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Investing in
Argentina / Editorial

From: Samuel Warde, December 21, 2007
Sent to the BANewcomers group

Investing in Argentina / Editorial on current economic trends and conditions

Real estate is an interesting subject and one that I personally think is much like predicting the weather.  One can certainly make reasonable cases both for purchasing and for avoiding buying real estate here at the present time. 

People that work in real estate here accurately note that the price of properties is raising while avoiding the relationship of those increases to the ongoing devaluation of the dollar.  One also needs to consider that in many ways what we have seen the last few years here was merely a return to the trends and valuations prior to the last big crisis.  Karin and others have given us some great examples of this theory in action.  

I personally believe that purchasing real estate for rentals is the safest investment here with commercial property coming in at a close second.  While there are all kinds of numbers floating out there from a variety of sources, I think it is safe to assume that annual yields on the average are no less than about eight to ten percent.  With the expected influx of tourists the next few years there is no reason to be anything less than optimistic regarding the ability to make money on short term rentals.  I personally would steer clear of the longer term investments such as in the northern suburbs. 

I do think that it is important to look at the overall economic situation here when it comes to determining whether to invest and then to figure out when is the best time.  For instance many economists here in Argentina and abroad are speculating that the prices of used real estate are going to flatten out here in the near future.  Some are even stating that this process has already begun.  Along with this leveling there is speculation that new properties may see substantive decreases in value due to the new affordability of used real estate.  Again some economists and real estate experts say this trend is already at hand.

There are several key factors that should be considered when looking to investing in Argentina that raise some important questions:

For instance let us look at things such as the consumer price index.  Earlier this month Indec reported inflation of 8.5% for November but when surveyed economists and alternative data from provincial governments put the actual rate at more than double.  What effect is this hyper inflation going to ultimately have on real estate?

Let's look to other issues such as Argentina's continued alienation in global markets through poor economic decisions such as its six year old default with the Paris Club of investors worth about 6.3 billion dollars which has made Argentina something of a pariah by most foreign investors and wealthy nations.

What about the government's recent raise in export taxes on soybeans, wheat and corn that is expected to have the potential for devastating consequences on exports and in turn the overall economy?

How about Internal Commerce Secretary Guillermo Moreno whose tenure is characterized by price-control agreements and threats to business under stale anti-hoarding statutes?  What about the new and young Economy Minister Martin Lousteau whom everyone is expecting to be ineffective?

What about the expected energy shortages due to Kirchner's artificially low utility rates that have fostered consumption and have discouraged any meaningful investment?  These price caps initiated in 2002 have had the additional impact of reducing the willingness of companies to invest in exploration and production.  Industrial output fell 2.7 percent in July after blackouts sparked by fuel shortages during winter forced factories to cut shifts and the onset of summer and air conditioning are leading to predictions of frequent rolling blackouts and new regulations on industry consumption. 

What about Cristina's claim to have better relations with the United States  in an attempt to secure confidence in accelerated investments and consumption by the USA?  Did you notice that the U.S.  was represented at Cristina's inauguration by the little known labor secretary Elaine Chao?  

What about the failure of the Kirchner government to reach meaningful wage accords with unions that don't accelerate inflation? Unions are expected to demand wage increases next year in excess of 20 percent which will put continued pressure on prices.

What about the  emergence of  economic and investment alternatives to Argentina such as Uruguay now known as the "San Tropez of South America"?  Known for its friendly business climate and private banking sector Uruguay is sure to lure many investors from the markets in real estate and business while at the same time assisting many Argentines in finding a home away from home for their money.

What about the raising public transportation rates by 19 percent beginning in 2008?  Many think it is a sign of governmental panic regarding its declining money reserves.

What about electricity, gasoline and heating gas that are expected to rise by at least 20% in the upcoming months? 

What about the predicted increases in insurance of 35% (and 25% for health insurance), or the ABL (property taxes) that are increasing from 19% in some areas to over 230% in others?  I have already seen posting on other forums talking about increases in those taxes.  Don't tell me that this will not have a direct impact on real estate values in the upcoming months and years. 

What about the ongoing relationship between the Kirchners and Chavez of Venezuela and meddling by that country in the economic and political landscape of Argentina?  Have you seen what has happened recently now that it appears Cristina got caught with her hand in Chavez's cookie jar?  (Not that anyone did not know at the time what that nearly $800,000 was for; Chavez has been buying influence in all of South America in recent years but seems to have a particularly close relationship to the Kirchners.)

Samuel Warde