In Argentina, the unstoppable rise of the American Dollar: how the rise in the informal currency exchange ( Blue ) affects construction, rents and property prices
The parallel exchange rate started today up to $41 higher than on Friday, when it reached $280; although at the end of the day it ended at $260
In a convulsive start to the week after the resignation of Martín Guzmán, the Ministry of Economy and the unbridled rise of the blue dollar , which started the day $41 higher than on Friday, uncertainty is growing in all economic sectors given the scenario of exchange rate instability while a new cabinet is being formed.
Within the real estate sector, the alarms began to sound regarding rental contracts, which according to the Lease Contracts Index (ICL) published daily by the Central Bank (BCRA), already projected an adjustment of 58.15% for July. In addition, for savers in dollars, doubts are growing about how the sale value per square meter will affect the real estate market, while the window of opportunity that generates a cheaper construction cost in dollars with the adjustments is once again widened. foreign exchange
Is it time to sell? Or a time to buy? What about construction sites? How will the adjustment of the Lease Contract Index (ICL) published daily by the Central Bank (BCRA) affect new rental contracts? These are some of the questions that were generated today among specialists in the sector and the actors involved.
What about New Construction Costs
After several months in which the price of the dollar remained stable, a variable that in an inflationary context was closing the window of opportunity to build that had been generated in the midst of the pandemic, the upward trend in the blue that began last week and accelerated with Guzman’s resignation may mean a new opportunity for savers who have foreign currency.
Until the end of last week, the cost of constructing a building lost competitiveness in dollars. Since January of this year, building a square meter has become more expensive, in dollars, by 22.1%. That is to say, the window of opportunity that had been opened during the first months for Argentine developers -thanks to a stable dollar price that caused the construction costs of a building to touch the lowest values of the historical series- began to close. in recent months. “What affected the rise in costs measured in dollars was the contrast of a more stable price of the dollar for six months versus the increases in pesos that are still very strong. Both factors generated this increase in hard currency”, points out Germán Gómez Picasso, head of Real Estate Report to LA NACION.
Now, the scenario is different and with a higher dollar, the cost of building a square meter is cheaper, which until Friday barely exceeded US$700/m². A cost that, measured in dollars, was low compared to the historical measurement, which until last week was 38.6% below the maximum recorded in 2017.
A separate analysis deserves how much it costs to build a square meter of a house located in a gated community. In this case, the numbers are higher than those for building a condo building. And the strong increase in costs in pesos -due to the effect of inflation-, added to a dollar with a stable price in recent months, put an end to the summer lived by those who had the bills in the mattress, at least for premium category homes in countries. According to the latest Real Estate Report report, the value per square meter reached US$1,725.63/m² in May- taking into account the price of the dollar blue at that time – well above the average of US$1,200 that it had been maintaining in previous months and close to the maximum floor of US$1,836/m² registered at the time of UVA credits between 2017 and 2018.
With this jump in blue, these values are expected to reflect a decline in this upward trend in prices, although far from the minimum recorded in 2020, when a square meter reached US$700.
What about the sale value
In recent weeks, specialists in the sector, real estate brokers and developers began to diagnose that property prices have bottomed out, based on a plateau in property values in recent months. According to data from the “Real m² Index” prepared by Re/Max in alliance with the University of the Center for Macroeconomic Studies of Argentina (UCEMA) and Real Estate Report, property prices stopped falling six months ago.
With the rise in blue, another unknown is opened regarding what will happen to the value of the square meter. On the one hand, according to the publications made in ZonaProp, the number of homes for sale remains at record highs, with more than 164,000 properties published in the Federal Capital. However, the number of deeds, although it continues to recover, does so at a very slow pace and is still far from the last stage of mortgage loans, when almost 6,000 monthly operations were registered. According to the College of Notaries of the City of Buenos Aires, in the month of May, there were 2,866 deeds in the sale of real estate. In Greater Buenos Aires, the recovery of operations has been more sustained and slightly better than in CABA.
Gómez Picasso indicates that the devaluation and exchange rate instability scenarios are not immediately reflected in market values. But what is observed is a paralysis of the buying and selling operations.
“It would seem that prices have bottomed out, they are not falling. But now we have to wait to find out what will happen; it all depends on how deep the devaluation is. Experience indicates that when there are strong devaluations, property prices do not adjust immediately, they take months or years. We come from three years of an adjustment that was very gradual. What does happen with strong movements in the dollar is that buying and selling operations are stopped because, in general, those who have savings believe, often unjustifiably, that prices are going to fall and that does not happen in the short term, ”says the specialist.
According to the ZonaProp index, the value per square meter of a two-room apartment in Palermo in June reached US$2,979, with one blue dollar under $230. While the same month in 2020, the value was US$3,500, while the blue was around $160. Meanwhile, in 2018 – a full boom of UVA credits and with a parallel dollar that did not reach $30 – the square meter was at US$3,655.
What about Renting Costs
The dramatic scenario that the rental market is going through is increasingly bleak. While the treatment of the opinions to modify the rental law is delayed, prices rise and supply suffers from shortages.
Last week, the College of Real Estate Brokers of the City of Buenos Aires (CUCICBA) assured that the rise in rental prices according to the ICL will reach 58.15% in July. Thus, for example, those who started a contract in July of last year for $47,047 per month, which was the average value paid at that time in Palermo according to ZonaProp, will pay $74,404. The amount is below what it costs to close a new rental contract today in that neighbourhood of Buenos Aires ($80,463).
According to the monthly index carried out by ZonaProp, renting a studio apartment in the Autonomous City of Buenos Aires (CABA) costs $53,993 per month. A two-room, 50-m² apartment is rented for $64,581 per month, while a three-room, 70-m² unit costs $87,931 per month, in both cases, without considering the cost of utilities and other services.
However, the situation changed radically this Monday: with the unbridled rise of the blue due to the departure of Martín Guzmán and the entry of Silvina Batakis to the Ministry of Economy, the alerts between real estate agents, owners and tenants were lit.
How will the rise in the parallel dollar impact the ICL? “This rise in the dollar is going to overheat inflation in the coming months, due to remarks and greater complications in importing, all of this makes inflation rise. That higher floor of inflation makes the ICL, base, higher. On top of that, salaries at some point are going to have to accompany and the ICL rises through both channels”, points out Federico González Rouco, an economist specializing in housing.
Meanwhile, the specialist explains that generally, the rent is analyzed in relation to the value of the property, which is usually called “gross profitability”. “With this jump, the rent in dollars falls and that makes profitability lower. What does this mean? That we will surely see an increase in rents” , he warns.
As for new contracts, the scenario is even less encouraging. For specialists, the lack of predictability regarding the Government’s economic plan is a factor that pushes prices and generates more shortages in the rental market.
“This increase in the dollar was something that was going to happen sooner or later, and rents are going to continue to rise until there is no stability, but we are far away,” says Rouco.
For Gómez Picasso, the rental problem depends more than anything on the lack of supply. “Because the law is not convincing and the owner prefers to take the properties off the market. I think this is only going to get worse and we are going to a zero-supply market, ” he says.
Along the same lines, the President of the Chamber of Owners, Enrique Abatti, considers that there is a lot of uncertainty among the different actors waiting for the definitions of the new cabinet and the decisions of the new Minister of Economy. “Today there were already several new contracts for commercial premises to sign that were suspended. Both owners and renters do not know where they stand. With regard to housing contracts, the new ones are already directly increasing. If last week a property started at $70,000, today it starts at $80,000 ″, he maintains.
The lawyer points out that the landlord is afraid of being behind and the tenant is afraid of paying more. “If the Central Bank index gives an accumulated figure of 58% for this month, and we start from the basis that a contract that was already inflated between 15% and 20%, because the owner had taken precautions before the sanction of the law 27,551, we are already talking about an increase of 78%. above inflation. Meanwhile, the law continues to go around and continues to harm the tenant, above all”, he concludes.
Source: La Nacion