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Overseas real estate investment
For those in this subforum interested in internationalizing, would you be willing to discuss any places you’ve actually bought real estate? What were your experiences–pro and con? Everywhere I go, I have an eye toward the real estate. It’s just fun for me to look at. I’ve bought land in a few places, though just recently made my first foray into a building being constructed that I hope will be my first cashflow earner.
This is a very broad topic. I’ve been directly and indirectly involved in international real estate investing, for a long time. Do you have specific questions or needs?
Rick, nothing specific. I just enjoy discussing different areas and what folks’ experiences are–to the extent they’re willing to talk about it. For example, I’ve invested a few times in Belize, have thoughts on that. This past year I invested in a couple of other locations. Right now my primary international goals are for cash flow, whether it’s agricultural properties (land/plantations) or residential/commercial rentals. I saw a number of interesting properties while in Chile and Argentina, though I don’t have enough experience to try and invest, though some of them, as an English-speaker, I’d never have seen just by cruising around the internet. That’s all, just hoping to get discussions started.
Hello Wesley, any investment in West Africa? you should consider looking into Lagos in Nigeria, Accra in Ghana…The real estates there have good ROI, especially now that their local currency is devalued, it cost less in Dollars to purchase; and can be resold when the economies get better when oil price goes up.
Kareem:
I’m open to anywhere. Not that I’m some big world-wide investor, but I have to come see it for myself first. I’ve found that I don’t have a lot of imagination, so I have to have proverbial boots on the ground to get an idea about different countries. I guess I’d probably feel a little more comfortable looking in Ghana first, given its good reputation. Thanks for those ideas–I’ll look them up!
The Gran Hotel Bolivar is scheduled to be auctioned off in about two weeks. They don’t make ’em like this anymore.
Craig
It’s tough not to be seduced by the amount of ” standing inventory… ie replacement cost”. What you need to worry about in historic structures is the sustaining capital expenditure.
In addition, hospitality is only partly an exercise in real estate, to make the real estate work, you have to make the hotel work.For those reasons, as well as sloth, and lethargy, I’ve preferred leased high quality ag and timberland.
Rick:
Along similar lines, what I’ve learned about myself is that I seem to lack imagination, and I like real estate with fewer variables if possible. I’ve never been able to look at a derelict building and on my own visualize its possibilities. There is the cost of upfit, the continued cost of maintenance, etc. whereas land—well, that can be a little simpler. I’ve had a bit of success buying land that has appreciated (in terms of actual sales and “paper appreciation” for land I’ve held). Now I’m looking to start get cash flow. I like the idea of cash flow from land. What I try to keep in mind is reminding myself of how limited my knowledge is. Easy example–the idea of owning land for coffee or cocoa growing is very enticing, almost romantic. But what do I know about growing either of those? Nothing. And how many people are already out there trying to do that? Tons. One upside of my lack of imagination is that though I’ve passed up some opportunities that turned out to be good, I’ve not had any (yet) that I’ve accepted which took took bad of a turn.
Wesley
That is my experience too.I’ve found property development to be a business, rather than an investment. I segregate the two, becausae I already operate a couple of successful businesses, and don’t have the time to take on a third.
If I can make an investment in real estate based on rents, where the delta between my cost of capital, and my return on capital employed is attractive, and I believe durable, I’ll do it, provided there are minimal requirements for non financial ( work) inputs required from me.
El remate del histórico Hotel Bolívar fue suspendido
The sale of the historic Hotel Bolivar has been suspended
http://peru21.pe/actualidad/hotel-bolivar-remate-historico-inmueble-fue-suspendido-2267975
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In order to stop the auction, Arte Express (Yves’ business) has made a partial payment on the hotel’s 1.5 million sol (about $440,000) debt. It seems that Yves has been negotiating to purchase the hotel with Huron Equities (the owners) for eight years (!) and wants to have the opportunity to finally reach an agreement.
The hotel is presently rated 3 stars. It occupies an entire block (4000 square meters) on the main square (Plaza San Martin) of Lima. It has a bar, two restaurants, two large meeting rooms. 230 rooms, 20 suites, and 500 employees. Past guests have included Ava Gardner, Ernest Hemingway and Orson Wells.
Rick,
You are right about all that. And that is doubtlessly why it is on the block.
But it is such an irreplaceable, gorgeous gilded age building!
The adjacent street is Pasaje Ocoña, which is the center of the foreign currency market in Lima.
Part of the building could be used to house a foreign currency and precious metals exchange. It could also be promoted as a luxurious downtown convention center. Maybe a smaller hotel would be more viable.
There is a Frenchman (see: Arte Express) in Lima who made a fortune as a builder on the Spanish riviera about 20 years ago. For the last ten years he has been buying up the old gems in downtown Lima, restoring and refurbishing them to their former splendor and renting out office space in them. Perhaps he would have the staff and experience to do the work necessary and make a go of it. He may not have the capital for such a large project right now. Or he may end up buying it.
This building is off the rear corner of the Hotel Bolivar. It is the century old headquarters of the Peruvian Society of Engineers (they have a newer center out in the suburbs now). The interior is an empty and unused stunningly gorgeous marble columned hall.
Craig
Do you have any sense of the cap rates, or unleveraged yields on A class space in Lima? Is it reasonable? I have fond memories of Santiago, when it was cheap.
I don’t. I have looked into the asking prices of various downtown properties but have never investigated what space in good condition brings for lease. I expect there is considerable difference between restored downtown space and new built suburban space.
The Frenchman (name is Yves Faure) is apparently doing well. I talked to Yves a couple years ago when he had just finished restoring the magnificent old Weise Bank building. He said that altho building labor costs are low it is difficult to find people who have the knowledge and skill to do the quality of work found in the old buildings.
There is an article in today’s (11/8/2017) Gestion. It says there is an oversupply of office space and prices are falling. It gives a current rental rate of $17-20 per month/m2 for A class space in the upscale suburbs. I would presume that the rate would be less in the city center.
More info from Gestion (11/23/2017). Residential prices in various districts of Lima:
Preferred — over 7000 soles ($2200) per m2.
Middle class — 5000 soles ($1500) per m2.
City Center — 4700 soles ($1400) per m2.
Lower middle class or semi rural — 3900 – 4400 ($1200 – $1300) soles per m2.
Low rent: — 2900 soles ($900) per m2.
Remote — 2300 soles ($700) per m2.
From Gestion:
Escasa demanda inmobiliaria de empresas deja Lima con oficinas vacías
Scarce demand by businesses leaves Lima with vacant offices.
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One thing that she points out is that there is insufficient parking space for existing offices. I can corroborate that. Perhaps building parking structures in Lima could be a good business.
This building was available a few years ago. The owner was asking $2.5 million but probably would have taken half that. There was a large basement vault.
Mr Deaton, might you start off with your 5-10 key considerations to buying for investment in over seas? This could be a great thread for many to follow.
All:
This has turned into quite a nice discussion, but unfortunately I didn’t receive notices of it or I would’ve replied sooner. I’ll reply shortly to some of the original comments.
Investing in real estate in third world countries is difficult. As many commenters noticed, you have to actively manage the asset, being that a commercial, residential, industrial or agricultural property. If you do not manage it, and leave it vacant hoping for appreciation of the asset, you run the risk of the property being occupied by squatters.
There is the option of investing in public companies dedicated to the business, or investing in units that are part of an on-going concern. For example an apartment in a resort on the beach that you put in the rental pool.
Returns can be significant. In Honduras, for example, the monthly rent of units in commercial malls in the two main cities (the capital, Tegucigalpa, and San Pedro Sula) is 0.8%-1% of the market price of the property (as a foreigner, you have to deduct a 25%, though, taxed at the source). The risks are often exaggerated. For example you can buy top prime residential units in Tegucigalpa at 1500-2000$ for square meter (about 11 sqr feet), the downside is very limited, because is not more than 3X the replacement cost of the building (building cost is about 280-300$ for the “opera gris” + the interns that have a very variable cost depending on quality and luxury levels). In both cases you will need a realtor to manage your property though, who will charge you a fee.
As disclaimer (and a bit of advertising :-)) I am developing with my brother a couple of projects in the hondureñan island of Roatan. The first is Roatan 1: https://www.facebook.com/ROATAN1COMMUNITY/. This is a project of 300 residential units priced between 60K and 100K dollars. We have already sold and given to the clients 50 of them, and we currently have a backlog of 15-20. It is not on the beach (that’s why the low price), but owners have access to the beach of the second project. The only case in which the owner decided to give one unit to us to rent is one of the cheapest department (60k$) that we are renting at 500$ per month, of which we keep a 15% commission. The second project is more ambitious but less mature, we are building now the first 16 units of a total of 84. It is on the beach and the prices go for 250k$ to 400K$ for units of about 1700 sqr feet plus the terraza on the top. We have pre-sold about 40 and we will give the first units to clients in March or April: https://www.facebook.com/Las-Palmas-Beach-Resort-Spa-332723136817207/. This will became a typical resort, so the opportunity of a continuos stream of cash-flow from the rental pool is part of the attraction. However, not having started yet with the resort operation I do not want to give forecasts about the cash-flows. Using other resorts in the island as comparison, the net flows are between 2% and 10%, depending on the success of the operations.
As far as I know there are not REITs in Central America, although there is a dedicated and favorable legislation at least in Costa Rica. I myself thought in the past to raise 3-400M$ and open one dedicated only to the region, but other priorities left the project in the back-burner. If I bump into one well-managed, I will let the community know.
It is virtually impossible for USians, knowing only a country where primary and secondary education were socialized over a century ago, to conceive of the possibility of private education. However, it is the norm in much of the rest of the world, especially in Latin America where it is a growth industry.
I want to suggest that this might be an opportunity for real estate investments of the sort even @rrule might find attractive. In the process education might be fostered that is both private and capitalist.
Below I have summarized some facts taken from the following newspaper articles.
Colegios privados: ¿cuál es la situación en el Perú?
Scotiabank ve potencial en las cadenas educativas locales
Futura Schools abrirá colegios en Lima en el 2018
Of the 8 million students in the Peru about 30% go to private schools. The “free” public schools cost the state over 500 soles per student month (about $150) and are of terrible quality but may be all that is available in some rural areas. Private schools range from cheap (less than 100 soles or about $30 per month) to very expensive ($15,000 per year: http://www.amersol.edu.pe/index.aspx).
The demand for private schools took off about 10 years ago due to Peru’s economic progress and the growth of the “emergent middle class” (families that have recently ceased being poor). Migration from public to private school is relentless with families seeking better and more expensive schools whenever their income improves.
The middle class needs about 400 new private schools in Peru. In 2011 the need was about 200. Getting licenses for construction and operation from a hostile bureaucracy can take over a year.
This has lead to the growth of chain school businesses that are aiming at the 400 to 450 sol (about $125) per month price range for an education aimed at college preparation as is most desired by the newly affluent parents. Below is a list of some compiled by Scotiabank.
Futura Schools
Invests about $2.5 million in each campus.
Grupo ACP invierte S/20 millones en cadena Futura Schools
Grupo ACP invested 20 million soles in the Futura Schools chain. Also the chain arranged a long term credit of 23,5 million soles from Banco de Credito del Peru (BCP, the oldest and largest bank in Peru). Existing shareholders contributed another 1.2 million soles of capital, increasing the capitalization of the business to 60.5 million soles. The funds are destined to construct 5 new schools and expand Futura’s 10 existing schools.
Inversionistas ingresan con fuerza al sector educación
Investors enter with force the education sector
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Perhaps providing funds to these chains to build new schools on a long term lease or lease-purchase arrangement could provide a good return on capital. One might even create a fund for the purpose of making such investments. If it was financed with bonds traded on the Peruvian market the investments might be made more liquid.
Craig
Funny that you mention investing in private education as an opportunity for doing well, while doing good. Market based education would appear to be a global phenomenon in emerging and frontier markets.Although I’m no expert, I’ve received information and proposals from schemes in Uganda, Congo and India.
It is likely, in my declining years ( about three years hence I suspect) that I will begin to study these opportunities more closely.
In my current incarnation, as an investor, I stick to doing well, and that means extractive industries, infrastructure, and financial services. My own investment outcomes, right now, are bound up in generating opportunities where Sprott clients and shareholders participate, so the opportunities where the risks are increased by my lack of knowledge ( meaning any sectors but the above), so for the time being, adventures in investing in education must wait.
Several groups, including the Aga Khan network, and Lundin For Africa have been very successful at socially oriented, frontier market venture capital. I look forward to participating actively in the future, when both my time and my money is my own.
Private education for the poor is very hot in this moment, although “the champion”, BridgeInternational, which has 100.000 kids mostly in Kenia, is going through a bad period (kicked out from Uganda, launch in India partially botched, IPO post-poned indefinitely)
A school building is a very specific investment, you have to be sure that the school will be successful, otherwise you’ll find yourself with an empty building difficult to monetize.
The schools that you mention are the vanguard in Latin America, but they are not targeted at the very poor. The teacher is tipycally 35-50% of the cost-structure of a school, and with minimum salaries in the region between 250-450 dollars (plus tax and contributions, 13th month, etc), it is impossible to price at African or Indian level (7$-15$ per month). But they work well at a price of 80-100$ per month, even 60$ if you can have 40 kids per class (the theory that less pupils, more quality is a demonstrated bullshit).
I entered this market in Honduras last year, together with James Tooley (the guy that wrote “the beautiful tree”, check his Ted talk in YouTube, if you haven’t seen yet). James moved to Tegucigalpa and we are trying to find a way to reduce as much as possible the cost-structure. To do that, all the lessons, exercises and supporting material are in a tablet, there are no books in the school. We went full “flipped class”, meaning the kids study the lesson at home and come to the school (everyday, of course) mostly to do exercises. We are trying to use university students as teachers (we are going to have problems with the teachers union when we get bigger). We price at 90$ all inclusive (tablet, internet contract, uniforms). The value proposition is simple: when the kid completes high-school, he will be fluent in English, will be able to pass the admission tests in any university of Honduras and he will also have a trade (coder, heavy machinery mechanic…) that will allows him to be recruited immediately for at least 2X the minimum salary. And, of course, most of them will hate the State with passion, 🙂
We started last year in February (the public school calendar, February-November in Honduras) with kinder, preparatoria, first, second and third grade. We had only 43 pupils. This Monday (in two days) we start with the additional fourth grade and we will have more than 300 pupils, we had to add more sections per grade and we were completely full at the end of December. Therefore we will buy (or rent, if we find the buildings) other three schools at least in Tegucigalpa and 1 in SanPedro this year, to start again in 2018 with at least 1000 students (there are about 1 million students in public k-12 schools, our objective is to take at least 100.000 in 8 years.
It is important for us to have a lot of small schools (just one class per grade) instead of large schools with 3-4 classes per grade. The cost of transport is about 30 to 50$ per month, which is an increase by 50% on the school fee (not to mention the time wasted in the bus by the kids) so the idea is to have every part of the city within a one kilometer radius from a Cadmus (our brand) school.
We are very excited with this project, and we have a fantastic libertarian team at the helm, managed by James, who, among other things, is a senior fellow at Cato, member of the MPS and already own private schools in Ghana (20.000 students) and in India (5.000 students). If somebody wants to join us, salary for a teacher is about 400$, salary for a curriculum designer (the guys that develop lessons and exercises) 800-1000$. It is low, I know, but life here is cheap, and you can be part to something really transformational. Drop me a line if you are interested.
putting your money where your mouth is, very admirable. We wish you well
Wonderful! You made my day.
I was surprised to hear that Tooley is with you in Honduras. I corresponded with him a number of years ago because I wanted to show him the low cost schools (not the chains listed in my post!) in poor areas of Lima. But he told me he only went to English speaking countries because he didn’t have any Spanish. I am glad to hear he has broadened his experience.
I may have a potential teacher to send you.
When will you open franchises in Peru and Paraguay? 🙂
“A school building is a very specific investment, you have to be sure that the school will be successful, otherwise you’ll find yourself with an empty building difficult to monetize.”
Definitely. That is why I thought the Peruvian chain schools I listed were good prospects. They already have a demonstrated track record of success and profitability at multiple locations. So there is good reason to think that they should be able to replicate their business model in a new built campus and generate the means to pay their lease.
“I entered this market in Honduras last year, together with James Tooley…”
What sort of problems are there in Honduras dealing with the bureaucracy?
One of the consequences of Peru’s increasing prosperity is that the politicians and bureaucrats have more money to pursue schemes to interfere with private activities. For instance, they argue that for Peru to continue advancing it needs to do things like the advanced countries (eg. the US) do and completely socialize all education. As a result, the government is attacking private education (primary, secondary and university) with the object of destroying and eliminating it. It remains to be seen how much of that agenda they can impose. I doubt that in the end they will succeed completely but they certainly have the aim of imposing government control of education that was never possible as long as Peru was poor.
Let me add that altho the newspaper article pegged private school attendance at 30% I don’t believe that. I think it is closer to the reverse: 30% public.
Easy to believe, Craig. It is the percentage in most of India and Africa.
Regarding James, I read his book and got in touch with him through the Francisco Marroquin University in Guatemala. You are right, he was a typical Commonwealth Englishman, but after a few bottles of wine together he started to consider we papist former Spanish colonies can be fun after all 🙂
About the schools in Peru, they are an example for all the industry, there is a lot of attention on them now, especially with Innova and its model of a fast roll-up of existing schools. An expert (and a friend) on Latin American school development is Gabriel Zinny, an Argentinian who owns a few operations of distant learning and is the guy in charge to professional schooling in Argentina since Macri came to power. You can search for his article in the Web.
Regarding Honduras, I don’t think they will attack the traditional elite and middle class private schools, everybody making 2.000$ or more send their kids to private schools. There are officially 250.000 kids in those schools, plus an unknown number in iinformal, very small schools for the poor, in most cases a former public teacher with 30-40 kids in her home (notably, they are usually with 2-3 grades per class, and in many cases they are fairly good). We will have problems with the unions, though.
Peruvian teacher’s unions are a noise problem. They are constantly demanding stuff from the government. But I have never heard any indication that they are of any concern for the private schools.
In general, unions are not a big problem, because the private schools are either a) elite schools, usually bilingual, that they know they can’t compete with, or b) very small informal establishments that are difficult to track down and are literally thousands, most often run by former public teachers.
But chains of low-cost schools are another matter. They are eating their lunch and are easily identifiable. Moreover, they can use all the usual leftist rethoric: education is a right, it’s despicable to make money on education, the owners are rich people, usually foreigners, that take advantage of the poor promising a lot but delivering less than a public school, the solution of bad public schooling is to give more money to the schools, etc.
As a matter of fact, Bridge is currently under the most severe attack in Africa since the launch. They managed to shut down their operations in Uganda and they are attacking the company even in Kenia, its core business.
And it’s not only the unions. Even the parasites at international organizations, like UNICEF, hate private schools for the poor and campaign actively for the States to shut them down.
“Moreover, they can use all the usual leftist rethoric: education is a right, it’s despicable to make money on education, the owners are rich people, usually foreigners, that take advantage of the poor promising a lot but delivering less than a public school, the solution of bad public schooling is to give more money to the schools, etc.”
Yes, that is the kind of tired rationale used by the Peruvian Ministry of Education in its campaign against private education. Unfortunately, such arguments have traction and there is little opposition. I think the Peruvian public would be receptive to principled opposition if it existed. The fight is ongoing.
Innova Schools has been listed on the Lima Stock Exchange (BVL) as COLEGIOS PERUANOS S.A for a little over a year altho there has never been any real trading of the stock. All the stock is in three hands.
Public Auction:
Two Properties for Sale in Lima and Miraflores
Subasta del Inmueble denominado “Nicolás de Piérola”,
Ubicado en Av. Nicolás de Piérola N° 508 al 540, y Av. Garcilaso de la Vega N° 711 al 795,
Distrito, Provincia y Departamento de Lima.
Área del Terreno: 2,005.77 m², Total Área techada 11,851.76 m2
Comprende 77 unidades inmobiliarias, 66 departamentos tipo flat, 10 locales comerciales y una zona para 40 estacionamientos, se ubica en una zona que cuenta con red de agua y desagüe, red de alumbrado público con sus correspondientes conexiones domiciliarias; red de telefonía, pistas y veredas de concreto.
Precio Base: US$ 4’950,000.00Subasta del Inmueble denominado
“Lord Nelson”,
Ubicado en Calle Almirante Lord Nelson Nº 236, 240, 244,
Distrito de Miraflores, Provincia y Departamento Lima.
Área del terreno: 1,905.85 m2, Total Área techada: 3,101.52 m2
Es un edificio de Vivienda Multifamiliar que consta de tres pisos más azotea, cuenta con departamentos tipo flat. El ingreso principal a la edificación es a través de una reja metálica con numeración N° 240 que conduce hacia el pasadizo de distribución, donde se encuentra la escalera principal y el ascensor que llega hacia los 2 pisos superiores.
Precio Base: US$ 5’615,000.00
The first is an enormous, solidly constructed, early 20th century building in a currently run down part of downtown Lima. It is on a corner of the intersection of Nicolas de Pierola (which runs down one side of the Hotel Bolivar) and Garcilaso de la vega. It is 3 blocks down Nicolas de Pierola from the Plaza San Martin directly across from the Hotel Crillon building (elegant newly renovated office space). Garcilazo de la Vega is another one of the major boulevards in the city center. It has 11,851 m2 (6 floors and a basement) and a base price of $4.95 million.
The second is a newer building in an upscale suburb. It has 3,101 m2 (3 floors) and a base price of $5.61 million.
I know this is a crude and apples to oranges comparison. However, if the first building were renovated (which I am sure it needs badly inside) to the point where it was valued at the same rate as the second then it might be worth
11851*5.61/3101 = 21.44 million dollars
which would be an increase of $16.49 million on an investment of about $5 million plus the cost of renovation.
Fixer upper
A second auction will take place July 18. The base price has been reduced to $4.5 million.
The second auction was null.
Make an offer for pennies before Yves buys it. 🙂
It seems that there is not much interest (among people who have the money) for such downtown buildings. I presume this is because there is not enough demand for the space to make them profitable. In spite of Peru’s current prospering, the center of Lima is largely still a rather run down, blighted area (altho it is not without its charms and bright spots). There is enormous growth in Lima and much demand for living, office and retail space but that is mostly taking place out in the suburbs.
There is the one fellow (Yves Faure) I mentioned above who is buying up and refurbishing downtown buildings for (mostly) leased office space. He is apparently making good money at it. However, his tenants are, in many cases, government agencies. His latest (very large) such project was the shuttered Crillon Hotel (which is directly across the street from this building) which it may take some time for him to digest. I would not be surprised if he eventually buys this building.
I imagine that other local buyers don’t know anything they can do with the building that will be profitable.
Note that the upper stories alone contain 66 apartments (of about 125 m2 each). Out in the suburbs apartment towers are being build (of inferior construction quality) as fast as possible and similar sizes sell out immediately for prices on the order of $160,000. At that rate those apartments would be worth over $10 million. If the building were purchased for $ 4.5 million and $1.5 million were spent refurbishing the apartments to modern standards that would leave a $ 4 million profit. There is certainly effective demand for the living space. The question is whether the upwardly mobile Peruvian buyers could be interested in living in the city center. So far I have not seen evidence of any such gentrification taking place.
According to Gestion (12/6/2017), the average rent for an apartment in the city center is 2594 soles per month. That is about $786. That would yield a monthly income for just the 66 apartments of about $ 52,000.
According to El Comercio, Alquiler de inmuebles es cada vez más rentable (12/10/2017), renting residential property is becoming very profitable in Peru: yielding 5-7% of the property value per year.
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This is a slightly different option to foreign real estate. I’ve bought on Montserrat… Small and peaceful. No heating bills…Low real estate taxes…. This is my foreign base. Now for the main part of my plan….. Am outfitting a boat to be able to live aboard…. Wherever I go and for any reason if I no longer want to be there….. I way anchor for a better location.
Will discuss details if others want to follow my lead.
Mineral rights possessed by the Peruvian government to the Huayday Ambara Project to be privatized.
It consists of 8 concessions totaling 2992 hectares. Known reserves are 1.8 million tonnes of clean anthracite (metalugical) coal. The location is in Lucma, Gran Chimu, La Libertad, an area near long producing, very high grade gold mines (eg. Poderosa, Alto Chicama, Sayapullo, Igor, Cascajal, etc.).
