Editor’s note: This is the first of a two-part series by real estate expert Benjamin Berger on Ecuador’s real estate market. The second installment looks at real estate in the sierra region of the country.
By Benjamin Berger
Since President Rafael Correa first broke the news of his proposed inheritance and capital gains tax increases in his state of the union address in May, there has been a perception that the real estate industry has entered panic mode.
While the proposal has been put on hold until January, likely in response to the widespread protests that erupted shortly after the announcement, we sought out some of Ecuador´s leading coastal real estate agents and developers to find out how this issue and others were effecting sales and planned investment over the next 12 months.
For those not familiar with the economic forces currently in play in Ecuador, it is worth briefly stating the backdrop for the proposed tax increase.
- President Correa has overseen unprecedented spending on public works projects during his eight years as president, greatly improving the country´s infrastructure and social services. His popularity and his legacy are largely dependent upon his ability to continue advancing these projects.
- Ecuador´s currency is the U.S. dollar, a circumstance credited with bringing economic stability to the country, but there is a downside: it also means that traditional monetary policy, such as revaluation, cannot be implemented to adjust to economic shocks. Given the dollar´s relative strength against regional and global trading partners, (up nearly 50% against the Colombian Peso and 25% against the Canadian dollar), less competitive exports and capital flight have led to a growing trade deficit.
- While the administration has done an incredible job diversifying its revenue sources to reduce reliance on oil exports, the drastic fall in oil prices has had a great impact on the trade deficit.
- Real estate values have increased between 5%-10% annually in many coastal areas over the past decade. Rather than cutting spending in public works (much of which is devoted to new hydroelectric plants to help mitigate the oil risk in the future), the government is looking to the two proposed tax increases to weather the current trade deficit. It should be noted that we will not know the new tax rates until they are re-introduced to the National Assembly.
What we expect to see
If real estate sellers were truly worried about the proposed tax increases, it would follow that they would attempt to capitalize on this window of opportunity before the anticipated taxes takes effect and reduce their asking prices by an amount comparable to the difference in their anticipated tax liability.
This does not seem to be the case.
CuencaHighLife reported last month “It´s A Buyer´s Market… But Sellers Don´t Know It Yet.” This statement was affirmed when I spoke to Todd Hebert, partner at the Ecuafriendly Real Estate Agency in Olón.
“We´re seeing continued interest and inquires, but fewer sales coming in. The sellers don´t seem to be feeling any sense of urgency to drop their prices.”
He went on to note that low season always feels this way, and that concern about an El Niño may be contributing to the slowdown in sales. (The last major El Niño, in 1997, caused heavy flooding and beach erosion.)
When asked if development has slowed down in the area, he winked.
“Not really. What we are seeing, which is great, is more diversity in the builders coming into this area. Over the last couple of years, we have a good mix of builder/developers coming in from Cuenca, Guayaquil and Manta, along with the North American developers. The resulting blend has improved quality standards, with both sides learning from the other on how to do—and in some cases how not to do—certain things.”
We asked Francisco del Castillo, General Manager of the Jama Campay beachfront development how their investment projections were looking for this coming year versus the last.
“Actually they´re way up” he told me. “We´re seeing good local demand for homes that are truly turn-key ready, so we´re going ahead with the construction. We have units that will be finished up in November of this year and more for next year, with great financing terms.”
Regarding the proposed tax increases, Francisco, is not overly concerned, and said,
“We have to pay what we have to pay. Sophisticated Ecuadorian buyers know that they can manage some of this risk by purchasing land in a trust in their children´s name. This and other alternatives are something that any attorney can set up for a buyer and is a great way to protect assets from generation to generation.”
Francisco is confident that this anti-cyclical strategy approach will put Jama Campay, a stunning development about an hour north of Bahia, in a great position as vacationers head for the coast in a few months and find that a shortage of beach homes in the surrounding area.
The Dollar Effect
Raquel Candra of Salinas´s largest real estate agency, Island Estates International, agreed that there has been a slowdown in sales on the Santa Elena peninsula, but not from the proposed tax legislation.
“A lot of our business is to Canadians and amongst that group we´ve really been hit by the weak Canadian dollar. There are a lot of regulars who come down every winter that aren´t going to make it this year.”
“Still, we´re close to 90% booked (for rentals) from December to March. And once people start coming down here, once they experience the weather, the community, some of them are going to buy.”
When I asked her generally about the state of the market and whether or not it had reached its peak, she responded:
“It´s not what it was two or three years ago where it seemed like everyone was jumping in, but every now and then you get a property that’s actually priced to sell and it sells in a week. So there are still buyers out there.”
“The market´s peak is still way out in front of us,” she added. “There´s still huge growth potential in this area.
Tune in next time when we will take the pulse of the market in the Ecuadorian Sierra to find out what real estate professionals are saying there.
Benjamin Berger is president of Ecuador´s leading bilingual real estate portal, MLS-Ecuador, with over 1700 properties focused in Ecuador´s most attractive expat destinations. He has lived in Ecuador for over three years with his wife Bibiana Robles. They currently live in Cuenca.