Real Estate in Cuba in an Era of Real Estate in Cuba in an Era of “Updating the Economic Model”“Updating the Economic Model”

Kerry D. VandellKerry D. Vandell

Dean’s Professor of Finance and DirectorDean’s Professor of Finance and Director

Center for Real EstateCenter for Real Estate

Cuba: A country in transitionCuba: 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 1999-

2013• The “Readjustment of the Socialist State” 2007 -

present

The Cuban government and The Cuban government and economy: a snapshoteconomy: 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:– Free universal education

– Free universal health care

– Adequate housing for all

– “Classless” society by social and economic status

The accomplishments: education The accomplishments: education and healthand health

The problem(s):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 profileSome statistics: a social/economic profile• 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%

• 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 capitaSome statistics: Trends in GDP per capita

OER

PPP

Some statistics: Low birth rates Some statistics: Low birth rates

Some statistics: Trends in real Some statistics: Trends in real monthly wage monthly wage

Some statistics: The decline of Some statistics: The decline of manufacturing and agriculturemanufacturing and agriculture

Some Some statistics: statistics: balance balance of tradeof trade

Monetary policy: A dual-currency Monetary policy: A dual-currency economyeconomy

• 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 pictureHow does real estate fit into the picture??

• Agriculture

• Transportation and infrastructure

• Tourism

• Historic restoration

• Housing

Agriculture: A flawed policyAgriculture: 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: 2001-2007Sugar cane production: 2001-2007

The Portugalete Sugar MillThe Portugalete Sugar Mill

Havana organic farmingHavana organic farming

A bodega vs. an open marketA bodega vs. an open market

Transportation and infrastructure: Joint Transportation and infrastructure: Joint ventures lead the wayventures lead the way• Roadways little-used. The Machado regime built the La Carretera

Central (Central Highway) in the 1930’s, later became the Soviet-era 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 Back to the past: A classic Havana street scenestreet scene

The La Carretera Central (Central Highway), The La Carretera Central (Central Highway), now the Autopista Nacional (A1)now the Autopista Nacional (A1)

Common modes of transport in CubaCommon modes of transport in Cuba

Infrastructure: The Port of MarielInfrastructure: 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 MarielThe evolving port of Mariel

Tourism: A driver of economic growthTourism: 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 tourismJoint 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, HavanaHotel Nacional de Cuba, Havana

The duPont Mansion Hotel (Mansion The duPont Mansion Hotel (Mansion Xanadu), VaraderoXanadu), Varadero

Hotel Meliá Varadero: A joint ventureHotel Meliá Varadero: A joint venture

Varadero BeachVaradero Beach

Caya Largo: an emerging Caya Largo: an emerging destinationdestination

Ecotourism is also on the riseEcotourism is also on the rise

Historic redevelopment: La Habana Historic redevelopment: La Habana Vieja (Old Havana)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 Eusevio Leal: Historian of the City of Havanaof Havana

La Habana Vieja “before”La Habana Vieja “before”

La Habana Vieja “after” (in process)La Habana Vieja “after” (in process)

Housing: A market in fluxHousing: 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)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)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)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)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? How can Americans take advantage of this opportunity? There are 3 Ways for Foreign investors to buy Real There are 3 Ways for Foreign investors to buy Real Estate in Cuba:Estate in Cuba:

1. 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

2. 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

3. 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 Housing has low priority in the Cuban budgetCuban budget

This is evidenced statisticallyThis is evidenced statistically

Most housing is not this badMost housing is not this bad

Soviet-era housing projectsSoviet-era housing projects

Art deco: West HavanaArt deco: West Havana

The high endThe high end

Permuto: The informal residential real Permuto: The informal residential real estate marketestate market

So what can we conclude?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– 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