Uruguay: Montevideo’s house prices up; Punta del Este down

September 30, 2015

After two year of house price falls, Montevideo’s property market is now showing signs of improvement.

During 2014, house prices in the capital city Montevideo rose by 4.6%, to an average of US$159,522, based on data compiled by El Observador from a database of 20,000 condominiums.

Among the eighteen Montevideo neighborhoods included in the survey, Centro recorded the biggest house price increase of 10.3% during 2014, followed by Carrasco (8.4%), Buceo (8%), Punta Gorda (5.7%) and Ciudad Vieja (5.7%).

Carrasco, Montevideo’s most exclusive suburb, had the most expensive housing in the capital city. Currently, a 65 sq. m. residential property in the area was priced at about US$224,997, according to InvestBA.

In Punta Gorda, a beautifully restored historic district, a 65 sq. m. residential unit costs around US$214,699. In Punta Carretas, where the magnificent Rambla (seaside avenue) can be found, the same unit has an average price of US$209,535.

In the districts of Malvin, Pocitos, and Buceo, the selling price of a 65 sq. m. residential property ranged from US$180,172 to US$188,767. On the other hand, the same property costs between US$158,551 and US$161,672 in the areas of Parque Batlle, Tres Cruces, and Parque Rodo.

Centro has the most affordable housing in the capital city, with an average price of US$126,174 for a 65 sq. m. residential property.

Despite the overall decline in property sales, demand remains healthy for apartments and newer townhouses with amenities like swimming pools, private patios and round-the-clock security, especially among retirees.  Apartments and newer townhomes in the more desirable parts of Carrasco are priced from US$372 to US$418 per square foot (sq. ft.), more than high-end single-family homes, which are offered for US$232 to US$279 per sq. ft.

Foreign demand still weak

Uruguay gdp inflation

Demand from foreign buyers remains weak. In Montevideo, “purchases by foreigners have decreased in 2014,” said Juan Federico Fischer of the law firm Fischer and Schickendantz. Foreign homebuyers make up more than a third of the total property transactions every year.

The real estate market in Uruguay, and particularly its beach resorts, heavily rely on Argentina’s high-end buyers.  Around 75% of foreign buyers in Uruguay are Argentines, followed by Brazilian buyers, making up around 20%, while the remaining 5% are buyers from other countries. Some European retirees are also drawn to Montevideo, especially writers and artists.

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

Foreign buyers are not restricted when buying properties in Uruguay. However, in November 2013, the Uruguayan government filed a new bill in Congress, which prohibits ownership of productive land by corporations in which foreign countries are direct or indirect shareholders. The bill does not affect individual foreign buyers, who can still purchase land in Uruguay.

The bill, which is proposed and signed by President Jose Mujica, was made for "the preservation and defense of the full sovereignty of the Uruguayan state, in relation to natural resources in general, and land in particular."

Uruguay’s economic growth slowed to 3.3% in 2014, the lowest level in five years, mainly due to a slump in commodity prices and the economic slowdown in the country’s trade partners, based on figures from the International Monetary Fund (IMF). Uruguay enjoyed high economic growth in 2010 and 2011 at around 8.4% and 7.3%, respectively, and avoided recession in 2009 with a 2.4% GDP increase. The IMF’s forecasts a growth rate of around 2.8% in 2015.

Punta del Este remains depressed

The fashionable beach resort of Punta del Este continues to struggle and in 2014, average residential property prices fell by 7.6%, to US$3,732 per square metre (sq. m.).  Punta del Este, along with Montevideo, had dominated Uruguay’s property market for more than a decade, but slowed sharply in recent years.

Declining demand from Argentinians is 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.  

Residential construction activity in Punta del Este fell 38.5% in 2014, to just 48 residential projects under construction.

“That sharp drop in the number of projects is due to the fact that new developments are not coming online. In fact 12 buildings were launched in the last two years with signage and sales centers only to be cancelled because of poor sales,” said El Pais’ Marcelo Gallardo.

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 lower costs and avoid paying real estate commissions and taxes, according to the Chamber of Tourism

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 the surge in per capita income and robust demand from foreign homebuyers, house prices continued to rise in the 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 2013-14.

Yields are moderate to good

Uruguay’s big city rental yields range from moderate to good, at around 6% to 7.6%.

In Montevideo, gross rental yields on 75 square metre (sq. m.) apartments are reasonable, at an average yield of 6.6%. Larger-sized apartments of around 120 sq. m. have higher yields averaging 7.3%, according to Global Property Guide research.

Houses in Montevideo yield higher returns than apartments. A 150 sq. m. house has an average yield of around 8.9% while a 375 sq. m. house yields about 9.5%.

Apartments in Montevideo cost around US$2,100 to US$2,500 per square metre (sq. m.) or around US$200 to US$235 per square foot.
Houses in Montevideo cost around US$1,500 to US$1,770 per sq. m., or around US$150 to US$165 per square foot.

Interest rates likely to rise

Uruguay interest rate

Due to rising inflation, interest rates appear to be heading up.  Banco Central del Uruguay’s (BCU) housing lending rate for indexed units (UI) increased slightly to 6.3% in August 2015, from 6.2% in the previous month and 6.1% in the same period last year.

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

The US dollar housing lending rate for loans payable within 367 days increased to 6.9% in August 2015 from 6.4% in the previous year.

Uruguay’s housing 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 for new operations in local currency dropped 0.4% to 671.65 million UI during the year to August 2015. The decrease of loans can be attributed to the increase in interest rates.

Slowing economy, rising inflation

During the second quarter of 2015, Uruguay’s economy shrank for the first time in more than a decade, amidst a slump in investment and retail sales. The economy contracted by 0.1% in Q2 2015 from a year earlier, and by 1.8% from the previous quarter, according to the Banco Central del Uruguay (BCU).

The downward trend is expected to continue. The IMF predicts 2.8% GDP expansion in 2015. The government, on the other hand, expects a less optimistic scenario, with a 2% to 2.5% growth.

Uruguay has recently unveiled a US$12 billion spending plan on energy, transport and housing infrastructure to create jobs and buoy the economy.

Uruguay is tagged as a “moderately free” and the world’s 43rd freest economy in Heritage.org’s 2015 Index of Economic Freedom, down 5 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.

After enjoying annual average GDP growth of around 6.1% from 2005 to 2011, Uruguay’s economic growth slowed to an average of 3.8% per year from 2012 to 2014. The slowdown in the recent years is attributed to a the slowdown in the global economy, which also affected Uruguay’s trade partners as well as the country’s neighboring countries in the region, such as Argentina and Brazil.

One of Uruguay’s main risks is its high inflation.

In July 2015, inflation stood at 9.04% on an annualized basis. Inflation is expected to hit 8.4% this year, far from the government’s official target of 3% to 7%. In 2014, inflation was 8.9%, from 8.6% in 2013, and 8.1% in 2011 and 2012, according to the IMF.

The Uruguay peso (UYU) has weakened by 17.4% against the US dollar since the start of the year, stoking inflationary pressures and shattering President Vazquez's hopes that inflation would ease to 5% next year. In August 2015, the average monthly exchange rate stood at UYU26.55=USD1.

The government’s fiscal deficit stood at 3.4% of GDP in 2014, up from the average deficit of 1.4% of GDP seen over the past decade. The shortfall is expected to fall to 3% in 2015 and to 2.8% in 2016.

Uruguay’s unemployment rate has reached its record lows in the recent years, falling to only 6.5% of the labour force in 2014, far from the average jobless rate of 14% from 2000 to 2006. In July 2015, nationwide jobless rate stood at 7%, down from 7.4% in the previous month, according to Instituto Nacional de Estadística. IMF predicts a slight increase in unemployment in 2015, to around 6.8%.

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