CHILE UPDATES #9
What's the Deal with the Chilean Real Estate Market?
What's the Deal with the Chilean Real Estate Market?
July 19th, 2013
Most of the world has never paid much attention to Chile and even less known or understood than the country itself is Chile’s real estate market.
This is actually quite understandable, considering the;
-Lack of a unified MLS (multiple listings service) in Chile
-The language barrier (bilingual RE agents are hard to find)
-Chile’s capital, Santiago, is far from some dirt cheap retiree’s get away
So while it makes sense that Chilean real estate isn’t a staple in your average fund manager’s portfolio just yet, there’s reason to believe it might be someday.
In case you weren’t already aware, real estate prices in central Chile have increased steadily over the last decade and have really gained momentum in the last 3 or 4 years.
If you blindly bought $100K USD worth of land somewhere in Chile’s central valley 10 years ago (paying roughly market value at the time), it would probably be worth somewhere around $360,000 USD right now, due to the rise of the overall market and the strengthening of the Chilean peso (ref:http://diario.latercera.com/2012/10/21/01/contenido/negocios/27-121138-9-valor-de-terrenos-agricolas-muestra-alza-de-30-a-40-en-ultimos-tres-anos.shtml and conversion rate in June of 2003).
That doesn’t sound so bad, but if you had done some due diligence before investing, spent some time on the ground, studied local development trends, and kept tabs on local infrastructure projects, you could have done a lot better than that. With some active management, selling in one area after serious price appreciation has been seen and averaging down in new up and coming areas over the years, that $100,000 USD could easily be worth over $2 million, $3 million, even $5 million dollars right now.
No, I Didn't Pull These Numbers Out of a Hat
$2.892 million USD would be the exact value of that $100,000 USD after 10 years if you were able to consistently earn 40% per year on your money. $5.766 million USD is the exact value of that $100,000 USD, if you were to earn 50% per year (add 35% to each of these figures if you want to take currency appreciation into account).
40% to 50% per year, for 10 years in a row, that’s crazy isn’t it?
If you really know where to look, it’s not crazy at all. I can give you numerous examples of where property prices have increased by 40% to 50% or more per year in central Chile just off the top of my head. Actually, this is exactly what many of my closest friends and associates and I shoot for when buying raw land in the path of development.
But Are Those Kinds of Gains Sustainable?
But let’s back up a little and take a closer look at this less than ordinary real estate market that exists in Chile. As previously mentioned, the overall market here has been rising in price steadily for over a decade AND has even been gaining momentum in recent years. Wouldn’t this indicate a correction in the near future is likely?
That’s what some financial analysts both in Chile and abroad are starting to say. They claim with these kinds of increases, we’re overdue for a fall, that “nothing goes up in a straight line”, and are even warning there is a bubble forming in the Chilean real estate market.
I can appreciate a fair share of caution and skepticism, especially when it comes to investing, and certain sectors of the market may indeed be overpriced, but when you actually look at why Chilean real estate as a whole has been such a solid performer over the last decade, it becomes very clear that the rise in prices here is probably just getting started.
Bubbles are formed when people buy things they don’t really need, when they use circular thinking to justify their investing, ie. “I think the price will go up because the price has already been going up”, and when there is easy credit available to fuel the flames.
You don’t want to buy Chilean real estate just because it’s been going up in price for the last 10 years.
You want to buy Chilean real estate because there is absolutely no other asset class in the world that currently offers the same upward potential, with as little downside risk. Consider these three factors affecting the market in Chile right now.
Demand- In many parts of the world right now, unemployment is high and the middle class is shrinking, meaning less and less home or property buyers and downward pressure on prices.
In Chile, with very low unemployment and a growing middle class, there are more end users looking for homes, apartments, or properties to build on every day. When you factor in the influx of professionals coming from Europe (or even the states) looking for work and/or a home in a country that isn’t drowning in debt, it becomes pretty obvious demand for real estate in Chile isn’t going to dry up anytime soon.
Private Property Rights- Chile’s private property laws are some of the strongest in the Americas, however, many sectors of its real estate market (office space, ocean view property, etc) are still drastically cheaper than in 95% of other countries on the two continents. On top of this, with asset forfeitures in the Northern Hemisphere increasing, more money is bound to start to make its way down to where private property rights are better respected.
Technology- Do any of you remember what happened to real estate prices in Silicon Valley in the 90s? Chile dubbed 2012 the Year of the Entrepreneur. 2013 has been named the Year of Innovation, and unlike in most parts of the world where politicians come up with all kinds of silly misnomers, this actually means something in Chile. Just in the last few months some of Chile’s medical research companies, supported by the CORFO program, have come out with revolutionary cancer diagnostic tests and a new anesthesia that’s proving to be more effective than anything else on the market. The term “Chilecon Valley” is still largely unknown today, but that might not be the case in another year or two from now.
I’ll let you draw your own conclusion as to what this is going to do to real estate investments in the country.
Until soon,
Darren
This is actually quite understandable, considering the;
-Lack of a unified MLS (multiple listings service) in Chile
-The language barrier (bilingual RE agents are hard to find)
-Chile’s capital, Santiago, is far from some dirt cheap retiree’s get away
So while it makes sense that Chilean real estate isn’t a staple in your average fund manager’s portfolio just yet, there’s reason to believe it might be someday.
In case you weren’t already aware, real estate prices in central Chile have increased steadily over the last decade and have really gained momentum in the last 3 or 4 years.
If you blindly bought $100K USD worth of land somewhere in Chile’s central valley 10 years ago (paying roughly market value at the time), it would probably be worth somewhere around $360,000 USD right now, due to the rise of the overall market and the strengthening of the Chilean peso (ref:http://diario.latercera.com/2012/10/21/01/contenido/negocios/27-121138-9-valor-de-terrenos-agricolas-muestra-alza-de-30-a-40-en-ultimos-tres-anos.shtml and conversion rate in June of 2003).
That doesn’t sound so bad, but if you had done some due diligence before investing, spent some time on the ground, studied local development trends, and kept tabs on local infrastructure projects, you could have done a lot better than that. With some active management, selling in one area after serious price appreciation has been seen and averaging down in new up and coming areas over the years, that $100,000 USD could easily be worth over $2 million, $3 million, even $5 million dollars right now.
No, I Didn't Pull These Numbers Out of a Hat
$2.892 million USD would be the exact value of that $100,000 USD after 10 years if you were able to consistently earn 40% per year on your money. $5.766 million USD is the exact value of that $100,000 USD, if you were to earn 50% per year (add 35% to each of these figures if you want to take currency appreciation into account).
40% to 50% per year, for 10 years in a row, that’s crazy isn’t it?
If you really know where to look, it’s not crazy at all. I can give you numerous examples of where property prices have increased by 40% to 50% or more per year in central Chile just off the top of my head. Actually, this is exactly what many of my closest friends and associates and I shoot for when buying raw land in the path of development.
But Are Those Kinds of Gains Sustainable?
But let’s back up a little and take a closer look at this less than ordinary real estate market that exists in Chile. As previously mentioned, the overall market here has been rising in price steadily for over a decade AND has even been gaining momentum in recent years. Wouldn’t this indicate a correction in the near future is likely?
That’s what some financial analysts both in Chile and abroad are starting to say. They claim with these kinds of increases, we’re overdue for a fall, that “nothing goes up in a straight line”, and are even warning there is a bubble forming in the Chilean real estate market.
I can appreciate a fair share of caution and skepticism, especially when it comes to investing, and certain sectors of the market may indeed be overpriced, but when you actually look at why Chilean real estate as a whole has been such a solid performer over the last decade, it becomes very clear that the rise in prices here is probably just getting started.
Bubbles are formed when people buy things they don’t really need, when they use circular thinking to justify their investing, ie. “I think the price will go up because the price has already been going up”, and when there is easy credit available to fuel the flames.
You don’t want to buy Chilean real estate just because it’s been going up in price for the last 10 years.
You want to buy Chilean real estate because there is absolutely no other asset class in the world that currently offers the same upward potential, with as little downside risk. Consider these three factors affecting the market in Chile right now.
Demand- In many parts of the world right now, unemployment is high and the middle class is shrinking, meaning less and less home or property buyers and downward pressure on prices.
In Chile, with very low unemployment and a growing middle class, there are more end users looking for homes, apartments, or properties to build on every day. When you factor in the influx of professionals coming from Europe (or even the states) looking for work and/or a home in a country that isn’t drowning in debt, it becomes pretty obvious demand for real estate in Chile isn’t going to dry up anytime soon.
Private Property Rights- Chile’s private property laws are some of the strongest in the Americas, however, many sectors of its real estate market (office space, ocean view property, etc) are still drastically cheaper than in 95% of other countries on the two continents. On top of this, with asset forfeitures in the Northern Hemisphere increasing, more money is bound to start to make its way down to where private property rights are better respected.
Technology- Do any of you remember what happened to real estate prices in Silicon Valley in the 90s? Chile dubbed 2012 the Year of the Entrepreneur. 2013 has been named the Year of Innovation, and unlike in most parts of the world where politicians come up with all kinds of silly misnomers, this actually means something in Chile. Just in the last few months some of Chile’s medical research companies, supported by the CORFO program, have come out with revolutionary cancer diagnostic tests and a new anesthesia that’s proving to be more effective than anything else on the market. The term “Chilecon Valley” is still largely unknown today, but that might not be the case in another year or two from now.
I’ll let you draw your own conclusion as to what this is going to do to real estate investments in the country.
Until soon,
Darren
