Smiling for Argentina, Part II The Rude Awakening
Wall Street, New York
Thursday, October - The state of real estate in the “Paris of South America,”
- An Argentinean style crisis for true value seekers,
- A pizza boy hits the jackpot with a simple
investing secret and plenty more…
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Joel Bowman, in need of a new motherboard and typing from
an internet cafe, reports....
As promised in part one of “Smiling from Argentina,” Chris Mayer
joins the commentary today with a background discussion on the state
of the economy down in the emerging South American giant. So, while
we seek technical assistance for our fizzled laptop, please read on and
send any comments to your café-squatting editor at:
aussiejoel@the-rude-awakening.com And remember to check in tomorrow for the third part of the series. Cheers, jOEL
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Smiling for Argentina, Part II
By Chris Mayer Buenos Aires, Argentina. Travelers 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 U.S. 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 U.S.
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. More on that, too, in this letter. 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. Bank accounts were frozen. The peso lost 75% of its value. The government
defaulted on its debt. The economy fell apart. Unemployment hit 25%. Violent
protests rocked streets. And the stock market collapsed. 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 s the Tequila Crisis
(Mexico, 1994), the Asian Crisis in 1997, Russia in 1998, 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, as I wrote in last
month’s letter, 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. When the storm clouds clear away, the sun will shine
again. And those valuable assets you always wanted to own are now at the right
price. 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. Travelers 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-flavored 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. And if visit one of the many local
parillas (or grills) and you will find out why the Argentines consume more beef per
capita 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.” 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 U.S. 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 neighborhood, 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 U.S. 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 mortgages and is only a few
years from a major financial crisis. Fortunately, there is a relatively easy way to invest in Argentinean real estate.
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.
Check in tomorrow… [Joel’s Note: As our fearless leader, Bill Bonner, mentioned in yesterday’s
Rude installment, Argentina is not just ripe with grazing land and commercial
real estate but also boasts an abundant water supply. As we push on into the
new century many investors predict that water will be the hottest commodity.
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