House prices in Lima have risen in Q3 2018
Maria de Guzman | February 08, 2019
House price growth in Peru has weakened since 2014, due to the economic slowdown caused by declining copper prices. In 2014, Peru´s economic growth slowed to 2.4%, followed by 3.3% growth in 2015. In 2016 there was 4% growth, but that was followed by another slowdown to 2.5% growth in 2017.
Prior to these recent years, the country had enjoyed strong growth from 2010 to 2013, and the housing market boomed during those years.
The outlook for 2019 is quite positive. Ricardo Arbulú, vice president of the Association of Real Estate Companies of Peru (ASEI) projects house price increases of between 4% and 7% in 2019, depending on the district. Arbulú points out that a factor likely to push up sales prices upward is the shortage of real estate supply.
Foreign residents and nonresidents alike may buy Peruvian property. Investment in Peruvian property does not require government approval, except if such property is close to Peru´s frontiers.
Peru: yields have fallen from excellent to moderate
Property prices in Peru have risen significantly over the past few years.
Apartments in desirable areas like Miraflores, Barranco and San Isidro may cost $2,500-$2,600 per square metre (more for larger apartments) while costs fall to $1,500 per square metre (sq. m.) in areas like Chorrillos.
How much can you earn? Rental yields in Lima are much less good than they used to be. Yields on smaller apartments have fallen over several years from an amazing 13% to around 5% for 100 sq. m. apartments. By regional standards house price to rent ratios in Peru are comparatively high, so you earn more in many other Latin American countries. 4.50%-5.50% is maybe not a bad yield, but it is not great either. Smaller apartments are likely to yield more.
The currency risk. Peru’s Sol depreciated during the period 2013-2015, but has been stable since. Over the past decade it has done much better the Chilean Peso, Brazilean Real, let alone (heaven forbid!) the Argentinian Peso.
Round trip transaction costs are moderate in Peru. See our property transaction costs analysis for Peru and property transaction costs in Peru, compared to the rest of Latin America.
Rental income tax is high in Peru
Rental Income: Rental income is taxed at flat rate of 30%, without any deductions.
Additionally, leasing real estate in Peru is subject to VAT at 18%. VAT is imposed when legal entities (individuals and corporations), resident or not, rent out Peruvian properties.
Capital Gains: Gains earned by nonresidents selling Peruvian property are taxed at a flat rate of 30%.
Inheritance: There are no inheritance or gift taxes in Peru.
Residents: Residents are taxed on their worldwide income at progressive rates, from 15% to 30%.
Total transaction costs are low in Peru
Total round trip transaction costs, i.e. the total cost of buying and selling a property, are between 6.10% and 9.06%. The biggest cost is the estate agent’s fee, which is between 3% and 5%. Five procedures must be completed to register property, which can be accomplished in about 6 to 16 days.
Peru's rental laws are pro-tenant
Rent: Although rents may be freely agreed by the landlord and the tenant, strong security of tenure is given to the tenant.
Tenant Eviction: Legal proceedings to evict the tenant can be burdensome and highly time-consuming (even tedious).
Positive economic outlook in 2019From a stronger expansion of about 4% in 2016, Peru's economy slowed to 2.5% in 2017, mainly attributed to:
- Floods brought by the "Coastal El Niño" phenomenon during the first quarter of 2017, which contributed to the slowdown in domestic demand;
- Investment fell as infrastructure projects were halted partly due to the Odebrecht / "Lava Jato" corruption scandal.
During the second half of 2017, the negative impact of the "Coastal El Niño" gradually dissipated and domestic demand recovered. However, the growth was still limited due to weaker exports of copper and fish.
The economy stated to pick up again in 2018, as the government focused on rehabilitation of areas and infrastructures affected by "Coastal El Niño". Domestic demand remained strong, backed by a recent minimum wage hike, low inflation, and increasing employment. And while the country faces political uncertainty, Economy and Finance Minister Carlos Oliva said that this has not affected the economy.
"We do not see any impact on the country's economy. Political noise is not good, but what is important is that we are on the way towards finding a solution," according to Minister Oliva.
Peru's GDP rose by 4% in 2018, and this growth is expected to continue in 2019 also at 4%, according to the Central Reserve Bank of Peru (BCRP).
In December 2018, inflation stood at 2.19%, up from last year's 1.36%. Unemployment was down to 5.7% in November 2018, from 6.5% in the previous year, according to the Central Reserve Bank of Peru (BCRP).