In every neighborhood in Buenos Aires, Argentina, dozens of buildings that are under construction stand out against the horizon. This phenomenon began shortly after the economic crisis started four years ago. According to a report by UADE, the Argentine management school, Argentina has enjoyed 14 consecutive quarters of continuous and meaningful growth in construction activity. During the first of 2006, growth reached 21.2%.

“The macroeconomic crisis of 2002 released pent-up demand for construction, after the fact,” says Ricardo Theller, a researcher and professor at UADE’s Center for Advanced Studies (CEAV). Theller adds, “Some of the factors that led to the current resurgence are low interest rates, [high] liquidity, exchange-rate stability from 2004 to 2006, the turnaround in public-sector investment and the strong pace of macroeconomic growth.”

When the government of Argentina defaulted on its debt payments in the summer of 2002, it not only aggravated the social and economic situation but also broke the banking system and, with it, the savings of ordinary citizens. According to Luis Martínez de Virgilio, manager of CB Richard Ellis, the global real-estate service company, “When people were left without a reliable alternative to depositing their money in banks, they turned their investment toward the construction sector.” Martínez outlines the other factors that contributed to rapid growth: “Relatively low prices for real estate, and the balance between the construction costs and sales prices, which yields positive returns for real estate developers. Add all that up and there is a real opportunity in the construction sector.” The price of a square meter in Argentina currently varies between 750 euros and 2,300 euros.

There seems to be no end to this phenomenon, known as a real estate boom or bubble. Some specialists believe that it is here to stay. “It is not a bubble because we are dealing with growth that is real. The capital they are using for construction is real, and there is practically no bank financing [of construction projects],” says Gustavo Kancyper. He is an architect who manages Construcciones Seweco, a company that constructs buildings in Palermo Hollywood, one of the neighborhoods popular with investors.

Virgilio agrees. “I don’t think that this is a bubble because it does not have a financial effect. What you’re talking about here are private investors who know how to anticipate good opportunities in the market, demand [trends], and so forth. We expect growth to continue. Everything points in that direction, although we know that some phenomena are cyclical in nature.”  

For his part, Theller says that we have reached a stage in the typical real estate cycle where “demand exerts upward pressure on prices and this pressure stimulates growth in supply, in turn.” Nevertheless, Theller recognizes some fundamental characteristics of the current growth. These include “the improved quality of the average construction project (which makes it more expensive); the relatively high growth in the population segment that is old enough to get married and become independent (which exerts greater pressure on demand); the fact that the economy has moved out of a deep recession that was largely unprecedented; and a positive wealth effect that has several different sources.” However, Theller warns, “After those various stimuli have been exhausted, both prices and volume will tend to align with the ‘fundamentals’ of the economy, and that will mean that growth rates decelerate.”

In August 2006, the Buenos Aires bureau of records recorded 5,583 deeds involved in real estate purchases worth a total of about 240 million euros. That figure was 1.9% higher than for the same month in 2005.

Buenos Aires, known as the Queen of the Plata [River] and the Paris of South America, is not the only place that is attracting attention from investors. The interior of the country is also experiencing feverish construction, especially in the larger provincial cities that have enjoyed growth in the industrial sector, and in agriculture and tourism. The UADE report shows 19.8% growth in the volume of square meters now under construction in the 42 largest cities of the country.

Winners and Losers

It is not only Argentine savers and wealthy Argentines who are involved. When it comes to investing in property, foreign buyers are also playing a major role, including other Latin Americans, Americans, and Europeans.

In the opinion of Gustavo Kancyper, “The northern hemisphere [Europe and North America] is very closed and quite saturated in many business sectors. Buenos Aires remains one of the most attractive cities in the world, and it has a future.” For his part, Theller believes that “the international situation offers high liquidity, and interest rates in Argentina are relatively low. The country has been stabilized, and forecasts call for growth rates of more than 6% a year.” Virgilio adds that while the price of a square meter in Argentina “is on a par with Latin America, it continues to be cheap compared with Europe and the United States.”

One of the areas of greatest interest for foreign investors is Puerto Madero, a recently rebuilt area neighborhood that is near the city’s financial center. Its impressive office buildings, equipped with swimming pools, gymnasiums and even restaurants, sell for more than 2,000 euros per square meter, making them popular among business executives, diplomats and others who can afford them.

Nevertheless, a significant segment of Argentina’s working population is still unable to acquire property. The real estate boom has left behind these renters, who find it hard to get loans. As a result, the government has launched a plan for low interest rates and loans of more than 20 years. To be eligible, renters must show that they are able to pay.

Theller says that “although not everyone can qualify for this program, an additional segment of medium-income people will be able to profit from acquiring their own housing; it depends on their previous level of savings and income.” Moreover, “the plan promotes relief of the value-added tax when the funds are used for constructing leased and rental properties.” 

At the moment, however, the good intentions of the government of Nestor Kirchner have yet to bear fruit. “The new plan is a good thing but it is not enough,” says Virgilio, who is worried. “People had expected that they could go talk with the banks, and they are disillusioned because the price of housing continues to be very high compared with their incomes. It is very hard to offer interest rates that are below the inflation rate, even for the official banks.” Rates for new loans are about 9.5%, while the annual inflation rate exceeds 10%.

For the time being, the [real estate] market continues to have positive expectations. The latest data collected by INDEC (the National Institute of Statistics and Census) in July showed that private real-estate developers were optimistic that construction activity would grow by more than 19% during the remainder of 2006. For their part, companies involved in public works were estimating almost 15% growth.

According to Ecolatina, a consulting firm, next year will bring “a renewal of growth in new niches for real-estate investment and a growing contribution from public sector projects.” Overall, Ecolatina forecasts growth of 15% for 2007. The only thing worrying experts is incipient growth in construction costs. The UADE report reveals that during the first half of 2006 “construction costs registered an overall increase of 18.6% compared with the first half of last year. The rise in general construction costs included 12.7% growth in the cost of construction materials, which represent 46% of the overall index. Labor costs, which constitute 45% of overall construction costs, rose by 28.8% during that period.