The Real Estate Market

August 2007 Update

Having recovered from the 2002 lows, the Argentine residential real estate market now shows signs of stability in premium locations. Although gains are still expected in these classic destinations, opportunities still abound in urban areas surrounding the city of Buenos Aires. Pushed by steady economic growth and stability, commercial real estate is currently very much in demand creating new opportunities in office and retail space. Interesting gains are also to be found in the tourism sector, mainly the result of low costs in dollar terms derived from the 2002, 3 to 1, devaluation of the Argentine peso. The farming sector is experiencing a bull market for the same reasons with added interest for tourism based destinations. World wide alternative energy policies are also causing added demand for bio energy apt farmland by foreign investors.

Although the end of the Menem government in 1997 spelled the beginning of a bear market which finally crashed in January 2002, residential real estate pricing has more than recovered in the classic destinations of Recoleta and Puerto Madero. Luxurious apartments are still very much in demand by local investors and end-users and by the foreign investment community. The latter comprise approximately 30% of all purchases in these two destinations. Pricing ranges at between U$S 2500 and 4500 per square meter in the notes areas. At Reynolds we expect this upward trend to continue but at a slower pace. In terms of residential real estate, we believe that opportunity lies in the barrios surrounding the city and destined more towards the average local consumer where pricing ranges between U$S 1300 and U$S 1500 per square meter. End users in this segment are slowly recovering their purchasing power and beginning to qualify for mortgage credit which, at this point, accounts for approximately 5% of all purchases. Although the market is hesitant at this point, pending the definition of the October election, we believe that the upward trend will continue soon after.

Following 51 months of consecutive GDP growth at yearly rates in excess of 8%, commercial activity has soared. The latter has created heavy demand for both office and retail space. This growth has caused vacancy rates to dwindle to 2%. The result is steady pressure on monthly rental rates which hover between U$S 10 and U$S 30 the square meter per month for office space and as high as U$S 70 for the equivalent retail space. Although office projects are under way in an attempt to fulfil demand in that segment, new office space will not be complete for the next twelve months and falls short of the need. A good reason for the lack of commercial space is probably attributable to the Argentine rental law which allows tenants to terminate their commitment, six months into the lease, with only one and a half months penalty. There are, though, several ways of lessening the risk such as obtaining international letters of guarantee or contracting larger fitting-up costs which makes it more costly to break the lease.

Tourism continues to rise in Argentina causing a growing demand for hotel accommodation and tourist related activities. One quick way to profit from this unique opportunity is investing in short term rental units. The latter should be acquired in the tourist rich areas of Recoleta, Puerto Madero, Barrio Norte & Palermo Holywood. A typical 70 meter apartment may be obtained and furnished for as low as U$S 185.000. Occupancy rates vary between 75 and 90% depending on amenities offered. Past performance shows combined rental and capital gains income in the area of 15 to 20% per annum. An added benefit for foreign investors is they get to use the unit when it is not rented out. Another related area is rural or adventure tourism destinations. The interior of Argentina offers amazing opportunities, specifically in the Provinces of Salta, Mendoza and Jujuy. Here, scenic land may be obtained for as low as U$S 200 a hectare in locations one to two hours away from a main airport. A good example of this is 23.000 hectares of land only 20 km from the city of Malargüe in Mendoza and 70km from Las Leñas Ski resort. In addition to providing an ideal tourism setting it also has a loading capacity of between 2500 to 3000 head of cattle. The farm is available for U$S 3.300.000.-

Although agricultural land in and around Buenos Aires has gone up substantially in dollar terms, since the 2002, 70% devaluation of the Argentine currency, there are several destinations which are only now surfacing, primarily soy apt land in the provinces of Salta and Jujuy. The latter may be obtained for approximately U$S 300 to U$S 500 per hectare and requiring an additional U$S 500 per hectare in land preparation costs. Equivalent land in the province of Córdoba is U$S 3000 per hectare. Commodity prices, a basic when considering agricultural investments, have sky rocketed over the past twelve months. The latter, combined with a world wide focus on renewable energy sources makes Argentine agricultural land an attractive destination for investment capital.

On a negative side, Argentina is facing several challenges. The most important is energy related. The current government, regrettably, has not placed enough incentive on utility based investments to accompany the overwhelming GDP growth. Energy supply is low and will, undoubtedly, cause a hindrance on future economic growth. Overall, though, Argentina offers opportunities which have not been present for decades. Real estate based investments are one such sector, albeit focusing on the right one will take a little more homework than it took a year or two ago.

Paul A.Reynolds
Managing Director
Reynolds Propiedades S.A.
August, 2007