Transcript The Program in Real Estate and Urban Development at the

Real Estate in Cuba in an Era of
“Updating the Economic Model”
Kerry D. Vandell
Dean’s Professor of Finance and Director
Center for Real Estate
Cuba: A country in transition
• Factors influencing the 1959 revolution
• The post-revolution years: Geo-politics and Soviet
aid 1962-1989
• The “Special Period” after the Soviet era 1989-93
• “Making do” 1993-1999
• Venezuela and Chavez step into the vacuum 19992013
• The “Readjustment of the Socialist State” 2007 present
The Cuban government and
economy: a snapshot
• One of the “purest” of Marxist states remaining
• Effectively, the Communist Party has a virtual monopoly on
political and economic power
• Virtually all control of economy in the hands of the
government
• Centralized State-directed allocation of all resources related to
social policy objectives:
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Free universal education
Free universal health care
Adequate housing for all
“Classless” society by social and economic status
The accomplishments: education
and health
The problem(s):
• Globalization and a One-World Economy: No place
to hide
• Economy not sustainable without continuing
subsidies, remittances, offshore investment
• Inadequate incentives for productive activity
• Low birth rate
• Necessary “client state” status
• Starved for capital investment
• Potential social unrest
Some statistics: a social/economic profile
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Population: 11.1 MM (About the
same as Ohio)
Size: 42,426 sq mi. (About the same
as Tennessee)
Population growth rate: -0.1%
Ethnic groups: 65% white, 25%
mixed, 10% black
Expenditures: $47B
Revenues: $44 B
External debt: $22 B+$21B owed to
Russia, $1B owed to Romania,
Hungary
Exports: $6B
Imports: $14B
Inflation rate: 4.7%
Labor force, state sector 78%
Unemployment rate: 3.2%
Population below poverty line: 1.5%
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Currency: 24 Cuban Pesos (CUP) = 1
Cuban Convertible Pesos (CUC) = 1
US$ (Official Exchange Rate
1CUC=1CUP)
GDP: $114.1 billion (2010 est.) (ppp),
$57.49 billion (2010 est.) (oer) About
the same as Arkansas (ppp) or Maine
(oer)
GDP per capita: $9,900 (2010 est.)
(ppp), $4200 (oer) (About the same as
Tunisia (ppp), 111th in world)
GDP by sector: Ag 4%, Ind 22%,
Serv 74%
Labor Force: Ag 20%, Ind 19%, Serv
61%
Average monthly wage: $US 20
Monthly pension: $US 10.50
Some statistics: Trends in GDP per capita
PPP
OER
Some statistics: Low birth rates
Some statistics: Trends in real
monthly wage
Some statistics: The decline of
manufacturing and agriculture
Some
statistics:
balance
of trade
Monetary policy: A dual-currency
economy
• Most employment paid in CUPs: Factory workers at 400
CUP/mo. and doctors at 700 CUP/mo.
• Nonconvertible. Government shops (bodegas) provide
staples at low prices but little else
• Those in tourism sector and with remittances have access
to CUPs and US$. Restricted to Dollar Stores and private
shops/restaurants (paladores) with higher-end goods at
marked-up prices.
• Doormen in hotels make more than MDs, requiring many
with doctorates to work second jobs as taxi drivers, etc.
How does real estate fit into the picture?
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Agriculture
Transportation and infrastructure
Tourism
Historic restoration
Housing
Agriculture: A flawed policy
• Once dominated by sugar, tobacco, citrus
• Government quotas misjudged world marketplace
• Many abandoned sugar mills
– Compounded by monetary policy problems: The sugar industry receives
earnings for its exports converted at par, but must purchase many inputs in
dollars.
• Much land lying fallow: perverse pricing
– Farmers may own (lease) small plots, but government quota at low price takes
precedence, then allows surplus on open market
• Cuba now imports 80% of food
• Once cattle (and beef) plentiful, but now scarce. Higher penalty for rustling
than murder
• Policy intends to make Havana self-sufficient with organic farming in small
plots near the city. Restrictions reduced. Little impact thus far
Sugar cane production: 2001-2007
The Portugalete Sugar Mill
Havana organic farming
A bodega vs. an open market
Transportation and infrastructure: Joint
ventures lead the way
• Roadways little-used. The Machado regime built the La Carretera
Central (Central Highway) in the 1930’s, later became the Sovietera Autopista Nacional (A1) from Havana to Santiago, intended
originally for defense
• Auto purchase using loans forbidden in 1959, resulting in few
purchases until the recent reforms. Many mid-century American
autos remain. Have significant tourism significance
• A “ghost” transport system in need of demand
• Railroads have fallen into disrepair. Being gradually replaced by
Chinese diesels. Little passenger service. Little freight service
• Air travel: International Terminals, in Havana (José Martí
International Airport) and Santiago (Antonio Maceo Airport).
Increasing traffic from tourism and after new rules for resident
travel.
Back to the past: A classic Havana
street scene
The La Carretera Central (Central Highway),
now the Autopista Nacional (A1)
Common modes of transport in Cuba
Infrastructure: The Port of Mariel
• Intended to attract marine freighter traffic
coming through the widened Panama Canal
• A joint venture. Built by Grupo Odebrecht of
Brazil, to be managed by PSA International of
Singapore
• A possible model for infrastructure FDI in
Cuba
The evolving port of Mariel
Tourism: A driver of economic growth
• All hotels, tourist facilities seized after the revolution
• Many (especially older) still government owned (e.g.,
Hotel Nacional in Havana, duPont mansion in
Varadero)
• Newer ones are joint ventures with European,
Canadian, Mexican partners (e.g., Hotel Meliá
Varadero)
• Government today typically farms out marketing,
management, development, debt position. But not
equity
Joint ventures in tourism
• In 1987, decree to permit joint ventures in the tourism sector
with foreign investors.
• Tourism institute became a government ministry
• New state corporation, Cubanacan, created to develop the
industry and to enter into partnerships (one-third of tourism
revenue)
• First tourism joint venture created in 1989 with the Hotel Sol
• Now three other conglomerates:
– Gran Caribe (one-fourth of the island’s hotel capacity)
– Gaviota (owned by the armed forces)
– Habaguanex: operated by the Office of the Historian in Old Havana,
profits used for that area’s restoration (see later)
Hotel Nacional de Cuba, Havana
The duPont Mansion Hotel (Mansion
Xanadu), Varadero
Hotel Meliá Varadero: A joint venture
Varadero Beach
Caya Largo: an emerging
destination
Ecotourism is also on the rise
Historic redevelopment: La Habana
Vieja (Old Havana)
• Habaguanex created 1994 as government-owned conglomerate
to restore Habana Vieja (and later expand to other historic
districts)
• Free trade zone (1995) allowed Habaguanex to by pass
customs and Ministry of Foreign Investment regulations that
govern joint ventures
• The only Cuban entity with complete control of resources and
expenditures/investments, including formation of joint
ventures
• Office of the City Historian oversees Habaguanex: Eusevio
Leal one of most powerful individuals in Cuba
Eusevio Leal: Historian of the City
of Havana
La Habana Vieja “before”
La Habana Vieja “after” (in process)
Housing: A market in flux
• After the revolution, all Cuban families “owned” their
units, but could not sell them; must barter or trade for
equal value
• New housing supply entirely dependent upon state
allocations of capital, dictated by centralized
planning, not “the market”. No private market. The
result: low allocation to housing
• A period of Soviet-styled worker housing until the
fall of the Soviet Union. Housing shortage always
present, but became dire in early 1990’s
• One result was much doubling-up of households:
“multi-generational” housing
The Cuban housing market (cont’d)
• Reforms came in November 2011, permitting buying and
selling of property. “Owners” owned the improvements
only. Land was held by government, but ground rent was
zero
• Most desired property concentrated in most significant
stock/locations (e.g., large architecturally significant
homes readily accessible to the central core in the west
side of Havana in the Vedado, Miramar, Central Havana,
Víbora and Cerro neighborhoods)
• This stock, however, was sometimes occupied by many
families
The Cuban housing market (cont’d)
• Market prices are in great flux, complicated by
political risk
• Eligibilty to buy is constrained
– Must be resident citizen, or foreign permanent residence
– Buyers will be required to swear under oath that they don't
own other property. Prohibition of the ownership of more
than one residential home and one vacation home
– Foreigners who are permanent residents can buy in the
same locations as citizens, though they usually are asked to
pay a higher price
The Cuban housing market (cont’d)
– Foreigners who do not live on the island are limited to
specific condominiums and must use registered companies
for their purchases, though such purchases are not subject
to the standard 4 percent tax on residential sales
– Resort-style vacation homes for foreigners expected since
the government legalized leasehold land ownership by
foreign companies
• Problems:
– Brokers until recently not permitted legally
– Central market for exchange evolving
The Cuban housing market (cont’d)
– No mortgage market. Banco Internacional de Comercio,
S.A., wholly owned subsidiary of the Central Bank of
Cuba, can now make consumer loans for appliances, and
even autos, but not yet mortgages for residences
– The result? Known places to gather for exchange. Informal
arrangements for satisfaction outside of the Cuban legal
system, a “gray market,” price suppression
• Nonetheless, the market is evolving:
– Brokers now legal
– Construction companies can register as private entities
– Property listings online
How can Americans take advantage of this opportunity?
There are 3 Ways for Foreign investors to buy Real
Estate in Cuba:
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Marrying a Cuban, which allows the foreign citizen to become
permanent resident, thus being allowed by law to buy a home from
local Cuban owner
Buying directly from a current foreigner who owns a home, or an
apartment in Cuba. During the 1990’s decade and part of the next
one, Cuban law permitted for short time the construction of some
condo buildings where foreigners could buy an apartment. Those who
did, and bought at fair rates during those times, are now able to sell to
other foreigners who are not residents in Cuba
By law, the market is open only to Cubans on the island or those
living temporarily abroad. But foreigners, including Cubans living in
the United States or other countries, are buying properties in the
names of Cuban spouses, family members or friends. Most of
them are buying Ocean front properties or houses in Havana
Downtown
Housing has low priority in the
Cuban budget
This is evidenced statistically
Most housing is not this bad
Soviet-era housing projects
Art deco: West Havana
The high end
Permuto: The informal residential real
estate market
So what can we conclude?
• Cuba is in sore need of capital and FDI
• Will gravitate to those opportunities most promising,
so long as regime is not threatened
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Move toward elimination of dual currency
Restructure agricultural pricing incentives
Infrastructure and transportation will respond to market reforms
Tourism a major opportunity. Joint ventures, so long as properly
structured, may be appropriate
– Must provide incentives and eliminate barriers to private firms. Use
taxation to reduce windfall gains
– Must develop market for consumer credit, including mortgages
– Possible “Grand Bargain” : Allow Cuban expatriates to invest and buy
homes and property (including their own) in exchange for forgiveness
for any possible claims against them. Amnesty and normalization