investing in buenos aires real estate

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Investing in Buenos Aires Real Estate:Introduction to Economy, Real Estateand Buenos Aires

August 2006

Prepared by [Name Here]

Read DISCLAIMER at end of presentation for

important information.


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Executive Summary

Buenos Aires, and more generally, Argentina, have experiencedsignificant positive economic growth over the last five years, following the

countrys economic crisis of 2002. Within the real estate sector, Buenos Aires has experienced tremendous

growth during this time period.

The timing is now good for certain kinds of real estate offerings in selectneighborhoods in Buenos Aires.

Specifically, there are opportunities for investors interested in buying andrenovating existing buildings and then re-selling the individual units tomarket participants.

This is not without risk, but given both the current environment of generallyfavorable macroeconomic trends and recent developments within the localreal estate market, a persistent investor should find desirableopportunities.




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Table of Contents

I. Scope of this Presentation

II. Argentina Overview

III. Real Estate Market Overview

IV. Analytic Introduction to Local Market

V. Buenos Aires A Physical Overview

VI. Conclusion




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I. Scope of this Presentation

The purpose of this presentation is to orient the reader to the currentinvestment climate in Buenos Aires, Argentina, with a specific focus on the

real estate market. It presumes very little knowledge and familiarity with the country and

proceeds by giving a brief historical overview of Argentina, selecting onlythose events and facts which are most relevant to the current investmentenvironment.

The presentation gives the authors view of the current local real estateinvestment environment. Such a view has been formed through eightmonths of significant analysis, meetings and data gathering of the localmarket, and wider economic and political situation, as well as havingconsulted on numerous development transactions locally.

The presentation includes sections which provide detailed relevant factualdata related to the macroeconomic situation and the state of the realestate, construction and credit markets. It concludes with a map tour ofBuenos Aires.




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Argentina, which is slightly less than one-third of theUnited States geographically, has a population of 40million people, with nearly 13 million people living ingreater metro Buenos Aires. Within this metro area, thecity of Buenos Aires contains nearly 3 million inhabitants.

Following independence from Spain in 1816, Argentinaexperienced periods of internal political conflict betweenconservatives and liberals and between civilian andmilitary factions.

The most recent period of military rule ended in 1983,when a disgraced junta which had been in power for eightyears was replaced by democratic governance.Successive elected governments have effectivelydismantled the militarys influence.

The 1980s, known as the Lost Decade throughout muchof Latin America, was characterized by economicstagnation and culminated in hyper-inflation in Argentina.

To combat these economic problems, President Menem,in 1991, pegged the peso one-to-one with the US dollar.Almost overnight the economy turned around, economicgrowth surged and inflation was virtually eliminated.

Historic overview




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This period of economic growth peaked in 1998 when a prolonged recession began. Theeconomic problems culminated in 2002 when the government removed the peso from its

constraining peg to the dollar. This brought on a brief period of civil unrest, massive unemployment and political

instability. By late 2002 the exchange rate dropped to its current, more natural level of3:1 (pesos:dollars). The crisis is largely blamed on a combination of domestic economicand policy failures as well as external emerging market default contagion (e.g. Mexico,Russia, southeast Asia, Brazil).

The lower exchange rate has been a boon to the economy as the export sectors(agriculture and light industry), tourism and construction sectors have thrived, leading theeconomy to achieve average annual growth rates of roughly 9% for the past 3 years.

Inflation has been a persistent problem for the current administration, reaching 12% in2005 but expected to improve to 10% in 2006.

President Kirchner, who was elected in 2003, has since effectively consolidated power tothe point that he is likely to easily win the next elections in 2007.

For the foreigner it is important to understand the impact of the recent 2002 economicand political crisis on the local psychology.

The current economic period started in 2002, as the economy started recovering fromthe collapse.

Furthermore, there is a local view that Argentina is destined to have endless repeatedcycles of economic boom and bust, coming in waves of roughly ten years.

Economic crisis of 2002 and recent economic events




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The most recent bust has dimmed the views of Argentines, of the local banking sector. Whilesavings accounts are currently beginning to see some growth, Argentines have a healthy

aversion of putting too much of their personal savings into local banks as many lost significantamounts of personal wealth during the last crisis as savings accounts were forced to undergodilutions.

Consequently, most people prefer to put their savings into bricks and mortar, which is viewedto be a much safer store of value. This preference, in combination with a significant reduction inbuilding costs due to the currency devaluation, has caused a massive construction boom, thevast majority of which has been in residential housing.

Because of the preference toward investing in real estate, banks have experienced low savingsrates and hence are constrained in their abilities to extend credit. (One consequence of this isthat investing in residential real estate can be thought of as the risk-free rate in Argentina.)

This is both good and bad for (foreign) investors. While a shortage of credit means moneyearns higher returns, limited credit also means potential end buyers of real estate productstypically buy all in cash, limiting the pool of potential customers.

The government is currently under political pressure to offer banks guaranties on credit formortgages as lower and middle class Argentines have limited ability to purchase housing.

It is possible that such guaranties will be made if inflation can be reduced. In order to combatinflation the government, beginning approximately 6 months ago, has been actively negotiatingprice increase limits in multiple sectors of the economy. While this policy was initially met withsignificant skepticism, the policy may actually be working. In light of a recent reduction ofinflation for the first six months of 2006, several analysts have reduced their inflation projectionsfor 2006 to 10% (which is 2% lower than 2005).

Credit is in short supply




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Because of the lack of credit, most investment in construction has been directed at thewealthiest neighborhoods. Within the city of Buenos Aires, the wealthiest areas arefound in the north, the east and certain select barrios (neighborhoods) in other parts ofthe city.

Certain noteworthy neighborhoods include:

Puerto Madero, which is the newest municipality and located in the eastern most part of the city.It is a Battery Park City-like neighborhood in that it is next to the financial district and consists ofnumerous modern high-rise towers. This barrio has the highest residential prices, oftenexceeding $3,000 / m2 ($280 / ft2).

Recoleta and Retiro, located in the north, have a high density of French-style buildings, manybuilt nearly 100 years ago. These areas have significant wealth and are viewed as areas of verylittle real estate risk.

Bario Norte, Palermo, Belgrano and Nunez, extending west from Recoleta all the way to thewestern edge of the city limits, marks the rest of the northern zone which has experienced thevast majority of construction-related growth.

San Telmo, which is located south of the government offices and the Pink House (presidentialoffice) is of historical and cultural significance as it is the tango district. It was not part of theoriginal wave of construction as this is a poorer area, however, it is currently experiencing a surgein investment.

Most parcels of available land in the wealthiest neighborhoods have been developedover the past three years. Consequently, land prices in these neighborhoods has risensteeply. Construction is slowly spreading to other barrios and to the greater metro area,as investors are continuing to look for favorable returns.

Introduction to the local real estate market




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There is considerable discussion among market participants, the local

newspapers and economically-minded porteos (as people who live in BuenosAires call themselves) as to whether or not there is currently a housing bubble.

The general view is that the northern neighborhoods are probably (slightly)above their fundamentals but a lack of widely available credit greatly restrainsany type of a bubble from growing too large.

Furthermore, most new housing stock will pass through either one or tworounds of selling before it reaches the final buyer (either local or foreign), whothen typically prefers to hold it for rental income and as a store-of-value.

A common method of development is as follows:

i. A developer and a small number of initial investors purchase a parcel of land

ii. In turn they will pre-sell a number of units to smaller investors to finance the actualconstruction of the project

iii. Finally, the developer / initial investors, along with some of the pre-sellers, will sellthe completed units at full market value to end buyers. These buyers will be acombination of small investor and users.

Local real estate development norms and trends




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One significant difference between the Buenos Aires and US

markets is that in BA most buildings (other than AAA officebuildings, industrial and commercial properties, and hotels) are notowned by a single individual or a single company. Instead,buildings both residential and smaller office buildings areowned in a condominium fashion with individual units within thesame building being owned by different owners (such residentialunits are still called apartments locally).

What this means is there are no apartment buildings, as exist inthe United States. Furthermore, the stock of singly-ownedbuildings is significantly less than that of the United States.

It also means that there is a very active small investor market asdevelopers seek to sell units in newly built or renovated buildingsto individual investors. However, this group of smaller investors isconstrained by factors related to Argentine macro-level economy

as well as to their access to credit.

Differences between real estate in Buenos Aires and the United States




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What does all of this mean for the foreign investor?

These current economic and structural realities mean that real estate developmentinvestment in Buenos Aires today (or Argentina more generally) requires carefulanalysis.

It also means that good returns can still be found as the economy is still growingstrong and inflation appears to be coming under control.

Furthermore, it is an ideal time for investing in barrios outside of the more affluentnorthern zone as such other areas offer lower land prices with reasonable demandfor finished products.

Additionally, Buenos Aires has numerous buildings whose economic value is beinggrossly under-utilized. Such buildings are well located near desirable commercial,business or tourist areas but whose interiors are long overdue for a significant over-haul and modernization.

Of these buildings, only a sub-set could be considered targets for a takeover, to berenovated and re-sold to smaller investors. This is due to a combination of i) agiven building may have numerous owners making negotiations for a sale difficult,ii) local laws favoring the lessee, and iii) a lack of local market experience withcertain products.

Furthermore, there appears to be an early trend for such a renovate-and-resellstrategy as a few such developments are currently under way in Buenos Aires.

Implications and opportunities in the current market




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This next section presents important analytics for the reader to

better orient to the local investment environment and climate. It contains relevant macroeconomic, construction and real estate

market trends, including:

Macroeconomic trends

Growth

Unemployment

Inflation

Import / exports

Construction trends

Rental and housing price trends

Mortgage trends

Relevant macroeconomic, construction and real estate market trends




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Since the default in 2002,

Argentinas economy hasrecovered to prior peak levels.

Both GDP and Investment haveexceed there 1998 levels.

GDP has averaged 9% annualgrowth since devaluing thecurrency as the economy shiftedto take advantage of its naturalstrengths in export and tourismsectors.

The growth is expected to still bestrong through 2007, but it willtaper slightly as many of the gainsin productivity have been put intoplace.

Source: Fundacion de Investigaciones Economicas Latinoamericas

Argentina has experienced strong growth in recent years





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GDP per capita (measured in

USD) has grown steadily over thepast 4 years.

After averaging $8,200 per personits peak in 1998, and bottomingout under $3,000 in 2001, percapita GDP is expected to reach$6,000 by the end of 2007.

Compared to its Latin Americanneighbors, Argentina currently hasa GDP per capita similar to Brazilat, at roughly $4,500 per person.

Sources: Fundacion de Investigaciones Economicas Latinoamericas; Latin Focus

IV. Analytic Introduction to Local MarketArgentina has experienced strong growth in recent years




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Following the 2002

devaluation,Argentinas growth inthe export sector hascaused the tradebalance to be stronglypositive.

Imports, whichdropped after the pegwas removed in 2002due to a lack ofpurchasing power,have almostrecovered to theirpeak levels in dollarterms.

Source: Fundacion de Investigaciones Economicas Latinoamericas

IV. Analytic Introduction to Local MarketArgentina has experienced strong growth in both exports and imports




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Inflation has increased steadilyafter its initial recovery followingthe 2002 devaluation.

Inflation reached 12% in 2005 andis expected to improve to 10% by2006.

Unemployment is currentlybetween 11% - 14%, which is wellbelow historical average for thepast 10 years. It is expected todrop only slightly in 2007.

Sources: Fundacion de Investigaciones Economicas Latinoamericas; Latin Focus, Banco Frances

Inflation (CPI)

% growth rates, end of year

Year Rate

1992 18.0%1993 7.0%

1994 4.0%1995 2.0%

1996 0.0%1997 0.0%

1998 1.0%

1999 -2.0%

2000 -1.0%2001 -2.0%

2002 41.0%

2003 4.0%

2004 6.0%2005 12.3%2006 10.0%

IV. Analytic Introduction to Local MarketInflation is tapering while unemployment is declining




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Construction, as measured bytotal square meters, for the city ofBuenos Aires has returned to justunder peak levels during the1990s.

Hard construction costs fell byroughly 1/3 after the devaluation in2002 as measured in USD. Thesecosts have been steadily climbingsince then but are still well belowtheir pre-2002 crisis levels.

Land costs have recovered fromthe crisis and climbed significantlysince their pre-2002 crisis levels.Land owners have been thebiggest beneficiaries of risingprices on a per m2 basis.

ApprovedConstructionPermits - Cityof Buenos Aires (m2)

Base Year = 1991

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0160.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Sources: Fundacion de Investigaciones Economicas Latinoamericas; UADE

Buenos Aires LandCosts in USD($ / M2)

0

50

100

150

200

250

300

350

400

450

500

2000 2001 2002 2003 2004 2005

USD

HardConstructionCosts per M2

Base =1991

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

IV. Analytic Introduction to Local MarketConstruction has grown steadily in recent years, driven by lower costs




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Relative to monthly household incomes, selling pricesof housing (per m2) have been recovering faster since

the devaluation. This is causing the spread betweenmonthly income and price per m2 to worsen, relativeto pre-crisis levels. (In several neighborhoods in thenorthern part of the city the trend is significantlystronger than depicted here.)

On a M2 basis, rental prices had been stable through2004 and began to rise slightly as inflation grew in2005.

Purchase prices per M2 for residences sold, droppedbriefly following the 2002 crisis and have sincerecovered and surpassed their pre-crisis levels.

As measured in real terms, purchasing power forrenters has increased slightly over the last few years.This trend appears to be ending as inflation in rentalprices is absorbing any increases in salaries.

Purchasing power for buyers has dropped sharplyfollowing the 2002 devaluation. Compared to pre-crisis levels, buyers are left with roughly 60% ofpurchasing power as selling prices per M2 have beensteadily increasing.

Index ofRentalandPurchasePriceper M2

Base =1991

-

50.0

100.0

150.0

200.0

250.0

300.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Purchase

Rental

Sources: el Credito Hipoticario, UADE

Indexof Real Salaries w/Respect toHousing Prices (M2)

Base =1997

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1997 19981999 200020012002 2003 2004 2005

Purchase

Rental

DifferenceBetweenPrice perM2 andMonthlySalary in$US(BuenosAires)

923

830

580.4507.5

459.2

361.9363.8

450

937

767

600

470

200

300

400

500

600

700800

900

1000

Dec 2001 Mar 2002 Mar 2003 Mar 2004 Mar 2005 Dec 2005

$

AverageMonthlySalary(BuenosAires) PriceperM2(BarrioCaballito)

IV. Analytic Introduction to Local MarketRents and prices are rising faster than incomes.




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Total mortgages for housingpurchases have droppedsignificantly since thedevaluation as banks havereduced credit and savers avoidthe perceived riskiness ofsavings accounts.

As a percent of GDP (PBI inthe graph to the right),mortgages are less than 1/3 ofits pre-crisis levels.

Compared to other large citiesthroughout the world, Buenos

Aires residential land prices, asmeasured per M2, are extremelylow.

Sources: Fundacion de Investigaciones Economicas Latinoamericas; Latin Focus

City USD / M2

London 11,000$New York 7,500$Paris 7,000$

Barcelona 5,400$Madrid 4,900$Shanghai 2,200$Bueno s Aires (North Zone) 1,275$Buenos Aires (San Telmo) 805$

Global Residential Prices per SM

(select areas, 2005)

IV. Analytic Introduction to Local MarketMortgages are below historic levels and Buenos Aires is cheap

compared with other cities globally.




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Buenos Aires is divided into 47

Barrios. The northern most barrios plus

Puerto Madero in the east haveseen the most construction overthe past 4 years.

Source: City of Buenos Aires

Municipal overview of Buenos Aires




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The shaded areas represent thesections of the city with both thehighest household wealth andalso the highest residentialgrowth.

The bulk of the growth has takenplace in Puerto Madero and thenorthern barrios (comprised ofRetiro, Recoleta, Bario Norte,Palermo, Belgrano and Nunez).

Land prices (per m2) as of 2005were high relative to historicvalues, with the highest ratesfound in the northern sections of

the city and Puerto Madero.

Sources: Reporte Inmobiliario

Buenos Aires Areas of high construction

Buenos Aires Land prices (per M2)

Geographic growth trends and recent land prices





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(See next pagefor detail)

(See twopages for

detail)

A close-up of downtown Buenos Aires





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Recoleta Cemetery

Pink House

Congress

Downtown Buenos Aires and relevant landmarks





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Plaza de Mayo

Pink House

Congress

A close-up of downtown Buenos Aires and relevant landmarks





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This presentation makes the argument that the timing is now good forinvestors to make targeted real estate investments in the greater Buenos

Aires metropolitan area. Macroeconomic conditions have generally been steady and favorable for

the last four years following the economic crisis.

The steadily growing economy, a historically restricted credit market, andhistorically low input costs make the current business environment appealing toinvestors.

The investor needs to be comfortable with a certain amount of risk, whichis generally greater than that found in the United States.

Furthermore, the investor should understand the local norms of the realestate investment environment in Buenos Aires and how they differ fromthose of the United States.



VI. Conclusion


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Disclaimer

The author takes no responsibility for investment decisions taken based on theinformation presented herein. All information is subject to change. The opinions stated

are those of the author.The information in this presentation is presented as-is and is made available forgeneral use. In no way is the author responsible for any actions taken based on theinformation presented herein.



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