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Central America Prices Falling
For First Time Since Boom

By Claudia Gonella
Co-founder, Reveal Real Estate

The Central American boom in real estate and tourism began around 2001, helped by improved airline links, better communications and international buyers flush with equity and easy credit. With an eye on the baby boomer wave, Central American countries rolled out the welcome mat with benefit laden retirement and residency programs.

But now, in 2009, for the first time since the boom, the developers of master planned communities have dropped their prices. The downward trend is most pronounced in the more speculative purchasing destinations, but the good news is that the falls are lower across the board than those experienced in the U.S.

The numbers come from our analysis of listing prices across master-planned communities in four Central American countries--Panama, Costa Rica, Nicaragua and Belize. The data reflects the high-end layer of the housing market, commonly referred to as ‘international real estate’, and targeted primarily to North American and European buyers. The results do not track re-sales from end-user to end-user (which, in the current market, we can assume are being offered for less than developer-direct prices).

The disappearing speculators

While the median price for international real estate in Costa Rica, Nicaragua, Panama and Belize fell year-on-year between 1 to 9 percent, depending on the property type, the data becomes more interesting when you add geographical granularity and analyze by location.

Overrall it’s the less expensive areas that are being hit the hardest. Take Tola Rivieria & Popo in Nicaragua which tops our list of year-on-year price falls at 10 percent. The median price per square foot for a condo is $167 compared with $288 for Jaco, the most expensive destination where prices have fallen only 3.41 percent since 2008.

Tola is an emergent destination still at an early stage in development. It has exactly the kind of features (beauty, surf, tourism growth) that attracted speculative, pioneering investors keen to realize capital growth in an ‘under the radar’ destination before the water cooler investors took notice. But now, these speculative investors are a dying breed. 

Without the easy access to extra funds that characterized the period before the credit crunch, speculative investors are no longer able to support the ‘early in’ destinations. The ‘lifestyle’ investors now forming the market are more interested in amenities and product they can see and touch than the promise of large investment returns when an area eventually ‘takes off’.

We’re seeing the same trend played out in Belize. Placencia with a median price per square foot of $254 came in second with a year on year fall of 9.91 percent.  It was already cheaper than Ambergis Caye, Belize’s most established destination, but the price falls in Placencia were greater, none the less.

Still, a few upscale established neighborhoods in Costa Rica, such as Papagayo, Hermosa & Playa Coco and Tamarindo in Guanacaste, fell greater than the country average. But generally destinations in Costa Rica--the most mature destination for real estate in Central America, and the most expensive--experienced smaller price drops, than those in Nicaragua, a cheaper, less developed destination.

Central America: not immune

There is a definite downward trend in prices in Central America, indicating that the region is not immune to the global downturn.  However, by no means is the bottom falling out of the market and the falls are less than those experienced in the developed world. 

The main reason is no shadow inventory of foreclosures dragging down the housing market.  Levels of lender-mediated activity are low when compared to the US market.  Most of the buyers pay in cash and developers, not tied to interest payments, have the freedom to hold out for the right buyer.  The lower property taxes in Central America have also helped.

There have, of course, been some notable exceptions. Heavily leveraged large scale projects have suspended operations. Examples in Costa Rica include the St. Regis Project and the Rosewood at Costa Carmel. But regionally we’re not seeing the rampant foreclosures that have swept across the US.

Gun-shy buyers

Although official prices have not plummeted, the chatter among developers is that sales volumes are down with few buyers biting. In order to boost sales developers are going to great lengths: from guaranteed rental agreements, free in-country tours where all expenses are paid, lot/home packages where the home is built at cost, to attractive seller financing, special programs for defaulting buyers and even buy-back guarantees. As one real estate agent remarked, ”It’s a way sellers can drop their prices without really dropping their prices.”

Another feature of the market is that re-sales (sales from end-user to end-user) are in many cases priced below developer direct sales.  Where existing owners are really feeling the pinch, the price for re-sales can be as much as 30-40% lower than prices offered by the developer. 

Most developers are not particularly bullish about the market’s direction and are having to rethink their plans.  Many are turning their eye to a new breed of ‘lifestyle investors’ - people whose nest egg has thinned and are seeking to fulfill their retirement plans in cheaper destinations with a low cost of living.  To attract this market gone are the McMansions and trophy apartments and out have come simpler, smaller and more functional properties such as “cottages,” “bungalows,” “efficiency units” and “casitas.”

The upshot for investors:

• Get geographically granular when analyzing the market - after all, real estate is local.
• Expect further declines before luxury home prices hit bottom.
• Put in the effort to dig out re-sales.  They tend to be harder to track down and don’t always have the same marketing support as developer direct sales.
• Sellers will continue to offer hefty discounts.  If you negotiate hard enough, you may get a deal of a lifetime.

Claudia Gonella is co-founder of Reveal Real Estate, a site dedicated to improving the transparency of real estate in Central America by putting data in the hands of consumers. Prior to moving to Central America full time in 2003 she consulted, wrote and spoke about corporate social responsibility and sustainable development. She now regularly writes on the state of the real estate markets in Nicaragua, Belize, Costa Rica and Panama.

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