Saturday, July 12, 2008
Dear International Living Reader,
As global real estate prices roared ahead over the past 10 years, yields compressed. We were happy to take less than 5%—sometimes even less than 3%—rental yields per year, based on the expectation of capital appreciation. But there are a number of markets where yields are high and can provide you with an income opportunity.
Here are my top three rental yield markets:
Panama City, Panama : There’s a Panama City real estate play delivering among the strongest and most reliable rental returns I have ever seen.
I have been a regular visitor to Panama City for nearly five years. Up to the middle of last year, I would book one of my favorite hotels a couple of days before traveling. I never had a problem getting a room, and never paid more than $128 per night.
Those days are gone…
There is no availability…and when there is, a room costs at least $180 per night. Last December, I tried to book a hotel room for a visit in January. The first two hotels I contacted told me that there was no availability until May. Extensive searching for an apartment rental was unsuccessful, and in the end, I was lucky to find a hotel room for $285 per night.
Panama’s visitor numbers are growing at a much faster rate than its supply of hotel beds. Visitors are coming from the Americas and Europe for vacation, to buy real estate, to do business, or to work. Multinationals are setting up regional headquarters in Panama and big infrastructure projects are drawing in skilled labor and contractors. In recent years, developers have made a killing from the property boom selling condos. The prime development sites went for condo developments, not hotels. Official stats indicate that hotel occupancy for hotels of 100 rooms or more is running at more than 90%. I got a first-hand look at the books of two 80-bed apart-hotels that had occupancy in excess of 95% last year. Both said they could fill their beds twice most nights this year.
Last year, IPAT (Panama’s tourism promotion department) approved 40 hotel projects and is currently reviewing 18 applications. There are about 10,000 hotel beds in the pipeline. This will take a couple of years to be delivered, and all the time, visitor numbers will continue to grow. Assuming Panama continues on its current path (which I think it will), supply will be at least five years catching up with demand.
It’s boom time for Panama’s hoteliers. You, too, can profit from the Panama City hotel boom, even if you don’t have the capital, expertise, or time required to be in the hotel business.
How? Buy a hotel room or a condo suitable for short-term rental.
Under a typical condo-hotel program, a developer will construct a hotel and sign an agreement with a hotel group to run the premises. The developer then sells the units to individual investors. Revenue from the hotel operation is pooled and divided between the hotel operator and the owners of the individual units. Splits between owner and operator can be as high as 70/30 in favor of the owner, although the big-name, high-end operators will typically take a bigger cut.
A second strategy to profit from the undersupply of hotel rooms is to buy a condo and make it available for short-term rental. Many International Living readers who bought in buildings like Bayfront on Avenida de Balboa have made their units available for short-term rental. In this case, the developer, Bern Group, has set up a rental management business to cater to the needs of the purchasers. A condo furniture fit-out package is available to owners wanting to rent their units on a short-term basis. Even purchasing a condo based on today’s purchase price, net rental yields are in the region of 10%. (But I know of one that gives rental yields of up to 15%, go here for details.)
Fortaleza, Brazil: It’s all happening in this part of Brazil right now. As a country, Brazil’s economy is booming, it has the largest stock exchange in Latin America…and the largest emerging stock market in the world. It has a strong currency and the country is energy independent. Standard & Poor’s rates Brazil’s long-term sovereign credit rating as investment grade.
Brazil is the largest country in South America, only slightly smaller than the U.S. It also has South America’s largest and strongest economy.
Brazil makes its own airplanes, automobiles, food, clothing, shoes, and appliances.
BOVESPA, Brazil’s major stock exchange, is the largest in Latin America, and has been in a strong bull market for nearly six years.
The country’s economy is booming so strongly that its currency has nearly doubled in the past four years. It’s becoming one of the strongest currencies in the world.
Today, Brazil is emerging into a First-World country, with all the amenities, infrastructure, and conveniences you would naturally expect in a Western First-World nation…but the prices…specifically in this part of Brazil…are a blast from the past.
Capital is expensive in Brazil. For example, a regular savings account pays an interest rate of 12%. A car loan costs 18%. If a Brazilian can get a mortgage, he pays even higher interest rates than that. This, combined with robust rental demand has created a rental income opportunity
Because mortgage rates are so high and there is a scarcity of smaller high-end rental units, you can get a rental return of 10% a year as a matter of course. Look for high-spec new construction with small units in one of the city’s prime areas. By high-spec I mean swimming pool, a gym, sauna, crèche, game room, movie room, a business center, and more all come as standard. By smaller units I’m talking 50 to 80 square meters. Follow these guidelines and you will maximize your yield while appealing to a broad pool of potential renters.
Berlin, Germany: While real estate prices across Europe and practically the rest of the world roared ahead in the past decade, the market in Berlin stagnated; in fact, prices slipped by 40% in real terms. Euphoric scenes around the wall coming down, reunification, and Berlin becoming the capital of a unified Germany was followed by a long hangover of economic pain and disruption. The economies of East and West couldn’t have been more different, and integration was more painful than anyone imagined.
Germany today is seeing strong growth in economic output and is the world’s second largest net exporter after China. With a population of 3.4 million, Berlin is almost as large as Frankfurt, Munich, and Hamburg combined. Berlin is the capital city of Europe’s largest economy and third biggest tourism city in Europe. Tens of thousands of government jobs have been moved to Berlin with another 8,000 slated to move from Bonn over the next 10 years.
Berlin’s industries include media, IT, music, advertising, design, life sciences, and micro technologies. Most importantly, Berlin is the gateway between old Europe and the booming economies to the east. It is strategically positioned at the geographic and infrastructure heart of Europe.
The factors that have kept real estate prices low are no longer at play. Meantime, the rental market is strong and stable. Berliners are not buyers; 85% of them rent their accommodation in the city. And prices for real estate start as low as $1,600 per meter—that’s as cheap as some cities in Eastern Europe.
Don’t expect the double-digit rental yields here, though. In Berlin you can see rental yields up to 7% and lower in prime areas. But these are the best rental yields I’ve seen in any major, developed world capital for some time, and it comes with the additional bonus of the prospect of capital appreciation.
Editor’s note: Ronan offers his Real Estate Trend Alertreaders the latest tips on how to make money from international real estate. He just wrote to his readers while in Lisbon (on route to Brazil) to tell them about this very special offer he is going to check out in Fortaleza. This pre-construction investment will be operated like a five-star hotel and will see rental yields of up to 15%. Ronan is so excited about this deal that he has agreed to share this RETA issue with you, our Postcards readers. Read it here and enjoy!
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