Four investment options in this expanding market

US$1=1,904 Colombian pesos

Dear Overseas Property Alert reader,

Capital gains of 10%…rental income of another 6%…and developer co-investment returns of up to 22% annually. These are the numbers that caught my attention for this property in Bogota.

Let me give you the details.

Colombia is the third largest economy in Latin America, after Brazil and Mexico. It’s one of the few countries in the world that sustained positive economic growth during the Great Recession, with a forecast GDP growth of 5% this year—better than the United States, UK, Europe, Mexico, or Brazil. Inflation is at a record-setting low: just 2.19% for 2013.

Significantly, Colombia has a rapidly expanding middle class—probably the most important macro element of any market you’re considering investing in. The number of people in Colombia’s middle class jumped 56.1% between 2002 and 2012, and is forecast to rise another 83% during the next 11 years, through 2025.

So Colombia offers the investor a growing economy with an expanding middle class.

Bogota is the growth engine of Colombia
Bogota alone contributes a huge 24.5% of Colombia’s total GDP, yet still maintained its own GDP growth rate of 4.1%.

International attention continues to focus on Bogota. In fact, the number of multinational corporations in Bogota went from 492 to 1,423 in the 10 years through 2012. That’s a 289% increase.

There are two important constraints relevant to this discussion. One is that the housing deficit in Bogota has affected around 2.5 million people annually since 1993, even though the total number of housing units has increased dramatically. The second factor is that developable land is shrinking fast, especially in the desirable sectors.

This, of course, is good news for the property investor: a strong, stable demand and a quickly shrinking means of supply.

Within Bogota, Santa Barbara is a prime neighborhood for housing investment
Santa Barbara is one of Bogota’s most desirable neighborhoods and is home to a large population of young professionals and young families.

They come to Santa Barbara to enjoy easy access to nice restaurants, bars, and quality shopping. And a good location combined with excellent public transit connections keeps residents within an easy commute to the business sectors where they work.

The Santa Barbara neighborhood is made up of mostly upscale residences, with relatively few commercial or corporate properties.

I showed up 45 minutes early for my meeting with the developer’s managing director, Darío Torres. While I was waiting, I saw as much of the project’s Santa Barbara neighborhood as I could.

Torres de Buenavista is on a quiet, tree-lined side street, with little vehicular traffic. There are a few other buildings of five stories, but most of the area is populated with two-story houses. About 30 yards west of the project, you’ll see a brick pathway heading into a green space, which cuts through into a large, treed park. A country club is about a block away to the west.

The setting, the country club, and the park will be attractive to the young families and professionals who make up the target market.

Here’s why I have confidence in Consinfra to develop Torres de Buenavista
Darío Torres pointed out a number of reasons why Consinfra is doing well in this market and why they’ve earned the trust of buyers and investors.

  • As of 2013, 30% of Consinfra’s sales were to previous buyers—a “satisfied-customer” data point that speaks for itself. They’ve been directly involved in 33 projects so far.
  • In each project, 50% of the capital is invested by Consinfra itself, with the remaining funding coming from investors. I like the fact that the developer has equal “skin in the game.”
  • Each project is owned by a separate financial entity. So if you invest in a project that you have confidence in, you don’t have to worry about another project or part of the company threatening your investment.
  • Darío lives in the neighborhood and has been developing here for more than 30 years. More importantly, he and the company stick to what they know well. They know who’s buying, what they can afford, what they’re buying, and where.
  • Consinfra has confidence in themselves, and their ability to raise funding. If you invest with them and change your mind later on, they’ll negotiate a buy-back from you and sell your share to someone else.

Finally, I asked to see a recently completed similar project. We went down to Santa Barbara’s Calle 112 to a project called Torre de Molino, where one of the residents was kind enough to let us in. I found the construction and finishings to be solid and of high quality and the finished product to be something the residents can be proud of.

Here are your options for investing in the Torres de Buenavista project
I like the project because it’s a sensible building, targeted to the right buyer, in a small sector where the developer has a lot of experience.

At this stage of the project there are four types of investments to consider.

Option 1: Buy an apartment for resale. The pre-construction offer has sold out, and in fact, the building is only seven months from full completion. But you can still buy an apartment with resale in mind, given that the market is rising for units of this size.

I think it’s reasonable to expect a capital gain of 10% annually in this part of Santa Barbara. Here’s why:

  • According to the developer’s managing director, Darío Torres, prices rose 20% between 2011 and 2013.
  • So I checked MetroCuadrado.com, and they confirmed an annual increase in this neighborhood of 10%, through the year ending April 2013. This adds up with Darío’s claim of 20% during two years.
  • Then I conducted my own survey of apartments in Santa Barbara, and the average has increased another 11.88% between April 2013 and May 2014. So there’s still more than a 10% annual increase through today.

That’s why, for now, I think you can expect 10% annual capital gain.

The prices to buy an apartment at Torres de Buenavista start at US$134,400 for the smallest unit (48M2) and go up to US$240,800 for the largest (86M2). The cost per square meter only varies a bit, between US$2,770 and US$2,800 per square meter.

As a benchmark, competing new apartments are going for an average of US$2,959 in Santa Barbara. Used apartments on the resale market are going for US$2,444 per square meter. Both of these data points are based on a survey taken in Santa Barbara on May 13, 2014.

In other words, the units are still priced below market for the sector.

Option 2: Buy an apartment for rental income. The rental demand in this area is as strong as the sales demand. In Bogota, 50% of the residents are renting, so the market for long-term unfurnished rentals is good.

The 79M2 unit, selling for US$221,200, should rent for about 2.12 million pesos per month (US$1,110 today). This would provide a gross return of 6%, in addition to the expected 10% capital gain.

For client convenience, Consinfra is now offering property management services. They’d been managing a portfolio of their own properties anyway, and with today’s large number of investors, it made sense to offer property management services to them as well.

Option 3: Make a fixed return investment. I like this alternative personally, because the investment level is lower than when buying an apartment and the returns are hassle free when compared to owning a rental. The returns are also better than the net you’ll see with a rental, unless you’re doing the property management and marketing yourself.

Consinfra’s fixed return investment pays an annual rate of 15% for a two-year investment. The minimum investment is US$50,000.

Option 4: Co-invest with the developer. This investment offers the same advantage as the fixed return above, with respect to being relatively hassle-free. Consinfra is estimating a 44% return during the next two years. So the forecast is for an annualized return of more than 22% for a two-year investment. The minimum investment for this offer is US$100,000.

This number is not guaranteed, as is the fixed return investment above. But after 33 projects—10 of which were just like Torres de Buenavista—they believe their forecasted returns are fairly accurate.

Is the Torres de Buenavista offer for you?
If you’d like to invest in Colombia, you should consider Torres de Buenavista. I believe it’s a good project, targeted to the right buyer, in a growing market where the developer has long experience. And, obviously, the returns are good.

If you think Torres de Buenavista would be right for you, feel free to contact Consinfra’s board chairman, Andrew Strauss. You can contact Andrew for more information here.

Lee Harrison
Editor, Overseas Property Alert

Letters to the editor

Lee,
What can you say about the property along the route of the proposed Chinese canal through Nicaragua?
Thanks,
Mick

First proposed by Napoleon III, the Nicaragua Canal came to life when President Zachary Taylor signed the Clayton-Bulwer Treaty with England in 1850, which paved the way for construction of a canal through Nicaragua. It was later dropped in favor of Panama, but rumors of its imminent construction have persisted from then until now.

And in fact, Nicaragua has granted a concession to a Chinese businessman that will extend 50 years after the planned canal completion date of 2019. Construction could begin late this year.

The long-touted, lower-cost route along the San Juan River has fallen out of favor for “technical reasons” according to President Ortega. (My guess is that he doesn’t want his canal on the already-contentious border with Costa Rica.) That leaves the proposed route along Rio Escondido between Bluefields (on the Caribbean) and Puerto Morrito on Lake Nicaragua.

I have no guess as to the possible route for the final 12 miles on the Pacific side of Lake Nicaragua. So if I were buying to capitalize on the proposed canal today, it would be along the Rio Escondido route. Personally, I’d buy at the Lake Nicaragua end of the river, so if the canal doesn’t get built, at least you’ll have a vacation property close to the lake.

But you’d better hurry…I’m sure others are thinking the same thing—especially the Chinese investors.

Lee,
I am interested in purchasing land as you describe in your newsletter. However I need your advice. I am not a farmer and I wonder if there are people who want to work the land. I like the property that is 500 meters from the beach.
Edgar

The practice of buying land for investment and then leasing it to a farmer is fairly common in Uruguay. The returns are low at best (around 3.5%), but it’s a good way to “bank” the land if you’re not an expert.

The average chacra however, would be too small to make that scenario worthwhile for a farmer. And those chacras by the ocean would have more touristic value than agricultural value.

Have a question? You can write to Lee here.

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