Real estate values in Medellin Colombia

by Ron McMahon

Medellin sunset

Medellin sunset

The leafy high-end area of El Poblado in particular is a great place to sip coffee or enjoy a nice meal next to one of the many streams that gurgle down the city's hillsides.

I enjoyed bright sunshine and temperatures in the low seventies. This is typical of the weather you can expect year-round. Much of my scouting was on foot. In this area almost everything is a pleasant stroll away. Neither the manageable altitude of 5,000 feet nor the afternoon sunshine gets in the way.

When the work was done I’d stop by the neighborhood Irish pub to pick the brains of expats. Canadians, here working for resource companies, were joined by Europeans and Americans. Folks popped in on their way home from work to have a beer, a burger or just to say hello. Other expats hang out at one of the open-air workout areas you’ll find in the neighborhood.

The locals are warm, welcoming, and friendly. They feel genuinely happy that foreigners are beginning to visit them. Everywhere we were met with bright smiling faces.

As for the real estate values… Medellin will surprise you.

This neighborhood of El Poblado is very upper middle class. The condos I saw were mostly furnished and fitted to a high spec. The hardwood floors in one condo would cost tens of thousands of dollars in North America.

I’m here to see if we could buy one of these condos, make them available for rental and generate a strong income.

Even in this prime area, $100,000 could buy you a 100-square-meter condo with views to the valley. That’s $1,000 per square meter.

For $900 per square meter, you can buy a large unit in an older building.

Figure $1,500-$1,600 per square meter for a shiny new condo in a high-end building that was delivered within the last couple of years.

Pre-construction condos sell for $2,000 per square meter and above.

As a reader of these alerts you will know that there are risks associated with pre-construction. The project or developer might fail. We could be left with nothing. So, we expect a discount for taking on that construction risk. All other things being equal, we don’t expect to pay substantially more for pre-construction than we would pay for a finished, move-in ready condo.

It doesn’t make sense to pay 30% more for a promise of a pre-construction condo than for a condo in a building that was delivered two years ago where you can test the elevators and take a dip in the pool. Nor does it make sense that prices in an older building, in a prime location, should be half that of pre-construction pricing. But that’s what you’ll find in Medellin.

It’s not uncommon in Latin countries that new construction commands a premium. It’s partly down to status. The new pre-construction buildings usually have better amenities and a more appealing finish than older buildings. But it doesn’t make any sense to me that they are priced at such a premium in Medellin.

I visited one pre-construction project in a location that wasn’t as convenient or desirable as the completed buildings I saw. You’d need a car. It would take at least 10 minutes to stroll to pick up your breakfast coffee and pastry. This is typical in Medellin. The older buildings are better located.

My instinct tells me a developer needs to charge $2,000 per square meter to buy the land, get permits, build, cover his other costs such as funding and leave a profit. Developers (for reasons I don’t understand) can sell to the local market at this price level.

But until recently there was a moratorium on new construction because of concerns of excess supply. I’m guessing that some of these units are priced at less than replacement cost. By this I mean you couldn’t build these units for what we can buy them for. It’s not the first time I have seen this in a place that has a strong growing economy. In Berlin for example you can buy in central areas for less than what the unit would cost to build.

The low purchase prices for older units means that even with modest rents, yields could be strong (as they are in Berlin).

It also means that prices have far to rise before new supply floods the market.

It also means that the excess supply has to be absorbed before prices start to rise quickly.

Real estate here is priced in the Colombian peso. As with buying in Brazil you are exposed to exchange rate fluctuations. In Brazil we have done well on the currency side of the equation on top of the appreciation we have enjoyed. But I’ll leave foreign exchange predictions to others.

The bottom line is that buying pre-construction here doesn’t make sense to me.

But there’s nowhere on my beat with a major cosmopolitan city and climate like this.

But Can We Make Money Here?
As investors we are interested in:

- The yield: How much income we can make as a percentage of the purchase price.
- The prospect for capital appreciation: Do we think prices will rise?

Our base in Medellin was a comfortable and spacious three-bedroom condo. We had an excellent WiFi signal and more channels than I could count on our wide screen TV. We paid $1,087 for eight days.

The short-term rental market here is strong. You could expect a condo like this to stay rented 50% of the time. Occupancy could be higher for a smaller unit.

The yields from the short-term rentals business here are strong, too. If you buy a unit and make it available for short-term rental you could get 8% net yields. You might generate even higher yields on smaller units at the low end of the price range here.

This means that your $100,000 condo could generate up to $700 a month in income after you have paid your bills (excluding any income tax liability). This is a strong yield.

The Catch?

Although commonly done, it’s illegal to rent here for less than a month in buildings where 70% of the owners haven’t agreed that it should be allowed.

Don’t bank on being able to stay in the short-term rental business even if it’s currently permitted in a building. This could change. Remember, this area is where upper middle class families live. They won’t want to have a different neighbor everyday…particularly someone who is in town to party.

Some buildings are known as short-term rental buildings. You have a better chance of riding the gravy train longer in one of these.

Another option is to rent by the month. Even if your tenant is only staying a week this can still be a decent earner. Follow this strategy, even with conservative occupancy, and your net yield could come out at 6%. You will be compliant with the current regulations if you have bought in a building that doesn’t permit renting for a period less than one month. Remember though—these types of regulations can change. There is no guarantee that regulations around short-term renting won’t be tightened further.

Finally, you could buy a condo and rent it long-term to the local market or to a foreigner. This strategy could get a net yield of around 5%.

As your real estate is priced in the Colombia peso you have diversification from the dollar. And Colombia is on the up. If commodity prices stay high and the security situation continues to improve I expect we will see increased demand for these condos. But perhaps not immediately.

Expats have started to come. But the real driver would be the region’s economy continuing on a growth trend. Along the golden mile the shiny new banks, high-end stores and construction sites tell us this has already started. The golden mile is minutes away from El Poblado. Here, offices, boutiques and outdoor eateries buzz and hum with traffic and commerce. FDI (foreign direct investment) in Colombia was up 88.7% in the first 9 months of 2011 compared to the same period in 2010.

This is a place where we could generate rental income, enjoy currency diversification and the prospect for capital appreciate if Colombia…and Medellin in particular… stays on its upward trajectory.

Ronan McMahon - Executive Director of Pathfinder Ltd. Original Post taken from "Pathfinder Alert" e-zine.

P.S. Owning international real estate can earn you income in another currency. If the value of the dollar goes down, for example, you could still have an income stream in an appreciating currency.

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