My Top Three Hottest Investment Markets | Pathfinder International

Friday, October 02, 2009

Dear Reader,

Greetings from Las Vegas. I’m here for International Living’s Live and Invest Overseas conference.

My first speaking slot will cover “The Three Hottest Investment Markets on my Radar”. Picking only three was a difficult choice. There are pockets of opportunity dotted across the globe. Global events are creating opportunities for us.

I had to pick just three so here they are….

Fortaleza, Brazil

Last year Fortaleza was Brazil’s #1 domestic tourism destination. It hosted 3m Brazilian tourists and 250,000 foreign tourists. In fact, it has been #1 for three out of the last four years. There is a hotel and short-term rental shortage. There is limited developable land remaining in the area these visitors want to stay in. This is where Brazil’s wealthy come to relax on the beach. This is where Brazil’s new middle class want to come as soon as they can afford to. Every day that passes more can afford to come. Brazil is now a middle class country. Brazil’s middle class is growing in terms of numbers and incomes.

This, combined with the momentum event of foreign investment, would be enough for Fortaleza to make my list. But there are 2 other major driving forces that meant it had to go to the top of the list:

-The World Cup Effect

The big buzz in Fortaleza (and surrounding areas) is the huge investment in tourism and infrastructure. The government is spending 9.8 billion reais ($5.50 billion) in Fortaleza in the lead up to the 2014 soccer world cup. 63.3% of this spend will be on infrastructure projects. In June this year, Fortaleza’s governor released a list of projects that will be delivered for the 2014 games.

850 million reais will be spent on tourism projects—gentrification of urban areas and installing attractions like the state aquarium. And big amounts will also go toward things you’d expect—improved internet access, better gadgets for the police, new equipment for the hospitals, and so on.

Transport infrastructure with a 6 billion reais spend is the big winner. The government is committed to delivering quality projects that will encourage and facilitate the economic development of the region.

The Fortaleza area is going to see a major upgrade in road (there will be a new ring road), rail (Fortaleza is getting a metro system), bridge, port, and airport infrastructure. This will make certain areas more accessible and desirable. This will drive real estate prices in these areas higher.

Many of the projects on the governor’s list could create an opportunity for us to profit. Here are a few that have caught my eye:

-The south line of the metro will cost 1.8 billion reais. This will link downtown with middle-class areas and outlying industrial areas.
-450 million reais is to be invested in the stadium. This area will also benefit from improved transport infrastructure.
-Over 100 million reais has been committed to new roads and road upgrades in the Morro Branco area. 800,000 tourists visited this area last year. Expect this number to rise as infrastructure improves. In addition to the local investment, the new ring road will reduce the drive time to this area to 45 minutes.
-Fortim (to the east of Fortaleza) has been identified as an area to host visiting teams’ training camps. The government is already negotiating to host Spain. This project will involve a major upgrade in tourism infrastructure in addition to huge marketing exposure for Fortim.
-Road access is on its way to the village of Praia Bela from Aquiraz. This is a relatively small project (10.3 million reais) but will have a huge impact on Praia Bela. This area will also benefit from the completions of the bridge and new road from Praia du Futuro to the Beach Park area.
-Further funds have been allocated to upgrading the boardwalk area. And to the east of the boardwalk, the Port of Mucuripe is getting a 120 million reais passenger terminal.
- 9.7 million reais has been allocated to complete the bridge over the Coco River. Another 62 million has been allocated to link this bridge with Fortaleza’s ring road. This project will have a big impact on Praia du Futuro and the area that’s going to open up on the other side of the bridge.

-My House My Life

While people from southern Brazil want to visit Fortaleza on vacation, Fortaleza’s new middle class want to move into a shiny new condo or house. They will want to be near infrastructure that will bring them to work and play.

There’s a government program called “Minha Casa, Minha Vida”. This translates to My House, My Life. This program has the mandate to make home ownership affordable to Brazil’s lower and middle classes. The My House, My Life program has 60 billion reais ($33.7 billion) in the kitty. The program will help one million Brazilians become homeowners this year alone. That’s a lot of new demand.

The program operates through a system of subsidies with Caixa Economica Federal, (Brazil’s government-owned savings and mortgage bank) at the heart.

Developers of qualifying projects receive a subsidy and a tax break. In return for this supply side incentive, they agree to offer units for sale at an agreed and competitive rate. The government is working very closely with their partner developers but they want to make sure that the incentives offered to buyers don’t go straight into developers pockets, through increased prices.

The government subsidy varies according to the applicant’s income. There are three categories:

—Families earning up to three times the minimum wage per month
—Families earning three to six times the minimum wage per month
—Families earning six to ten times the minimum wage per month

The minimum wage is currently 465 reais (set to rise to 505.90 reais next year).

Earn up to three times the minimum wage and you can own a home worth up to 50,000 reais, by making payments equal to just 10% of your income. Earn three to six times the minimum wage and you can buy a home costing up to 130,000 reais. The maximum price depends on where you live. In Rio and Sao Paulo, for example, it’s 130,000 reais; in cities with more than 500,000 inhabitants (like Fortaleza), it’s 100,000 reais, and the cap is 80,000 reais in smaller cities. Buyers within this range get a government cash subsidy and 100% mortgage over 30 years at 6%.

Earn more than 6 times the minimum wage and your incentives are much more limited.

This is the bracket where I expect to see the most activity, growth and further upward mobility. I’ve seen a site for one project aimed at this market in Fortaleza. It’s only 250 meters from the metro line and new shopping facilities. If you think this is some kind of slum or favela, you couldn’t be more wrong. The plans call for a great project, well equipped with amenities (gym, pools etc) and the location is excellent.

Costa Rica’s Southern Zone

Prices have stayed low in this area because it’s difficult to get to. That’s set to change. You have the opportunity to position yourself ahead of the Path of Progress. But you need to move fast.

Some of the most amazing scenery in Costa Rica is in an area that runs south of Quepos to the border with Panama. Landscapes here in Costa Rica’s Southern Zone are dramatic—panoramic ocean views…lush tropical rainforest…and sheer jungle-clad slopes, rising sharply away from pristine stretches of sandy beach.

There is more land preserved in national parks and reserves in the Southern Zone region than in any other in Costa Rica. Ballena National Marine Park is a hotspot for humpback whales. Corcovado is awesome, and is reputedly the largest area of primary rainforest left in the Americas, home to numerous endangered plant and animal species. Beaches are mostly deserted.

In a country with an established real estate market like Costa Rica, this sounds like just the type of place that would attract a lot of fervent investors. Difficulty getting there has kept it under the radar in terms of development, and kept prices far lower than areas in northern Costa Rica.

The Costanera Highway is unpaved between Quepos and Dominical and the airports are small, local affairs. These are exactly the kind conditions I look for when scouting for a good real estate opportunity. Especially when these conditions are set to change.

Costa Rica’s President Óscar Arias Sánchez recently kick started the final stage of the Costanera highway.

Asphalt work has started. This has been promised by successive governments for 30 years. The Costanera Sur is the vital Pacific coast highway. Four bridges have also been constructed along this route. On completion (slated for next spring) it will open up an area of Costa Rica that has remained undiscovered…simply because it’s difficult to get to. The geography is dramatic. This has hampered accessibility.

The bulk of the heavy traffic now takes the Interamericana highway that winds through San José and Cartago and then over Cerro de la Muerte. The Costanera will cut all this out. The 90-minute trip from Quepos to Dominical will be cut to 25 minutes.

An international airport is planned for Palmar Norte. Due to be completed in 2013 (the government has already allocated funds) the airport is planned to open in stages; the first will allow international flights with a maximum capacity of 50 passengers. Eventually, the plan is to have a runway capable of accommodating even the world’s largest passenger plane, the Airbus A-380.

An airport of this scale needs to be close to a hospital…so they built one. The ultra-modern 85,000-square-foot Hospital De Osa located in the town of Cortez opened in April 2008. The hospital features multiple treatment facilities including a state of the art emergency room, a pediatrics wing, a neurology center and an obstetrics and gynecology center.

The “Right” Distressed Opportunities in Europe

Distressed or crisis opportunities in some European markets is one of the hottest plays on my radar today. This is an opportunity we have because of the current economic crisis. I’m talking deals with discounts of 52% on list prices or 40% on official valuations. Deals in blue-chip locations that will immediately throw off positive cash flow. Deals in locations that will be the first to recover once market sentiment changes. Deals where up to 100% financing may be available.

Crisis investing means buying when everyone else wants or needs out. At an aggregate level, markets overreact and overshoot both on the up and downside. Assets become mispriced.

Banks lent to developers to build. Developers built in anticipation that there would be no problem selling their units. After nearly a decade of runaway demand and floods of cheap money, they took their eye off the ball. They took on more debt and risk than they should have and they overpaid for land.

Credit and financial crises combined with oversupply has led to a breakdown in some markets…many markets in fact. Put simply: sales dried up. High quality, completed units are left sitting waiting for a buyer. Banks need to purge their loan books. Developers want to lick their wounds, move on, and live to fight another day. That’s why we have this opportunity. Forced sell-offs are happening…demand is rock bottom. This is a formula for opportunity.

Distressed deals are available in many markets across the world. Europe in particular is awash with distressed deals. Thing is, no matter what the price, most markets still don’t make sense to me. The countries of Central and Eastern Europe have deep structural and currency issues that need to be resolved before I would recommend any opportunities there.

In Ireland, there is a major oversupply problem, compounded by sky rocketing unemployment and an imminent fiscal crisis. Rents in Ireland have fallen by up to 30% in the past year alone. These countries are on my watch list but I don’t expect to be making any recommendations here in the near future.

I’m focused on these three golden rules:

-Buy quality (location, construction, amenities and fit-out)
-Don’t take on any construction risk…buy completed units
-Don’t take on any project risk…make sure the condominium is functioning. You don’t want to be one of 10 owners in a 100-unit condominium.

The best opportunities are in the UK, Spain and Portugal. Developers here relied heavily on debt. The discounts here can be big…buy well and you still have access to a strong rental market.

Picking the best markets to invest in is only half the battle. Next, we need to clearly define a strategy to maximize our return on investment (ROI). In each of these markets, we could buy pre-construction condos to flip…or rent. We could buy a lot, raw land, invest in a development company or offer hard money loans. We could even invest in publicly traded companies with exposure to the market.

Stay tuned. Next week I’ll explore strategies to maximize your ROI in each of these markets.

Ronan McMahon