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Tourism and Real Estate projects in Argentina

We have just briefly described the increase of tourism and real estate projects in Argentina. We must now mention that much of the increase in the real estate market was sourced by the big increase in tourism.

TOURISM

Tourism is known to be the main industry in the world. According to the World Tourism Organization (“WTO”), tourism has grown worldwide 6,8% per annum from 1950 to 2000. This growth has been higher than the growth of the world population itself and of the world economy as a whole.
From 2001 to 2003 tourism somehow declined, especially because of the acts of terrorism in New York and Madrid, and the war in Irak. However, according to the WTO, in 2004 tourism increased 10% in relation to the previous year (i.e., the highest increase in the last 20 years), and is expected to continue growing in the coming years.
Argentina was not foreign to this process. According to the Argentine Secretary of Tourism (“AST”), while between 1990 and 2001 the increase in this area worldwide was of 72.7%, in Argentina it rose 125.1%. This is certainly remarkable since in the 1990 decade the Argentine Peso was pegged one to one to the U.S. Dollar, which made Argentina a rather expensive country to visit for foreigners.
With the devaluation of the Argentine Peso in 2002, tourism boomed in Argentina, with a growth of 31.6% in 2003, 28.2% in 2004 and 18.4% in 2005. In the first quarter of 2006, tourism grew a further 22% vis-à-vis the first quarter of 2005.
This notwithstanding, Argentina is yet far from being a key worldwide player in the tourism area. For example, in 2004 the U.S. received 46 million visitors, Mexico received 20.6 million visitors and Brazil received 4.7 million visitors, while Argentina received “only” 3.3 million.
However, because of its climate, landscapes, culture, natural resources and distance from global conflict areas, Argentina is indeed likely to greatly increase its share in this global industry. Everything still remains to be done. And in this connection, the AST is promoting and developing the tourism industry which is expected to produce in the near future, a minimum of 10% of the country’s GDP (it is currently slightly lower than 8% of such GDP).

REAL ESTATE

The 2001-2002 crisis, which as previously mentioned included a brutal devaluation of the Argentine Peso, severely affected the Argentine economy as a whole. Some industries, however, flourished in this period: tourism (as mentioned above), agriculture, manufacturing industries and exportation related industries boomed. With the crash of the financial markets and the lack of predictability in other industries and markets, investors found real estate to be a good means to protect the value of their earnings in other investments or of their savings generally. Real estate investments likewise proved to be a solution for many investors looking for a safe investment and a means to protect hard-earned savings.
We cannot avoid mentioning that with interest rates low worldwide, investment in real estate increased substantially in many areas, especially in big cities in the northern hemisphere. Investment in this area in Argentina then, just followed the trend shown in other major jurisdictions.
In many areas in Argentina, prices of real estate have in general terms already recovered their U.S. Dollar value existing prior to the 2002 devaluation, and in many cases (especially in urban areas) have even reached the prices existing in 1999, when the Argentine economy began to slide downwards until the collapse in January 2002.
One cannot yet say however, that there is a real estate bubble in Argentina as there in fact is in other parts of the world. In this sense, the key sign to know whether there is a bubble or not in a real estate market is the degree of leverage of the investments, which as mentioned before, is still lacking in Argentina. With the rates low worldwide and as mentioned, with few other safe investments to pursue, investors have been flooding the real estate market which has indeed boomed over the last few years. These investments however, have been financed through equity of the investors and not through “external financing” as in other markets (e.g., in the U.S. -especially in the city of Miami- and Spain -especially in the cities of Madrid and Barcelona-) where the existing bubble is beginning to frighten analysts.
From a legal perspective it is worth mentioning that a tool that has aided the development of the real estate market (1) in the last number of years is the “fideicomiso”. The fideicomiso is a legal means that, though having many differences with the American trust, is somewhat comparable to it. This tool in fact helped direct the big wave of available resources to the real estate market . The fideicomiso is not an investment in itself but a means to pursue and realize safe investments in many areas, including real estate.
This boom in the Argentine real estate market, however, has not been fuelled just by Argentine investors: real estate globalization meant that much of the investment directed to the Argentine market came from outside of Argentina. In this sense, 30% of the investment in certain projects in Puerto Madero, one of the key booming areas in Buenos Aires (and the most expensive lands in the country), comes from foreign investors, especially from Europe (English and Spanish investors lead this list), the U.S. and Mexico (2). The reason for this is that although the Argentine economy has suffered cyclical crisis in the last decades, quality properties have not lost their value and have usually proved to be safe investments. This, added to the fact that real estate prices in Argentina are still, in comparable terms, remarkably lower than in other parts of the world, makes the Argentine market very tempting to pursue.

IMPACT OF TOURISM IN REAL ESTATE PROJECTS

We have just briefly described the increase of tourism and real estate projects in Argentina. We must now mention that much of the increase in the real estate market was sourced by the big increase in tourism. The golden rule has thus been fulfilled: increase of tourism necessarily brings with it real estate developments, and further depends on these last mentioned projects (i.e., it is a two way street).
In this connection, existing and new hotel projects showed an investment of around US$ 37 million in 2003, US$ 110 million in 2004, US$ 250 million in 2005, and an expected investment of near US$ 500 million in 2006. In other terms, 19 new hotels were opened in 2005, while there are currently more than 200 new hotels being constructed (56% of which belong to international groups).
These figures however, are just the top of the iceberg in what relates to tourist related real estate projects. Many real estate developments (other than hotels) are being pursued in tourist areas, especially in Patagonia (mainly in the cities of Bariloche, San Martín de los Andes, El Calafate and Ushuaia -the southernmost city in the world-) and in the Provinces of Salta, Córdoba and Mendoza (in this last Province, mainly related to the winemaking activity).
From a legal perspective and in a nutshell, for these tourism related real estate developments (which are often located in border and/or sea areas) lawyers must always be prepared to assist investors in relation to local regulations which regard to construction in border areas, use of rivers (e.g., for navigation and fishing purposes), special use of mountains (e.g., for heli-ski), zoning in general (e.g., size and distribution of parcels) and permits to develop specific construction projects. A strict legal analysis is likewise highly recommended before pursuing these types of projects, since the basics of real estate projects what give value to the land are not only its location but also the use that can be assigned to such land.
To conclude, tourism is likely to continue to increase not only worldwide but also in Argentina, which will no doubt generate further real estate projects and investments. As lawyers, we need to be fully prepared for this.

Pedro Nicholson
Partner
Estudio Beccar Varela
pnicholson@beccarv.com.ar

© Real Estate & Economy Report, October 2006

(1) We shall not describe herein the characteristics of the fideicomiso because it exceeds the purpose of this paper. We thus consider it sufficient just to mention that it basically functions in a similar way to the American trust and that it is a tool that has helped in the development of the real estate arena in Argentina.
(2) It is worth mentioning that this percentage was just 3% before the 2002 devaluation. For descriptive purposes we can add that one third of foreigners investing in real estate in Argentina acquire properties to live in Argentina, while the remaining two thirds acquire properties solely for investment purposes.


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