Don't cry for me, Argentina,
The truth is I never left you
- Evita
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Buenos Aires, Argentina. Travellers sometimes call it 'the Paris of South America,' for good reasons, which I'll get to momentarily. More importantly for investors, though, it is also a place where prime waterfront real estate goes for prices only one-tenth of what comparable properties go for in Europe and the United States. There are reasons for that, too. But I'll make the case that they are not good reasons.
Argentine real estate may never trade on par with Europe or the United States. But if it is two-tenths as valuable, prices will double. Sounds like a fair bet to me. Especially since Argentina's real estate is practically bubble-proof at this stage.
Investors who think about Argentina in their reflective moments perhaps recall the awful meltdown in 2001. If they had any money in Argentina back then, they probably recall the episode with a shiver and reach for the brandy.
The litany of woes was great. Bank accounts are frozen. The peso loses 75% of its value. The government defaults on its debt. The economy falls apart. Unemployment hits 25%. Violent protests in the streets. The stock market collapses. From 1998-2002, the Argentine economy actually shrank by about a fifth.
When the Argentines have a crisis, they don't mess around.
Emerging markets generally have a habit of melting down every once in a while. Just look at the roll call over the last dozen years or so: the Tequila Crisis (Mexico, 1994), the Asian Crisis in 1997, Turkey in 2000, Argentina in 2001 and Venezuela in 2002. And I'm probably forgetting somebody.
All in all, it was a tough stretch for emerging markets. Investors in these countries at these times stood about as much a chance as a toupee in gale-force winds. Consider that from 1994-2002, the MSCI emerging market index lost 60% of its value.
However, these markets also snap back famously. Last year, the MSCI index (a common benchmark for emerging markets) climbed back to its 1994 peak - and made back all those losses. Then, in May-June of this year, emerging markets as a group lost a quarter of their value in stunning fashion. It was a little reminder that stability and emerging markets are an unnatural pairing, like a courtship between a snake and an eagle.
Still, there are times to buy. With that thought in mind, let's take a look at Argentina four years after the crisis.
Argentina has always had a romantic quality to it. The eyes of travelers everywhere widen at the thought of those lush grasslands of the Pampas, the rolling plateaus of Patagonia, the rugged Andes Mountains in the west and Tierra del Fuego ('Land of Fire') at the southernmost tip.
Travellers also probably fondly recall Argentina's biggest city, Buenos Aires. With more than 11 million people, about one-third of all Argentines live in and around the city. Buenos Aires has its charms. One of them is being easy on the wallet, a fact that has attracted a growing expat community.
The European-flavoured architecture reflects the influences of its early settlers. There are wide avenues and plazas. You can wander down cobbled streets finding old-time cafes and world-class restaurants. Enjoy empanadas - small meat-filled dough pockets - which are a staple in the city. Be sure to visit one of the many local parillas (or grills) and you will find out why the Argentines consume more beef per head than any other country. Something about those free-ranging cattle on the fertile plains of the Pampas produces some of the world's tastiest beef. A good meal with wine and an unforgettable steak can cost less than a pair of movie tickets.
Argentina is also the eighth largest country in the world and the second largest in South America. Yet its economy ranks only 38th in size globally - behind countries such as Iran, Portugal and Greece. Somehow, it feels like it should be bigger.
It is also one of the world's fastest growing economies, and Buenos Aires is among the world's fastest growing cities. 'Perhaps the most tangible sign of Argentina's economic recovery,' The Wall Street Journal reports, 'is its booming real estate market, which has transformed Buenos Aires, the capital, into a construction site.' Though gauging economic growth is a tricky business, estimates peg Argentina's at around 8% annually.
The stock market has come back, and real estate has been a top performer. Those who survived the debacle in 2001-02 looked to real estate as a safe haven against further inflation. Then, too, foreign investors snapped up cheap real estate as easily as they downed those magnificent steaks.
According to an Argentine real estate trade group, Camara Inmobiliaria Argentina, housing prices have increased 50% since 2002. Even though real estate prices have soared, they still look surprisingly cheap.
Prices in prime real estate locations are only one-tenth of what they are in the United States and Europe. Puerto Madero is one such prime location. Restaurants and lofts converted from old warehouses now line the old port. It is a popular barrio, or neighbourhood, in Buenos Aires. There is also, as the Journal notes, '420 acres of undeveloped land within walking distance of the financial district, and an open view to Rio de la Plata, the wide estuary that separates Argentina and Uruguay.'
This area is among the swankiest and most expensive in town. Prices go for $280 per square foot. For similarly located property in the United States or Europe, you could pay 10 times that. It's not surprising, then, that many buyers of cheap Argentine real estate are foreigners.
There are inconveniences. For one thing, Argentina's mortgage market is practically nonexistent. Real estate transactions are mainly in cash. That means meeting someplace secure and counting out piles of notes before pushing them across a table to the seller. Then, the other side recounts the money.
Therefore, easy credit and excessive leverage do not make up the foundations of the Argentine real estate boom. In other words, it's almost bubble-proof - though that could change at some point. The government is taking steps to encourage mortgages. But for now, it would seem Argentine real estate has a long way to go.
Argentina, because it is Argentina, may never command prices on par with Europe or the States, but if the discount goes from one-tenth the price to two-tenths the price - real estate prices will have doubled. That's a small step for a market that is only beginning to use housing loans and is only a few years from a major financial crisis.
Fortunately, there is an easy way to get Argentine real estate exposure in your portfolio. You only have to buy one stock and you get the full array of Argentine real estate - quality office properties in Buenos Aires, shopping centers, residential developments, luxury hotels and undeveloped land.
By Chris Mayer for The Daily Reckoning. You can read more from Chris and many others at www.dailyreckoning.co.uk
Editor's Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is a fomer editor of the Fleet Street Letter.
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