Investment, Real Estate and Real Information

Thanks for your feedback ‘El Hombre’

No! There is simply no way to get the accurate sales data you are looking for… It does NOT exist.

As a little background, I am an investor and a Wall Street trained investment advisor with 20+ years of experience and still help manage about $75 million in offshore investments for my non-US clients. This is mentioned because when it comes to investments and risk management I am accustomed to telling it like it is, and even though my website is called WeLoveCostaRica.com I would be committing business suicide and totally destroying my credibility if I said the real estate market was fine when it was not.

Yes! Some hotel projects have been put on hold because the tightening credit situation!
Yes! A few projects have been cancelled because of lack of financing!
Yes! A few underfunded cowboys are gone! Thank goodness…
Yes! There are few desperate sellers as there always are …
Yes! More aggressive offers are being considered especially on the Pacific Coast where there was more speculation but we have yet to see any serious across the board price declines.

For the most part Costa Rica real estate prices remain stable and although this may indeed change in the future, rest assured I will report on that should they occur.

Here are two questions for you:

1. Costa Rica is NOT the USA or Europe or Iceland or Asia. Costa Rica is not ‘connected’ financially in the same way! Many financial and real estate markets are dying but since Costa Rica is NOT as connected, and NOT invested in the same types of toxic investments as the rest then WHY should Costa Rica suffer in the same way?

2. Since Costa Rica banks are very much more conservative – too bloody conservative in my opinion – with how they give mortgage financing, why should Costa Rica and Costa Rican banks suffer from the same problems?

I am not necessarily referring to you but it seems to me that there are people out there that just can’t wait to hear that the Costa Rica real estate market is crashing – Well it’s not! And no matter what data we produce regarding the present condition of the Costa Rican economy, the state of the banks here and the fact that very few people are even late with their mortgage payments, it would appear that people simply don’t want to believe it…

If you have not yet seen it, you might wish to read: Costa Rica Real Estate Investors Market Update – Finance Minister says Costa Rica is in a “very strong and very favorable” financial position. at [ https://www.welovecostarica.com/members/1944.cfm ]

Unlike Hank Paulson who’s worth about $700 million, I would be surprised if Costa Rica’s Finance Minister is worth $70,000 but would he say that Costa Rica in a “very strong and very favorable” financial position if it wasn’t true?

And for those of you waiting to buy real estate in Costa Rica?

You might want to carefully examine what’s currently available in the area now where you plan on buying and try to determine what will be available in the next five years…

Try to imagine what prices you would expect to pay in five years for the quality real estate you are looking for…. I doubt very much it will be lower than where those prices are right now.

There are many markets in Costa Rica where there is a very limited amount of quality real estate available and, with this tightening credit situation, fewer new projects starting so what does that mean?

When perceptions change – and they will – it means that quality, already built real estate will have maintained it’s value better and will probably appreciate faster when there is renewed demand and of course future projects will take quite some time to become available. And when they do, it will probably be at higher prices.

The following email was received from Terry Moran, our Recommended Realtor in Arenal [ https://www.welovecostarica.com/public/1702.cfm ] on Fri, Oct 10, 2008 at 12:47 PM

“On another note I have just had the best September in my 30 year real estate career. I have clients flocking to the Lake Arenal area as a safe haven, an insurance policy, to get their money out of the stock market/US, and more clients coming. Hope this continues.“

This does not mean that every Realtor is enjoying the same success – they are not – but many Realtors are doing just fine…

Scott Oliver – Founder
WeLoveCostaRica.com

I don’t know if you follow the writings of George Monbiot [ http://www.monbiot.com/ ] the author of the best selling books Heat: how to stop the planet burning; The Age of Consent: a manifesto for a new world order and Captive State: the corporate takeover of Britain; but this is very relevant:

Posted October 14, 2008

The economic crisis is petty by comparison to the nature crunch. But they have the same cause.

By George Monbiot. Published in the Guardian 14th October 2008

This is nothing. Well, nothing by comparison to what’s coming. The financial crisis for which we must now pay so heavily prefigures the real collapse, when humanity bumps against its ecological limits.

As we goggle at the fluttering financial figures, a different set of numbers passes us by. On Friday, Pavan Sukhdev, the Deutsche Bank economist leading a European study on ecosystems, reported that we are losing natural capital worth between $2 trillion and $5 trillion every year, as a result of deforestation alone(1). The losses incurred so far by the financial sector amount to between $1 trillion and $1.5 trillion. Sukhdev arrived at his figure by estimating the value of the services – such as locking up carbon and providing freshwater – that forests perform, and calculating the cost of either replacing them or living without them. The credit crunch is petty when compared to the nature crunch.

The two crises have the same cause. In both cases, those who exploit the resource have demanded impossible rates of return and invoked debts that can never be repaid. In both cases we denied the likely consequences. I used to believe that collective denial was peculiar to climate change. Now I know that it’s the first response to every impending dislocation.

Gordon Brown, for example, was as much in denial about financial realities as any toxic debt trader. In June last year, during his Mansion House speech, he boasted that 40 per cent of the world’s foreign equities are now traded here. “I congratulate you Lord Mayor and the City of London on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London.”(2) The financial sector’s success had come about, he said, partly because the government had taken “a risk-based regulatory approach”. In the same hall three years before, he pledged that “in budget after budget I want us to do even more to encourage the risk takers”(3). Can anyone, surveying this mess, now doubt the value of the precautionary principle?

Ecology and economy are both derived from the Greek word oikos – a house or dwelling. Our survival depends upon the rational management of this home: the space in which life can be sustained. The rules are the same in both cases. If you extract resources at a rate beyond the level of replenishment, your stock will collapse. That’s another noun which reminds us of the connection. The OED gives 69 definitions of stock. When it means a fund or store, the word evokes the trunk – or stock – of a tree, “from which the gains are an outgrowth”(4). Collapse occurs when you prune the tree so heavily that it dies. Ecology is the stock from which all wealth grows.

The two crises feed each other. As a result of Iceland’s financial collapse, it is now contemplating joining the European Union, which means surrendering its fishing grounds to the Common Fisheries Policy. Already the prime minister Geir Haarde has suggested that his countrymen concentrate on exploiting the ocean(5). The economic disaster will cause an ecological disaster.

Normally it’s the other way around. In his book Collapse, Jared Diamond shows how ecological crisis is often the prelude to social catatrosphe(6). The obvious example is Easter Island, where society disintegrated soon after the population reached its highest historical numbers, the last trees were cut down and the construction of stone monuments peaked. The island chiefs had competed to erect ever bigger statues. These required wood and rope (made from bark) for transport and extra food for the labourers. As the trees and soils on which the islanders depended disappeared, the population crashed and the survivors turned to cannibalism. (Let’s hope Iceland doesn’t go the same way.) Diamond wonders what the Easter islander who cut down the last palm tree might have thought. “Like modern loggers, did he shout ‘Jobs, not trees!’? Or: ‘Technology will solve our problems, never fear, we’ll find a substitute for wood.’? Or: ‘We don’t have proof that there aren’t palms somewhere else on Easter … your proposed ban on logging is premature and driven by fear-mongering’?”(7).

Ecological collapse, Diamond shows, is as likely to be the result of economic success as of economic failure. The Maya of Central America, for example, were among the most advanced and successful people of their time. But a combination of population growth, extravagant construction projects and poor land management wiped out between 90 and 99% of the population. The Mayan collapse was accelerated by “the competition among kings and nobles that led to a chronic emphasis on war and erecting monuments rather than on solving underlying problems”(8). Does any of this sound familiar?

Again, the largest monuments were erected just before the ecosystem crashed. Again, this extravagance was partly responsible for the collapse: trees were used for making plaster with which to decorate their temples. The plaster became thicker and thicker as the kings sought to outdo each other’s conspicuous consumption.

Here are some of the reasons why people fail to prevent ecological collapse. Their resources appear at first to be inexhaustible; a long-term trend of depletion is concealed by short-term fluctuations; small numbers of powerful people advance their interests by damaging those of everyone else; short-term profits trump long-term survival. The same, in all cases, can be said of the collapse of financial systems. Is this how human beings are destined to behave? If we cannot act until stocks – of either kind – start sliding towards oblivion, we’re knackered.

But one of the benefits of modernity is our ability to spot trends and predict results. If fish in a depleted ecosystem grow by 5% a year and the catch expands by 10% a year, the fishery will collapse. If the global economy keeps growing at 3% a year (or 1700% a century) it too will hit the wall.

I’m not going to suggest, as some scoundrel who shares a name with me did on these pages last year(9), that we should welcome a recession. But the financial crisis provides us with an opportunity to rethink this trajectory; an opportunity which is not available during periods of economic success. Governments restructuring their economies should read Herman Daly’s book Steady-State Economics(10).

As usual I haven’t left enough space to discuss this, so the details will have to wait for another column. Or you can read the summary published by the Sustainable Development Commission(11). But what Daly suggests is that nations which are already rich should replace growth (”more of the same stuff”) with development (”the same amount of better stuff”). A steady state economy has a constant stock of capital maintained by a rate of throughput no higher than the ecosystem can absorb. The use of resources is capped and the right to exploit them is auctioned. Poverty is addressed through the redistribution of wealth. The banks can lend only as much money as they possess.

Alternatively, we can persist in the magical thinking whose results have just come crashing home. The financial crisis shows what happens when we try to make the facts fit our desires. Now we must learn to live in the real world.

http://www.monbiot.com

References:

1. Richard Black, 10th October 2008. Nature loss ‘dwarfs bank crisis’. BBC Online. http://news.bbc.co.uk/1/hi/sci/tech/7662565.stm

2. Gordon Brown, 20th June 2007. Speech to Mansion House. http://www.hm-treasury.gov.uk/2014.htm

3. Gordon Brown, 16th June 2004. Speech to Mansion House. http://www.hm-treasury.gov.uk/1534.htm

4. Oxford English Dictionary, 1989. Second Edition.

5. Niklas Magnusson, 10th October 2008. Iceland Premier Tells Nation to Go Fishing After Banks Implode.
http://www.bloomberg.com/apps/news?pid=20601087&sid=azZ189JG.1S8&refer=home

6. Jared Diamond, 2005. Collapse: how societies choose to survive or fail. Allen Lane, London.

7. Page 114.

8. Page 160.

9. George Monbiot, 9th October 2007. Bring on the Recession. The Guardian.
http://www.monbiot.com/archives/2007/10/09/bring-on-the-recession/

10. Herman E. Daly, 1991. Steady-State Economics – 2nd Edition. Island Press, Washington DC.

11. Herman E. Daly, 24th April 2008. A Steady-State Economy. Sustainable Development Commission. http://www.sd-commission.org.uk/publications/downloads/Herman_Daly_thinkpiece.pdf

I certainly cannot speak for the Costa Rican government but sincerely hope that they continue to improve their management of both the economy and of Costa Rica’s precious natural resources.

But my respect, faith and confidence in politicians – no matter what language they speak – is not high so we do have to try and keep them on their toes.

Although Costa Rica’s reliance on the US is less than ever, it is obviously an extremely large and important part of the economy. My comments regarding banks and mortgages were specifically with regards to the root causes of the ‘financial crisis’, in that regard Costa Rica’s financial and investment ‘disconnect’ with that problem has been a lifesaver.

However, we are certainly feeling the effects with fewer real estate sales to customers from the USA and the local banks are naturally being extremely careful with their financing.

Lastly, my comments about this disconnect was not with regards to the “world economy” it was specifically with regards to the world’s current financial crisis and when CAFTA (the Central American Free Trade Agreement) is finally implemented then no doubt Costa Rica’s disconnect will – unfortunately – no longer apply.

Scott Oliver – Founder
WeLoveCostaRica.com

I agree that Costa Rica is not a self sustained entity – but would love to see it as such – and Intel certainly makes up an enormous portion of Costa Rica’s GDP. Costa Rica certainly cannot afford to lose Intel but thankfully they seem to be very content here.

We have all just witnessed a total bloodbath in the financial markets – and many of those mortgage related investments were originally rated AAA – so although I understand the reasons why they have dropped Costa Rica’s credit rating slightly, I don’t tend to pay too much attention to rating agencies because the credit agencies have obviously been sleeping in the same bed with the people that caused this ‘financial crisis.’

I know Gary Sherrif and although I like him and would agree that his statements may be relevant for his partner’s own very upscale project, they certainly do not apply to all of Costa Rica.

And you noted that this Thomson Financial press release comes out of Mumbai right? Not New York or London – Mumbai, the business capital of India!

Scott Oliver – Founder
WeLoveCostaRica.com

PS. In today’s La Nacion [ http://www.nacion.com/ln_ee/2008/octubre/15/economia1737908.html ] there is an article about the NASD listed (SYKE) US firm Sykes [ http://www.sykes.com/ ] (founded in 1977) which is looking for 370 new staff for their new $4 million ‘call center’ in Moravia and they plan to have 3,000 employees in Costa Rica by the end of 2009

PPS. You can see an excellent case study of ‘ The Impact of Intel in Costa Rica’ at [ http://www.fdi.net/documents/WorldBank/databases/investing_in_development/intelcr/casestudiesIntel.pdf ]

Of course the world financial meltdown is connected to the world economy – when did I say that was not the case?

My comments about the disconnect between Costa Rica and the rest of the world was not with regards to the “world economy” it was specifically with regards to how Costa Rica’s banks are being affected by the world’s current financial crisis due to bad mortgage investments, toxic ‘Special Investment Vehicles’ and other derivatives in which Costa Rica had no part.

Obviously there are less US$ flowing around which is affecting the economy but Costa Rican banks have been far less affected than most…

Scott Oliver – Founder
WeLoveCostaRica.com

Saw this on “Inside Costa Rica” this morning… seems the world slowdown is having an impact on the BIG players too!

AOL Founder Steve Case’s Project in Costa Rica Delayed Until 2010

The financial problems in the United States are taking a toll on Costa Rica. Several well-publicized projects have been put on hold, including Cacique, an ambitious us$800 million development on the northern Pacific Coast spearheaded by AOL founder Steve Case.

Construction was scheduled to begin next year on the much-discussed Cacique development, which includes two boutique hotels, a spa, an array of high-end home sites and a tennis facility designed by Andre Agassi and Steffi Graf. But now the project won’t break ground until 2010, at the earliest.

“In the current environment, we do not consider it prudent to start construction,” said Jorge Cornick, spokesman for the project. “But as soon as the market goes back to normal, the project will proceed, as planned.”

A St. Regis hotel planned for the central coast and a Regent Hotel project in Guanacaste, not far from Cacique, are also in limbo due to financing concerns. “We are pausing for the moment, giving us a chance to investigate further how the situation with the capital markets might play out,” Regent hotel developer Blaine Kirchert said.

Costa Rican president Oscar Arias joined Case to announce plans for Cacique last year. The first project for Case’s company, Revolution Places, Cacique is designed to combine the “highest-end services and amenities” with the latest in environmental and green development practices, according to marketing materials. Plans call for only 300 private residential units on the 650-acre site.

The delay is more bad news for Agassi and Graf, who are having a tough time in their initial forays into real estate. Earlier this year, a project they were helping to develop in Idaho, the Fairmont Tamarack, also ran into financial problems.