Sunday, January 25, 2015
Three years ago, there was an opportunity in the Colombian city of Medellin to buy a condo for as little as $80 per square foot that generated a rental yield of 8%. That's a strong yield on some of the most inexpensive real estate I have seen in any world-class city.
Real estate prices in Medellin have risen each year since I made this recommendation. Rent increases have followed, so you can still command that 8% plus yield by buying a condo here and rent it long term.
For example, you could buy a high-end condo for $135,000 here, rent it long term and unfurnished for $1,085 per month. Buy cheap and you can earn a strong yield with the prospect for capital appreciation. With visiting foreign executives and a growing tourism and retirement market, the short-term rental market is also very strong.
Let me remind you why Colombia, and especially Medellin, is on my radar.
Colombia's middle class is on the up. The income of the average Colombian has doubled in less than a decade. The rich are getting richer. (The free report I told you about on Friday reveals more about the emergence of the new middle class—It’s yours here.)
But despite this new prosperity real estate prices still reflect Medellin's past—not its present nor future potential. (Note that real estate here sells in Colombian pesos. So, you also get diversification from the dollar. In recent months the dollar has significantly strengthened against all major currencies including the Colombian peso.)
In Medellin, you can see the signs of this new middle class everywhere. From one of the new cafés or restaurants along the Golden Mile, you'll see streets packed with modern cars.
Foreigners have started to retire here or come as high-earning contractors (mostly in the resource industry).
Multinationals like Hewlett-Packard are making Medellin their home. Domestic Medellin-based multinationals are strong in sectors such as cement, financial services, and food products. Although the action for big oil and banking is in Bogota, that city is already bursting with traffic jams and choking in smog—and it's getting expensive.
On Wall Street they call Colombia "the next Brazil." And with good cause. I’ve been bullish on the opportunities in Northeast Brazil (and Fortaleza in particular) for the past five years. Prices of pre-construction condos have as much as doubled there.
Colombia has gold, oil, and hydroelectric power. After two decades of liberalization, the government is one of the most forward and outward looking in the region. Debt levels are low. They're strongly and ambitiously pro-business and realize that the key to their country's future is to help lift people out of poverty.
Demographics are on Colombia's side, too. Approximately 40% of the population is under the age of 20. They're growing in confidence and optimism. They see a future for themselves and for their country. Many Colombians are returning from North America and Europe with skills and ambition.
A $100 billion infrastructure plan is in the works (and desperately needed) over the coming decade. There are also plans for roads, airports, and even an $8 billion Chinese-funded railway that will compete with the Panama Canal. A government program calls for 200,000 new middle-class houses. The government is focused on initiatives to improve social mobility.
Don't expect all this progress to be without turbulence. Colombia is slowly healing after decades of civil and narco-related war. Scary pictures may flash across your television screens from time to time. But it's because of this that we have such an opportunity here.
The people are already enjoying a peace dividend. They won't easily hand that back. The fighters and revolutionaries are old and tired. The notorious Medellin cartel was based here. Headed up by the infamous and powerful Pablo Escobar.
But that reputation couldn't be further from what I found.
Medellin is an extremely pleasant city of 2.5 million people (3.5 million if you include the outer valleys). At 5,000 feet elevation, the weather is perfect. Most days have sunshine and temperatures in the 70's F. The leafy, high-end area of El Poblado in particular is a great place to sip coffee or enjoy a nice meal in the shade. Almost everything is a delightful stroll away.
The locals are warm, welcoming, friendly, and genuinely happy that foreigners are beginning to visit their country. They're aware that Medellin's reputation for many is still one of out-of-control drug cartels.
The present-day Medellin I visited was very different. There's a real café culture here. Like you'll find in a leafy European city. But here, you get to sip your coffee or dine outside year-round—scorching summer heat or cool winters won't cramp your style. You'll find great restaurants, trendy bars, and fancy boutiques.
Minutes away from El Poblado, the Golden Mile of banks, offices, boutiques, and outdoor eateries is buzzing with traffic and commerce. At weekends, the nightlife is in Parque Lleras in the Zona Rosa.
Medellin is a place that's misunderstood, which keeps prices low. With a fast growing new middle class, the El Poblado area of Medellin is the place to be—and to invest.
You want to own the condo that a member of an emerging middle class will want to rent...or own. It's important that they would want to own it. This gives us a strong market when it comes time to reselling. Meantime you have a rental income along the way.
A growing middle class means more potential buyers and renters with more disposable income. Values and rents will likely rise.
Another of the core ideas I follow is to look for places that are set to see a surge of foreign visitors (for business, retirement, or pleasure) and where the inventory of real estate doesn't meet their requirements.
We also want to buy and own in a place where there are supply constraints and where it's difficult to bring competing supply to market. These constraints could be a function of scarce land, tight permitting requirements, or pricing below replacement cost. When real estate is priced below replacement cost, prices must rise significantly before more supply comes on-line.
Remember, always buy quality. You can buy really cheap, but it won't be in a location that'll appeal to your target market. Stick with the prime locations like El Poblado.
I’ve put together a free report for you: Three Ways to Find the World’s Best Real Estate Markets in 2015. In it I explain more about the new middle class and other trends to follow in 2015. Pick up your free report here.