Investment Memorandum01 Dec
UPDATE: This investment memorandum was originally prepared for our Nicaragua 5865 project which is now sold out. Please review our investment prospectus for Charcas 4955.
Introduction
The real estate market in Argentina is an attractive investment opportunity for a number of reasons. This memo will outline the economic background of the country, the current state of the markets, a description of the project, and the investment opportunity.
Background
Argentina is a unique and wonderful country that differs in many ways from its South American neighbors. It is a large country with incredible resources from the world’s second largest natural water reserves to its place as a world leader in soy, wheat, and other food exports. Argentina has all four seasons and a very diverse geography, ranging from Las Pampas, Mendoza (Wine Country), the Andes, and Patagonia, down to the Antarctic. It has a literacy rate of 98% and a public education system rivaled by few in the world.
Argentina’s past is part of what makes this a great opportunity. Its economy crashed in 2001. The country defaulted on its IMF debt and the peso, which was artificially pegged at 1-1 ratio to the dollar, was devalued to 3 pesos to the dollar. The country froze the banking system and prevented depositors from withdrawing their money. Property was purchased with mortgages at very high interest rates. Buenos Aires was once one of the world’s most expensive cities and quickly became one the world’s cheapest.
This set of circumstances led to distrust in the banking system and created a cash economy. Real Estate is priced in dollars, not pesos, and almost all transactions are handled in cash. There is very little financing of real estate in Argentina, which is limited to 50% of the purchase price with a cap of usually 100,000 pesos or the equivalent of 33,000 dollars. Alternative forms of financing are available but at a high cost which discourages such practices. The end result is an almost entirely cash based real estate market in dollars which creates a real market based on supply and demand. This eliminates the speculative nature of the market that was evident in pre-2001 Argentina as well as the current crisis we are experiencing in the USA based on cheap, easy, and irresponsible lending and borrowing.
This has led to a large amount of foreign investment in Buenos Aires for either retirement or vacation homes. Argentina continues to be a great value to foreigners on vacation or retirement as the dollar goes a long way and it is at 25-30% of the costs in Europe.
State of the Current Market
The real estate market has had steady appreciation in the established parts of Buenos Aires over the last 7 years. This reflects the nature of the cash environment and not the speculative returns seen in the USA in the early 2000’s. We expect steady price appreciation at healthy levels.
Buenos Aires is experiencing a large amount of investment from foreign investors as well as locals. The foreign investors can be divided into two groups. The people who are either retiring to Argentina, or are looking for a vacation home because of the incredible value that it offers in both terms of costs of living and quality of life.
The locals continue to purchase real estate for both personal use and as investment property. During the 2001 devaluation, they lost 66% of their money in the banks because of the devaluation of the peso. The peso is currently not pegged to the dollar and floats freely in the market thus eliminating the risk they were exposed to in 2001. However, distrust for the banks and equities markets continues.
The distrust of the financial system has led most Argentineans to invest their savings in bricks and mortar and seek rental income. The real estate market for them is a dollar denominated investment that guarantees a preservation of capital and provides income.
The current global financial crisis has also created an interesting dynamic in Argentina. Many wealthy Argentineans who had their money out of the country in large global banks or investment firms are now repatriating the funds back into their country. They now are concerned with the systemic risk in the global financial system and are thus investing at home in real estate, which they see as a safe haven. The government also recently passed an amnesty law, which allows them to bring back the money and pay a 1% tax instead of the normal tax. The government did this as part of their economic stimulus package. This has created incredible demand for properties in the higher end established neighborhoods in Buenos Aires such as Belgrano, Recoleta, Palermo, and Las Canitas. The flight to quality in these areas offers an interesting investment opportunity.
Project
Buenos Aires is a major world capital and has many of the same characteristics of great cities such as London, New York, Tokyo, Moscow, and Paris. The city center, where the established high-end neighborhoods are located, is dense with buildings everywhere. Most of the buildings are 40 plus years old. New construction is highly sought after. New construction is usually built on a site that had previous construction that was demolished. The demand for new projects in these neighborhoods is large and commands a premium price compared to the older buildings. Most of the old buildings do not offer amenities.
The site is 5865 Nicaragua between Carranza and Ravignani located in the heart of Palermo Hollywood. The location is blocks from the Buenos Aires Golf Club and in close proximity to the Hipodromo (race track) and the parks of Palermo. The site is quite literally in the heart of Palermo Hollywood, which is arguably the gastronomic and nightlife center of Buenos Aires.
The area is one of the most sought after in town by both tourist and locals and offers great access to public transportation such as the Subte (subway system), buses and taxis.
The building will be 8 stories and 26 units, with 4 units on floors 1-6, 2 units of floor 7, and amenities and the solarium on floor 8. The units will be 29 meters in size (approx 312 square feet) with an added 1.96 meters of amenities. Each unit will come with a fully equipped kitchen, washer/dryer unit and an exterior storage unit. The building will be high-end with top quality finish work standard and upgrades available.
The units are designed for personal use, long-term rental, or short term rentals which we feel is the best investment opportunity.
The amenities include a solarium, grill area for barbecue, roof top terrace, 24-hour security and doorman, and more.
We have hired BW Group (Baylac-Wasserman) one the leading architectural firms in Buenos Aires with over 30 years experience in the market and over 200,000 square meters of development. (over 2 million square feet) to design and build the project. Developments include residential, commercial, professional, and municipal projects. You can see some of their work at www.bw-group.com.ar
Pricing
The opportunity is interesting because we are offering a fixed price. The normal pre-sell process in Argentina usually allows the builder to adjust the prices each year until completion based on any inflation that may occur. The fixed price option is the best for the investor because there will be no increases or adjustments. Commodity prices have fallen and material costs will be fixed based on our executing purchase contracts at the beginning of the construction. The dollar has also strengthened somewhat against the peso and if it should continue to strengthen, we will have an extra hedge against price increases.
The comparables for new construction in this area range from $2000 a meter to $3500 a meter depending on the height and location.
The most powerful opportunity in our view is that of nightly rentals. The owner of the units can contract with our management firm, Grupo EMR Management, to manage their unit in our rental program. The Palermo area does not have any major chain hotels due to zoning issue and most hotels are small boutique hotels. We offer the perfect location for nightly rentals and the going market rate in the area is between $90-$200 dollars a night.
The units will have estimated annual costs of about $2000 dollars including property taxes, utilities, and association dues. The management fee will be 20% of rentals and will include all administration and operational aspects of the business.
Pro-Forma
The following example will show a pro-forma at a 30% and 50% occupancy rate assuming a $150 USD per night rental and a total investment in the unit of $75,000 USD:
Example 1
| 30% Occupancy (110 nights per year) | |
|---|---|
| 110 nights x $150/night | $16,500.00 |
| 20% management fee: | $(3,300.00) |
| Expenses (i.e. property taxes, utilities): | $(2,000.00) |
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|
|
| Annual Return: | $11,200.00 |
| 14.9% annual return assuming a $75K investment | |
Internal Rate of Return
5 year hold (30% ROI, no rental income until years 3-5): 13%
10 year hold (100% ROI, no rental income until years 3-10): 18%
Example 2
| 50% Occupancy (183 nights per year) | |
|---|---|
| 183 nights x $150/night: | $27,450.00 |
| 20% management fee: | $(5,490.00) |
| Expenses (i.e. property taxes, utilities): | $(2,000.00) |
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| Annual Return: | $19,960.00 |
| 26.6% annual return assuming a $75K investment | |
Internal Rate of Return
5 year hold (assuming 30% ROI, no rental income until years 3-5): 15%
10 year hold (assuming 100% ROI, no rental income until years 3-10): 21%
The market today is averaging 82% occupancy in Buenos Aires.