An Insider’s View of the Property Market

Hello, Santiago de Tezanos here.

During the last year we have had many email and phone questions about real estate not only on the Coast but about Montevideo as well. Since I’m a more or less familiar with property values thought the country, I offer the following opinion.

One recent reader asked about investing in Ciudad Vieja (the old city in Montevideo), as have many others. Ciudad Vieja seems to be the “place of the future”, but it has always been that, so it looks like it might be in the future forever, therefore never being a place to get a return. Ciudad Vieja can vary sharply from block to block, with the “trendy” blocks being overpriced, and the “gloomy” blocks being advertised as being part of the nice area and not being really that.

An average REAL return on real estate nowadays is around 4 to 5% after deducting income and property tax and maintenance between tenants. The real estate market was supposed to be booming until last week, now we’ll have to see how the pitfall global economic crisis hits us. Per some historical trends, real estate prices (sale or rent) of the days until last week was around the same level of 1998 in constant dollars, i.e. the highest historical levels. This would say that it was not the best time to invest. However (now the good news), it looks like the market could be in for a correction (say 10 to 20% depending on the area) in the next 6 to 8 months. Various factors come in here: while the obvious might be the global financial crisis, therefore a correction in income of the Uruguayan economy as a whole, the not so obvious but real consideration is that there are a huge number of flats being completed in the next few months.

Many of these new projects have been built with investment of Argentineans fleeing their country financial system, and looking for a safe and near haven. Therefore, they will never occupy those flats, they’ll just have them there to preserve wealth and pay maintenance through renting or eventually selling. Population in Uruguay does not grow, actually it’s been the same for more than 35 years, so the new units are nearing 100% increase of inventory so an economist would say that price should go down. Other factors are the upcoming elections and the usual economic woes attached to them in UY, the cooling of the economy by the lower commodity prices, etc.

If my money were involved, I would hold on until February when the results of the summer season will be obvious as well to make a decision. In my opinion 2009 could be a good year for investing in order to get a nice return in 2011/2012. But all things in Uruguay arrive at least 6 months late, locals haven’t yet perceived the global financial situation, and therefore prices are still holding.

All of the above applies for Montevideo/Colonia.

Now for Punta del Este, PdelE is, marketwise speaking, part of the Buenos Aires market. When Argentineans can, they buy in Punta del Este. When they need their money back, they first sell their PdelE flats. Another benchmark for PdelE is the price of the Square meter in Miami. Again, Argentineans compare and decide to buy PdelE or Miami. Punta del Este is always a gamble, prices fluctuate enormously, you can make a fortune if you buy low and sell high (2002/2007), but you can lose as well. If you buy PdelE to enjoy, an eventually to make a profit (or at least get an income to pay for the taxes and maintenance) you can hold to the property until the market’s high. The market is now in a high, again, remember, things in Uruguay happen 6 months later.

Punta del Este high-end property rents out always, 15 days in January at least, and depending on the area, amenities, furnishes you’d be easily above of 15% return, but these are expensive properties to buy as well. Average properties depend more on how the season develops, and seasons are very fluctuating depending on Argentinean mood, and recently the mood of the Brazilians.

So, am I telling you to flee away of this market? No, just telling you to study it in detail. Uruguay is a small country; market situations differ strongly from one place to the other, even one block in Ciudad Vieja can make a big difference.

A good bet, and something that’s missing in Montevideo is to have short-term rental property (i.e. a 1-2 bedroom in Pocitos/Punta Carretas), well built and nicely furnished, for tourists/short term visitors. There are almost none of these I know of only ONE flat in this conditions. It should be a really interesting market, if promoted appropriately (an online campaign with correct targets would do the trick), and there yes, you could eventually be renting a $75,000 flat well into the $1,000-$1,200 per month range. With the rentals organized correctly you could have it occupied 8 to 10 months a year. Taxes and maintenance deducted, you’d be in the 8-10% return.

Feel free to address questions, doubts, ideas that you might have.

Until Next Time,

Santiago