I wanted to share an analysis that I conducted after my first week in Puerto Rico. Looking back on it I am amazed as to how valid much of it was and how much of it has come true. I have included my comments from October 2014 for your review.
October 19, 2014
Macro View
The opportunity in Puerto Rico to acquire land, residential and commercial real estate is very real. The best way to describe this opportunity is "home steading" (similar to the great land grab of the 1850s). Yes, there are expats here, but the nature of the environment still makes it a difficult place to maneuver. The expats (for the most part) are located in 5 mile radiuses with Condado San Juan, and Humacao (Palmas Del Mar). Outside these two areas, I didn't see 1 westerner and I traveled around the island 3 times already. This is good news in terms of an investment.
The cost to build is the same around the world relative to cost of materials. The difference between a property in a higher end and lower end market is not the structure itself but the land that it sits on. For example, it costs the same for us to build in Mclean VA as Bakersfield CA, the only different is the price of the land.
The value in Puerto Rico is in the land due to the aging infrastructure that has already greatly depreciated. Given substandard building techniques from (30-50 years ago) it makes no sense to buy an older property that will ultimately have to be torn down. It is also not rational to buy a newer structure since all the "value creation" has also taken place. After considering these comments, only the land remains. The land in Puerto Rico is extremely undervalued. Relative to the per square ft price of land elsewhere in the US, the land in PR is cheap. Here is where the opportunity lies. There is a large difference between the price of land in San Juan versus surrounding areas. As you move away from San Juan the land becomes cheaper and cheaper. This holds true for beach front property as well. In the US there is not any beach front property available at a reasonable price (relative to other opportunities). In PR, there is still much unchartered territory all around the coast of the island. The hot spots (moving west from San Juan around the island are Durango, Arecibo, Hatillo, Rincon, Ponce (southern coast), and Humacao (Palmas Del Mar).
An additional factor is rent. The operating spread from rent revenue relative to financing costs and acquisition costs is not sufficient. In the heart of Condado, San Juan where the expat community resides, you will find 1 MM$ condos next to 50k$ condos in many places. I see no difference between these two apartments because you have the same values in terms of view and geographic location. The more expensive apartment is newer, includes amenities, but certainly not enough to warrant the huge jump in price. These complexes are for rich foreign investors who have cash to burn and want a place in SJ. When these complexes try to rent (vs owner occupancy) the rent needed to justify the investment is not adequate.
A huge obstacle in terms of renting condos is that most HOAs do not allow renting to tenants. This creates a whole set of obstacles on its own. For these reasons, I would stay away from condos in PR in general. The price of new vs. old real estate is very elastic but the rent between the two is inelastic respectively.
Speculation
To justify an acquisition, normally a series of conditions are needed. Given the unique opportunity in Puerto Rico, speculation is the name of the game. Low price points for land with enormous upside potential make this the play. We have little downside with great upside potential.
San Juan
I see opportunities to buy land here but there is a huge opportunity cost given we can buy a much larger quantity of land a short distance outside the city near the growing beach communities. These properties have the greatest upside potential.
Arecibo
This is the place to invest. 45 minutes west of San Juan. Home of UPR-Arecibo which is the second best public university in Puerto Rico. A short distance to San Juan, great infrastructure, and a growing tourist community make this a highlight area. Walmart, Home Depot, YUM Brands (KFC/PHUT/TBELL), Walgreens, CVS, along with the Premium Outlets, make this a high desirable area for growth. There is a community in Arecibo called Islote, Arecibo (Wikipedia article available). I would compare this to Malibu CA. You can buy beach front property in this area all day long and I saw many "Se Vende" signs. This is the location of the quarter acre lots for around 15,000. These lots are about 1/2 mile to a mile inland but still within the beach community. Lots can be purchased directly on the water. I am still working on a price point for this but I feel you can buy a quarter acre, beach front lot for around 35,000 from the few listings I have seen.
Humacao (Palmas Del Mar)
Humacao (Palmas Del Mar), home of the largest tennis and golf resort in the Caribbean. The price of land here is quite high and I think there is not opportunity. Microsoft, Costco, Walmart, Sams, all the usual suspects are present here as well. This is the highest concentration of expats and the prices reflect this. I see no opportunities here given finite resources.
Rincon
Surfing hot spot on the western face of the island. 1 hour 45 minutes west of San Juan. An area I need to investigate further. Beach front property and land much cheaper overall but the tradeoff is not as much infrastructure and less potential for growth compared to areas closer to San Juan.
The best investment will lie in a property that is located with close proximity to San Juan so an individual/family can migrate back and forth with ease between the city and countryside. This is Arecibo (Islote beach).
Regulatory Issues
I am still carving out all the regulatory problems. The largest problem is residency. Yes, US and Puerto Ricans share the same citizenship but residency creates a divide. Residency and establishing residency are used to create restrictions on investment and opportunities in general. This is the piece that I'm most concerned about. Another reason I feel that holding land for speculation is the safest play now since we won't encounter any social problems with this kind of investment. I've already read a half dozen or so articles on starting a business, establishing residency, etc, but will need time to sort out the details.
Other business opportunities
Parking lots, trailer parks, consulting firms, recycling, call centers, food (not really any Asian/Southeast Asian/Indian/Russian/European) food here all possible. Again, the issue is doing business in Puerto Rico. Great value can be created by just figuring out how to get around. At the local level, permitting is a big issue. For a nonresident, I'm pretty sure they make your life a living hell. Everyone knows everyone here, it's an island! It's the good old boy system at it's finest. You cannot even pass the law bar here unless you are politically connected according to a Professor I talked to at UPR-Arecibo (it's insanity). I believe these statements because the feel is present in day to day life. Equality and fair treatment is an issue. Of course I thrive in these kind of environments so I'm looking forward to showing up to the party.
Global Environment
Given the current and ever worsening Puerto Rican debt crisis, the uncertainty in the US, and the unique nature of PR, we will have an opportunity very soon. Within the next 12-18 months prices will slide, demand will decrease, and something can begot for nothing.
My sentiment in general is that everything will start to crash immediately after the fiscal year. Winter '15/'16 will not be a good time for the US economy in the run up to the Presidential election. The good news is I feel the economy will rebound but continue to oscillate in this fashion (with swings of 10-20 percent in the price of real estate for the next 5 years. PR will be disproportionately affected given the current crisis and lack of financing alternatives.
October 19, 2014
Macro View
The opportunity in Puerto Rico to acquire land, residential and commercial real estate is very real. The best way to describe this opportunity is "home steading" (similar to the great land grab of the 1850s). Yes, there are expats here, but the nature of the environment still makes it a difficult place to maneuver. The expats (for the most part) are located in 5 mile radiuses with Condado San Juan, and Humacao (Palmas Del Mar). Outside these two areas, I didn't see 1 westerner and I traveled around the island 3 times already. This is good news in terms of an investment.
The cost to build is the same around the world relative to cost of materials. The difference between a property in a higher end and lower end market is not the structure itself but the land that it sits on. For example, it costs the same for us to build in Mclean VA as Bakersfield CA, the only different is the price of the land.
The value in Puerto Rico is in the land due to the aging infrastructure that has already greatly depreciated. Given substandard building techniques from (30-50 years ago) it makes no sense to buy an older property that will ultimately have to be torn down. It is also not rational to buy a newer structure since all the "value creation" has also taken place. After considering these comments, only the land remains. The land in Puerto Rico is extremely undervalued. Relative to the per square ft price of land elsewhere in the US, the land in PR is cheap. Here is where the opportunity lies. There is a large difference between the price of land in San Juan versus surrounding areas. As you move away from San Juan the land becomes cheaper and cheaper. This holds true for beach front property as well. In the US there is not any beach front property available at a reasonable price (relative to other opportunities). In PR, there is still much unchartered territory all around the coast of the island. The hot spots (moving west from San Juan around the island are Durango, Arecibo, Hatillo, Rincon, Ponce (southern coast), and Humacao (Palmas Del Mar).
An additional factor is rent. The operating spread from rent revenue relative to financing costs and acquisition costs is not sufficient. In the heart of Condado, San Juan where the expat community resides, you will find 1 MM$ condos next to 50k$ condos in many places. I see no difference between these two apartments because you have the same values in terms of view and geographic location. The more expensive apartment is newer, includes amenities, but certainly not enough to warrant the huge jump in price. These complexes are for rich foreign investors who have cash to burn and want a place in SJ. When these complexes try to rent (vs owner occupancy) the rent needed to justify the investment is not adequate.
A huge obstacle in terms of renting condos is that most HOAs do not allow renting to tenants. This creates a whole set of obstacles on its own. For these reasons, I would stay away from condos in PR in general. The price of new vs. old real estate is very elastic but the rent between the two is inelastic respectively.
Speculation
To justify an acquisition, normally a series of conditions are needed. Given the unique opportunity in Puerto Rico, speculation is the name of the game. Low price points for land with enormous upside potential make this the play. We have little downside with great upside potential.
San Juan
I see opportunities to buy land here but there is a huge opportunity cost given we can buy a much larger quantity of land a short distance outside the city near the growing beach communities. These properties have the greatest upside potential.
Arecibo
This is the place to invest. 45 minutes west of San Juan. Home of UPR-Arecibo which is the second best public university in Puerto Rico. A short distance to San Juan, great infrastructure, and a growing tourist community make this a highlight area. Walmart, Home Depot, YUM Brands (KFC/PHUT/TBELL), Walgreens, CVS, along with the Premium Outlets, make this a high desirable area for growth. There is a community in Arecibo called Islote, Arecibo (Wikipedia article available). I would compare this to Malibu CA. You can buy beach front property in this area all day long and I saw many "Se Vende" signs. This is the location of the quarter acre lots for around 15,000. These lots are about 1/2 mile to a mile inland but still within the beach community. Lots can be purchased directly on the water. I am still working on a price point for this but I feel you can buy a quarter acre, beach front lot for around 35,000 from the few listings I have seen.
Humacao (Palmas Del Mar)
Humacao (Palmas Del Mar), home of the largest tennis and golf resort in the Caribbean. The price of land here is quite high and I think there is not opportunity. Microsoft, Costco, Walmart, Sams, all the usual suspects are present here as well. This is the highest concentration of expats and the prices reflect this. I see no opportunities here given finite resources.
Rincon
Surfing hot spot on the western face of the island. 1 hour 45 minutes west of San Juan. An area I need to investigate further. Beach front property and land much cheaper overall but the tradeoff is not as much infrastructure and less potential for growth compared to areas closer to San Juan.
The best investment will lie in a property that is located with close proximity to San Juan so an individual/family can migrate back and forth with ease between the city and countryside. This is Arecibo (Islote beach).
Regulatory Issues
I am still carving out all the regulatory problems. The largest problem is residency. Yes, US and Puerto Ricans share the same citizenship but residency creates a divide. Residency and establishing residency are used to create restrictions on investment and opportunities in general. This is the piece that I'm most concerned about. Another reason I feel that holding land for speculation is the safest play now since we won't encounter any social problems with this kind of investment. I've already read a half dozen or so articles on starting a business, establishing residency, etc, but will need time to sort out the details.
Other business opportunities
Parking lots, trailer parks, consulting firms, recycling, call centers, food (not really any Asian/Southeast Asian/Indian/Russian/European) food here all possible. Again, the issue is doing business in Puerto Rico. Great value can be created by just figuring out how to get around. At the local level, permitting is a big issue. For a nonresident, I'm pretty sure they make your life a living hell. Everyone knows everyone here, it's an island! It's the good old boy system at it's finest. You cannot even pass the law bar here unless you are politically connected according to a Professor I talked to at UPR-Arecibo (it's insanity). I believe these statements because the feel is present in day to day life. Equality and fair treatment is an issue. Of course I thrive in these kind of environments so I'm looking forward to showing up to the party.
Global Environment
Given the current and ever worsening Puerto Rican debt crisis, the uncertainty in the US, and the unique nature of PR, we will have an opportunity very soon. Within the next 12-18 months prices will slide, demand will decrease, and something can begot for nothing.
My sentiment in general is that everything will start to crash immediately after the fiscal year. Winter '15/'16 will not be a good time for the US economy in the run up to the Presidential election. The good news is I feel the economy will rebound but continue to oscillate in this fashion (with swings of 10-20 percent in the price of real estate for the next 5 years. PR will be disproportionately affected given the current crisis and lack of financing alternatives.
Faro Los Morrillos de Cabo Rojo (December 2015)
