in 2019

Total visitor expenditures fell by 19.1% to US$2.92 billion in 2020 from a year earlier, following a 9.3% growth in 2019.

About 55% to 65% of visitor arrivals in Puerto Rico in the past three years came from the United States.

Tourism accounts for about 7% of Puerto Rico’s GDP.

Economic crisis, natural disasters and the housing market

Puerto Rico’s recession began in the fourth quarter of 2006. GDP has grown very little or declined over the past decade, contracting every year from 2005 to 2018, with an exception in 2012 when the economy grew by a meagre 0.03%.

After huge annual house price increases in the early 2000s, the housing market came crashing down in 2008. But then the market continued down. House prices fell by more than 31% (41.3% inflation-adjusted) from Q2 2007 to Q3 2018.

There’s been high unemployment, massive emigration, and a near-catastrophic national debt crisis and credit rating downgrades.Puerto Rico has lost about 20% of its jobs since 2007. The population shrank by 17% over the past 15 years (2005-20). Nearly half of Puerto Rico’s population lives in poverty, and household income is about US$18,000 annually – less than half that of Mississippi, the poorest U.S. state. And public health and retirement systems are insolvent.

The loss of net worth among Puerto Ricans associated to the collapse of real estate prices in the past several years has been close to USD 30 billion, according to economic consulting firm Estudios Tecnicos’s director, Jose Villamil.

Puerto Rico’s economic collapse was accompanied by a banking crisis, with non-performing loans at elevated levels. Most of the problem was in the housing market, which represents about two-thirds of total loans, according to Scotia Bank. In 2006, before the crisis, the prime interest rate stood at 7.26%. It dropped to 3.25% in 2009 and remained very low since, but despite this about 80,000 families have been unable to refinance their loans and risk losing their homes.

Puerto Rico filed for the equivalent of bankruptcy protection in May 2017, unable to pay its massive debt or provide its citizens effective services. With US$70 billion in debt and US$50 billion in pension liabilities, Puerto Rico’s bankruptcy filing was the biggest in the history of the United States, dwarfing Detroit’s US$18 billion bankruptcy filing in 2013.

As if Puerto Rico’s economic woes were not enough, Hurricane Maria struck the island in September 2017 – killing an estimated 2,975 people, severely damaging the island’s infrastructure, adversely affecting thousands of small businesses, and destroying nearly all agricultural production. The category 4 storm caused an estimated US$90 billion in damage. A total of 357,492 homes in Puerto Rico were damaged, according to the Federal Emergency Management Agency (FEMA). Overall, about 23% of the island’s housing stock was affected, with around a third of them located in the San Juan metropolitan area and other coastal counties.

The Housing Stimulus Act

To rescue the island’s plunging housing market, former Governor Luis Fortuño implemented the stimulus program “Impulso a la Vivienda” (Act 152) in 2010. The idea was to cut home inventories and stimulate new housing construction. Even before the ratification of Act 152, a "combo program" allowed people to buy second homes at a reduced rate, through a US$25,000 incentive, plus a US$10,000 voucher covering closing costs.

Act 152 provides:

• Loan to value mortgage ratios of 105%
• A 100% exemption from net rental income tax, for a 10-year period.
• A 100% tax exemption during a 10-month window, plus a 100% exemption from capital gains tax at the time of resale of new property, and a 100% exemption from fees, stamps and vouchers. There also is a 100% exemption on temporary property tax, and a five-year exemption from property taxes.

Effectiveness of Acts 20 & 22 disputed

Two laws, which came into effect in early 2012, provided significant new tax benefits to foreign individuals and businesses relocating to Puerto Rico:

• The Export Services Act 20 offers tax incentives to export services.
• The Individual Investors Act 22 provides total exemption from Puerto Rican income taxes on all passive income realized or accrued after becoming a bona fide resident of Puerto Rico. Aside from this, other benefits offered to residents include tax exemption on gains from sales of property acquired after becoming a resident.

Then in December 2014, the government expanded the coverage of both Act 20 and 22, expanding the period of tax exemption. On July 11, 2017, Act 45 further expanded Acts 20 and 22, adding “medical tourism services” and “telemedicine facilities” as eligible services under Act 20; abolishing the minimum number of employees required for most Act 20 businesses.

However nine years since their introduction, some claim that these two laws have not generated the expected investments and job creation on Puerto Rico, causing them to lobby for their repeal.

But the Economic Development Department (DDEC) remains supportive of the said laws. “Studies have shown that these laws have been positive for the economy of Puerto Rico,” said Carlos Fontán of DDEC. “They provide economic activity that we may not otherwise receive. Repealing these laws would give the false impression that Puerto Rico is not open for business.”

Based on a study conducted by Econometrika Corp. and commissioned by DDEC, Acts 20 & 22 created about 33,000 new jobs between 2012 and 2017. As of 2017, Act 22 attracted 1,332 individuals and their families to live in Puerto Rico while Act 20 approved another 781. The number of decree holders plunged in 2020 due to the pandemic but in recent months, 579 additional decrees were approved under Act 22 and 710 under Act 20.

“We do not recommend the repeal of Acts 20, 22. Rather, we recommend overhauling them to maximize their potential,” according to the study.

Moreover, Puerto Rico’s government has also reformed the business permits system, to attract more investment.

Major reforms:

• Effective June 7, 2019, new and existing businesses in the island can obtain a single permit, consolidating all licenses, authorizations and certifications;
• A Unified Information System for the filing and processing of permits, authorizations, licenses and certifications for land uses and operation of businesses.
• Time limits for the issuance of permits. Before the pandemic, getting building permits take only 20 days, on average, instead of 98 days two years ago.

In response to Hurricane Maria, the US Department of Housing and Urban Development (HUD) approved US$1.5 billion for the Community Development Block Grant-Disaster Recovery (CDBG-DR) Action Plan in July 2018 to assist rebuilding. The grant includes US$1 billion for housing projects, US$ 100 million for infrastructure and US$ 10 million for rental assistance to vulnerable households and the elderly.

Then in March 2019, HUD allocated another US$8.2 billion funds to the program – the largest funding approved by HUD for the recovery after a disaster. Of which USD 2.85 billion is allocated for housing.

Just recently, US President Joe Biden approved another US$10 billion relief recovery funding for Puerto Rico for housing and infrastructure reconstruction, among other social programs.

The Community Development Block Grant-Disaster Recovery (CDBG-DR) plan for Puerto Rico’s reconstruction also presents huge opportunity for the construction industry, particularly for new housing construction.

The economy improved in 2019, registering growth of 1.2% in 2019. However, it was immediately cut short by the pandemic, dragging the economy back to recession with a record 7.5% decline in 2020.

Unemployment has fallen, reaching 8.4% in August 2021 - down from 16.4% in 2010, and 15.9% in 2011 – but it remains far above the United States’ 5.2% jobless rate. Many of the new jobs are in rebuilding, which has created many construction jobs, and much of the improvement is in fact due to the emigration of labour.  And we should remember that these additional jobs in construction are mostly temporary.

Residential construction expected to improve

Quite aside from the disaster recovery programme, residential construction activity is expected to improve in the coming months due to the strong demand.

During 2020, the total value of housing construction in the islands fell by 3% to US$516 million from a year earlier, following a 9.4% increase in 2019, according to Puerto Rico Planning Board.

• Private residential construction fell slightly by 0.5% y-o-y to US$504 million in 2020, in contrast to a growth of 8% in 2019. This was also far below the US$2.3 billion residential construction recorded in 2007.
• Public residential construction was just US$12.5 million in 2020, sharply down by 52.5% from a year earlier and from 2007’s US$223 million public residential construction.

Yet cement production and sales, the construction industry’s key indicators, showed mixed results.

• Cement production fell by 32.9% y-o-y to 4.95 million bags in the first eight months of 2021, following an annual decline of 14.6% during 2020, according to the Office of the Commissioner of Financial Institutions (OCIF).
• Cement sales rose by 25.8% y-o-y to 10.77 million bags in Jan-Aug 2021, after increasing modestly by 2.8% during 2020.

Residential foreclosures rising again

Residential foreclosures dropped sharply last year due to the imposition of moratoriums to help struggling homeowners due to the pandemic. As a result, the number of foreclosures in Puerto Rico dropped almost 78% y-o-y to just 911 units in 2029, in contrast to the 31.3% rise in 2019 and the lowest level recorded in recent memory, according to the Office of the Commissioner of Financial Institutions (OCIF).

However, foreclosures have been rising again in recent months. In the first half of 2021, residential foreclosures surged 126% y-o-y to 1,614.

In June 2021, there were a total 9,812 properties in process of foreclosures. 

Delinquent mortgages in Puerto Rico accounted for about 9.9% of loans in June 2021 – one of the highest levels in the United. States.

Sources:

• House Price Index (Federal Housing Finance Agency): https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index.aspx#ReleaseDates
• Economy at a Glance: Puerto Rico (U.S. Bureau of Labor Statistics): https://www.bls.gov/eag/eag.pr.htm
• Puerto Rico Act 20 and Act 22 (Alpen Partners): https://alpenpartners.com/insights/puerto-rico-act-20-and-act-22/
• Puerto Rico Tax Incentives (Sotheby’s International Realty): http://puertoricotaxincentives.com/
• DDEC Supports Acts 20/22 (The Weekly Journal): https://www.theweeklyjournal.com/business/ddec-supports-acts-20-22/article_2d008f08-e40f-11eb-b622-ffad64ab661e.html
• HUD Approves Amended Action Plan with $8.2 billion in CDBG-DR for Puerto Rico (McConnell Valdes LLC): http://www.mcvpr.com/newsroom-publications-HUD-Approves-Action-Plan-CDBG-Funds
• Puerto Rico, getting building permits now take only 20 days on average instead of 98 days (Puerto Rico New Comer): https://puertoriconewcomer.wordpress.com/2019/05/12/puerto-rico-getting-building-permits-now-take-only-20-days-on-average-instead-of-98-days/
• Doing Business 2020: Puerto Rico (World Bank): https://www.doingbusiness.org/content/dam/doingBusiness/country/p/puerto-rico/PRI.pdf
• Rental incomes in San Juan, Puerto Rico are good (Global Property Guide): https://www.globalpropertyguide.com/Caribbean/Puerto-Rico/Rental-Yields
• Property Sales, Rentals Take Off as the Economy Recovers (The Weekly Journal): https://www.theweeklyjournal.com/top-stories/property-sales-rentals-take-off-as-the-economy-recovers/article_a3a9a294-d360-11eb-b55c-5787cb5167b2.html?fbclid=IwAR2MfOwA2ZHlF5U47e_mHzuJ9gMoVhVMLFOuiDouEokhLbokcA_C8bbgiZQ
• Comprehensive Housing Market Analysis Puerto Rico (U.S. Department of Housing and Urban Development): https://www.huduser.gov/portal/publications/pdf/PuertoRico-comp.pdf
• Record Tourism Numbers for Puerto Rico (The Weekly Journal): https://www.theweeklyjournal.com/business/record-tourism-numbers-for-puerto-rico/article_90b37a48-e40e-11eb-bf5f-ff56ce538638.html
• Caribbean tourism performance positive despite pandemic — CHTA (Jamaica Observer): https://www.jamaicaobserver.com/business-report/caribbean-tourism-performance-positive-despite-pandemic-chta_231399
• 34K Puerto Rico homeowners sheltered by USDA eviction moratorium (NimB): https://newsismybusiness.com/34k-puerto-rico-homeowners-to-benefit-from-eviction-moratorium/
• Economic Report to the Governor 2020: Statistical Appendix (Junta de Planificación): https://jp.pr.gov/Portals/0/Economia/Apendice%20Estadistico/Ap%C3%A9ndice%20Estad%C3%ADstico%202020%20(1).pdf?ver=2021-07-12-161806-597
• Residential Units Foreclosed (Office of the Commissioner of Financial Institutions): https://ocif.pr.gov/DatosEstadisticos/Datos%20Estadisticos/Foreclosure%20Unit%20Residential%20by%20Institution.pdf
• Americans move to Puerto Rico, triggering historic real estate boom (Dominican Today): https://dominicantoday.com/dr/economy/2021/04/16/americans-move-to-puerto-rico-triggering-historic-real-estate-boom/
• Relief Funds Accelerate into Puerto Rico (Coatings World): https://www.coatingsworld.com/issues/2021-04-01/view_latin-america-reports/relief-funds-accelerate-into-puerto-rico/