Monday, May 09, 2011
Dear Reader,
On Saturday, Margaret showed us how excess supply was putting downward pressure on real estate rents and hotel occupancy rates in Panama. There’s an important lesson to be learned here.
Too much supply is too much supply…no matter what other positive stuff is going on. When a flood of units is chasing a relatively small number of buyers it sets off a race to the bottom. As investors, we’ll wait at the bottom.
I exited the market in Panama when I realized that there wasn’t the end-user demand for the volume of pre-construction units going under contract. Panama had become a speculator-fest. I expect to re-enter this market in the future. Over-supply is pushing prices back towards 2004/2005 levels.
Before all this new supply started flooding the market, hotel rates and real estate prices in Panama jumped two- to three-fold in a couple of years. One bed short-term rentals on Avenida Balboa (a prime waterfront location) saw 70-80% occupancy at nightly rates north of $200. The Intercontinental hotel (also on Avenida Balboa) started charging $300 plus a night (up from $120 a few years earlier). This situation was a temporary bottleneck that the new supply has freed…and then some.
The good times for hoteliers and the short-term rental market slipped away with every new building that was delivered. Once you build a new condo it’s there. You can’t put it on a ship and export it to a city in China that needs more condos.
Panama isn’t a country that has crashed. Its economy is doing extremely well. There’s just too many of those shiny new expensive condos.
That’s why we always need to understand what type of supply is in the pipeline and how that compares with the levels of demand we expect. We want to be in a market where supply is growing at a slower rate than the pool of buyers. And we want to buy units that match the growing demand.
For example, a unit in Trump Tower is not the kind of thing Panama’s new middle class in the market for. Trump Tower was aimed at high-rolling expats and a tiny number of locals. Is there enough of these floating around to fill that great big tower ... willing to pay up to $500 per square foot…or $600,000 for a twelve-hundred square-foot condo?
Today, along Fortaleza’s boardwalk (in northeast Brazil) we see real estate prices and rents, and hotel room rates, going through the roof…as we saw in Panama three to four years ago. Three years ago when I first visited Fortaleza, I paid $80 per night for a hotel room on the boardwalk. Book that room this week and it would set you back $400. Another boardwalk hotel will charge you a bit less this week but you’ll still spend more than $200. And this is in low season. (The Brazilian currency, the real, has appreciated by 40% against the dollar. This has accentuated price rises if you convert prices to dollars as I have here).
Real estate prices for example in the Landscape project, where members of my Real Estate Trend Alert group bought units, have increased by close on 60% in two and a half years in Brazilian reals…in dollar terms the increase is much higher.
Short-term rentals are almost impossible to find. And if you do find one, you will pay through the roof.
So, is Fortaleza today where Panama was four years ago? Of course I can only guess but here are some thoughts and observations.
When I first recommended Fortaleza’s boardwalk in early 2008 I made particular reference to the fact that the boardwalk was almost built out. As you can see in the photo below there just isn’t any more developable land. This was one of the main reasons I was so bullish.
The economic drivers were the booming economy in resource-rich Brazil and the fact that Fortaleza was Brazil’s biggest domestic tourism destination. The cream was the limited supply of developable land.
To the east of the boardwalk is the old industrial port area. In time this will be cleared out and moved down the coast to Pecem, but that’s going to be at least a decade in the planning. The boardwalk is being extended west to Iracema beach (this is an area I am extremely bullish on). Here, though, height and other density restrictions will limit the amount of development. Moving inland from the boardwalk towards the upscale residential and commercial area of Aldeota there are few undeveloped plots. Again, it’s pretty much built out. Pure geography puts a cap on potential supply.
Also, permitting restrictions are tightening by the month. Getting projects through the various approval processes is becoming more and more difficult. This is also limiting supply that has come on the market.
All this time the economy in Brazil (and Fortaleza in particular) is booming. And the boardwalk is the hottest ticket in town.
Having said all that, I have passed on the last two pre-release opportunities on Fortaleza’s boardwalk area that have crossed my desk. These were priced at 1200 reals ($741) per square foot for a new residential project just past the eastern edge of the boardwalk, and 1,000 reals ($617) per square foot for office space a block off the boardwalk. It’s just getting too expensive. It doesn’t feel right.
As someone who has bought multiple units in this area I’m excited about price increases…and that the short-term rental market is more robust that I expected. I’m sticking with my plan to make my units available as rentals. Assuming no major bumps in Brazil’s growth curve, I expect this will be a good business to be in for the medium term.
But I won’t be jumping in at the prices being asked for new-release boardwalk projects.
I’m still bullish on Iracema, the area around the new convention center, and I really like a couple of the beach towns east and west of Fortaleza. (More about that in future dispatches.)
As for the boardwalk…it’s just got too rich for my palate.
Ronan McMahon
Posted Under:
brazil, real estate opportunities
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