By Liam Higgins
Editor’s note: This is the first of a two-part series. Part two, on Monday, focuses on emerging investment opportunities.
It has been a brutal two years for Ecuador’s real estate industry. Ecuador’s national real estate association reports that total sales dropped 60% between April of 2015 and April 2016. This follows a 20% drop from 2014 to 2015.
“We’re really hurting,” says Jaime Rumbea, spokesman for the Association of Ecuador Real Estate. “It’s a huge drop, and the slow-down is affecting dozens of other industries,” he said.
Among those taking a hard hit are developers and building contractors, who report that they are working on less than a third of the projects they were in 2014. Building associations in the country’s major cities say that industry lay-offs amount to more than half the workforce.
In Quito and Cuenca, few projects, either commercial or resident, have broken ground in 2015 and 2016. “Developers are waiting to see what happens, to see if demands increase,” says Quito builder Xavier Maxwell, who built condo and small housing projects in the suburbs east of Quito. “It’s almost impossible to plan right now.”
With sales down as much as 85% in some markets, real estate agencies are reducing staff and, in some cases, closing their doors.
Following the April earthquake, sales on the coast have come to a virtual standstill although reconstruction promises a prolonged boom for building contractors.
The real estate recession follows a boom from 2007 to 2014 that saw annual double-digit appreciation and new construction that set records every year. “It was a golden age for real estate,” says real Guayaquil investment analyst Gustavo Calderon. “In Quito, Cuenca and the coast, you had sellers doubling their money in four or five years on condo and raw law resales. Sometimes they made more than that.”
“The boom was part of a natural business cycle,” says Calderon. “Oil prices were high, the dollar was appreciating, you had a new government investing unprecedented amounts of money in highways, airport, schools, and hospitals. There were big construction projects going on everywhere. Very quickly, Ecuador became a better place to live with all the new infrastructure, lower crime rates, rising tourism. Tens of thousands of Ecuadorians living overseas came home, people in politically unstable countries like as Venezuela and Colombia wanted a place to invest,” he says.
So what happened?
“Again, it’s the cycle, except now it’s the down side of it,” says Calderon. “The oil money began to disappear. The strong dollar began to hurt businesses that depended on exports. The government increased regulation on businesses and threatened to raise taxes on inheritances and capital gains. The number of returning Ecuadorians began to decline and the investors from Venezuela no longer had any money. There are many factors but taken together, they are just part of the other side of the cycle.”
Calderon adds: “You hear a lot of people blaming government policies, but that’s only a part of the problem.”
Calderon argues that what happened in Ecuador is not a U.S.-style housing bubble. Since most properties do not carry large mortgages, there has not been a steep decline in prices. “On average, prices on sales have dropped only about 5% since the peak of the boom,” he says. “There are a few fire sales but, for the most part, sellers seem willing to wait,” he says.
This might change, he says, as a historically high number of properties are on the market. In Cuenca, he says, there are almost twice as many properties on the market as there were in early 2014 but the number of sales have fallen 70%. “If you do the math, you get an idea of how long it takes for a sale,” he says.
When will market start to turn around?
It could start to change in two years, Calderon says, maybe sooner. “There will be a new government with new polices. We are beginning to see rising oil prices and a weakening dollar. It will take time, but it will happen.”