Driven by a new global commodity super-cycle as the global economy continues to grow fueled by emerging markets growth, LATAM presents a solid, long-term growth opportunity at an undervalued entry point. Chile is one of the best emerging economies for international investors featuring stability, high transparency (13th worldwide) and openness to trade. Similarly, Colombia’s economy is set to improve significantly with rising government investment in basic infrastructure and increased openness. Both countries are projected to grow economically by ~3% in 2018 (vs. US 2.4%) according to Global Economic Outlook Report by the OECD.
Since 1950, Latam has seen a sharp growth in its urban population, followed by a strong middle class emergence. In fact, LATAM is currently more urbanized than any other emerging market. Over the past decade, middle class in Colombia has doubled and reached 3 million in 2015, reaching nearly a quarter of total households, vs. 43% of the Chileans. By 2025, 85% of Latin America’s population is expected to live in towns and cities.
It is not hard to find a nice one bedroom apartment in downtown Santiago, the capital city of Chile with a population of more than 7m people, priced at around USD$70,000. Imagine what you could buy in the downtown of any major US with the same money. Maybe a closet at most. The reasonable price yields nice rental return. Based on Andes Property’s current investment portfolio, rental returns in gentrification zones are as high as 12-14% with a strong potential for appreciation over the next 5 years and projected IRR of 20+%. And in short run the inefficient brokerage market creates short sale opportunities for bulk purchases in cash.
LATAM debt markets are immature and impossible to access for majority of the population but things are modernizing rapidly. The application process is currently very slow and a borrower with a good income may still be rejected after waiting two to three months for their loan application to be processed. Moreover, interest rates are higher than in the US, and large down payments are required. Yet things are quickly modernizing and getting closer to developed countries with increasing number of mortgages given every year, growing number of government assistance programs to help home buyers, and banks offering more mortgage products that are accessible to the general population. As debt market matures in LATAM, the difficulty to purchase a home for the average person will decreases. In turn, we expect local demand for real estate will increase while supply will remain constrained due to lack of land for construction in downtown of major cities. This can only mean that prices will go up. A mature debt market also opens the option to finance investments and thus further increase returns.
Both Chilean and Colombian currencies are highly correlated to commodity prices such as copper and oil. Under the influence of global commodity cycles, both currencies have gone down in value versus the strong US dollar in recent years resulting the US dollar reaching historical highs against Chilean Peso and Colombian Peso. The strong dollar coupled with the weak peso makes for a very attractive entry point for investors in LATAM, one which only comes around ever 10-20 years! This is a great news for US based investors looking to grab cheap LATAM real estate as they get a 10-15% bump just from exchange rate appreciation as the Peso recovers value. Investors will have to act quickly as the window for investment will only last a few more years – before the global commodity prices go up again driving the Peso back up versus the US dollar.
Last but not least, investors should not ignore the importance of diversification, especially when future of US economy seems to be very unclear at the moment. The current US stock market has priced in a future economic growth that the current government administration has promised but has yet to create a plan to deliver. A wise move in these times of uncertainty is to spread your eggs into more baskets, including some baskets outside of the US. LATAM Real Estate assets have continuously been proven to be recession resistant and undervalued and remain an alluring destination for US investors.
Andes Property is a real estate company with offices in Milwaukee, WI and Santiago, Chile. Our services include a Real Estate Fund for investing in LATAM markets, Property Management, and Property Investment Consulting. Our goal at Andes is provide our investor the best opportunities to invest in real estate market in LATAM market with strong presence and operational knowledge . Andes Property currently manages over 150 Multifamily housing units in Latin America. For more articles on LATAM investment, please follow us on Facebook.