BUY HIGH AND SELL HIGHER: REAL ESTATE IN THE

UNCLAS SECTION 01 OF 03 CARACAS 001318

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR KLINGENSMITH, NGRANT, AND MMALLOY
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
HQ SOUTHCOM ALSO FOR POLAD

E.O. 12958: N/A
TAGS: ECON EFIN VE
SUBJECT: BUY HIGH AND SELL HIGHER: REAL ESTATE IN THE
BOLIVARIAN REPUBLIC

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SUMMARY
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1. (SBU) Real estate prices are skyrocketing in Venezuela as
the oil boom fuels an ever-increasing number of people
chasing an increasingly limited supply of properties. Sales
are up 30 percent so far in 2007, after growing 80 percent in
2006 and 60 percent in 2005. Venezuela continues to suffer
from its historical problem of housing shortages, which are
worsening despite massive government intervention in home
construction. The problems are exacerbated by machinery and
materials shortages as well as disincentives to investment,
including rent controls. Despite a recent up-tick in housing
construction, demand for residential and commercial real
estate is expected to exceed supply and prices will continue
to go up, pricing many Venezuelans out of the market.

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NO ROOM AT THE INN
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2. (SBU) According to the Real Estate Industry's Chamber of
Commerce (Camara Immobilaria),Venezuela suffers from a
housing shortage of 1.6 million homes and another 1.1 million
are in disrepair. Given an average household of 4.3
individuals, this means that over 40 percent of Venezuelans
do not have adequate housing. This is a long term problem in
Venezuela as the population has tended to grow faster than
the market and government have been able to provide homes.
In the 1990s, prior to Chavez' election, Venezuela averaged
100,000 new homes annually. In the eight years since, on
average, 20,000 homes have been built per year. The country
needs to build 130,000 new homes annually just to keep pace
with population growth, let alone dent the current deficit.


3. (SBU) Venezuela lacks large construction firms capable of
meeting the demand. According to Camara Immobilaria, the
largest Venezuelan firms can build between 2,000 and 3,000
apartments annually, little when compared to firms in Mexico
that are building 50,000. The difficulty of doing business
here has driven out many contractors and engineers. They
have moved their businesses to Miami, Panama, and Colombia
where conditions are more business friendly. These expat
firms are now marketing their offshore projects in Venezuela,
with Caracas' high end shopping malls filled with posters for
apartments in Panama City and Miami.


4. (SBU) The BRV has thrown all sorts of ideas at the
problem, from bilateral agreements to build homes with China,
Uruguay, and Iran, among others, to the recent inauguration
of a petrochemicals plant that will supposedly provide
material to build houses completely out of plastic. Little,
if any, progress has been made. One contact described to
Econoff the horror of Chinese engineers who arrived to begin
construction at a building site, only to find that no roads,
utilities, or ground clearing had been done. They returned
to China without hammering a nail.

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BRV MIS-INTERVENTION
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5. (SBU) There are shortages of building materials in
Venezuela due to price controls and government demand for
public works projects, including preparations for the Copa
America, for which the BRV has built two new soccer stadiums
and completely renovated seven others. The President of
Cemex Venezuela recently denied in an interview with El
Nacional that there were concrete shortages, blaming
"bottlenecks" in the distribution chain for most problems.
He acknowledged that concrete consumption had grown 116
percent over the last two years and claimed that production
would increase to keep pace. Shortages of skilled labor are
also rampant due to poor technical schooling, high demand,
and the Missions, which discourage labor force participation
via handouts. The President of the Heavy Construction
Chamber told Econoff that they are also suffering from
shortages, with a deficit of at least 5,000 heavy machines,
including earth movers, cranes, and dump trucks


6. (SBU) Rents were frozen in 2003 for buildings built before

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1986 (and rumors are that a new law is planned to freeze
rents in apartments older than 1997 (the combined total would
affect between 60 and 70 percent of the market). As owners
cannot raise rents, there is little incentive to improve
buildings. Rentals now make up less than 10 percent of the
housing market, down from 30 percent prior to 2003. In other
Latin American countries rentals make up between 30 and 50
percent of the market. The lack of rentals primarily impacts
poorer and younger Venezuelans as they cannot afford to buy
an apartment.


7. (SBU) Post has experienced these trends first hand as the
number of available properties has declined and costs have
skyrocketed. Post now requires waivers for every lease in
the housing pool (as they are in excess of USD 25,000/year)
and the few remaining renters ask to be paid in dollars in
accounts abroad. According to the Director of human
resources firm Marsh Venezuela (PROTECT THROUGHOUT),
competition for housing in the Valle Arriba neighborhood
where the Embassy is located is complicated by its
desirability for expats employed by multi-national companies,
who stipulate an apartment in the neighborhood as part of
their contract. These expats are understandably eager to be
close to the American school and in an area deemed "safer"
than other parts of Caracas.


8. (SBU) BRV actions have discouraged investment in new
projects. According to the Director of Century 21 Venezuela,
housing prices peaked in 1998 (before Chavez came to power)
and had fallen by as much as 25 percent by 2001. The fall in
prices coupled with disruptions due to the oil and general
strikes in 2002-2003 essentially halted construction in the
country. Prices have increased in recent years, and by the
end of 2006 prices had returned to their 1998 levels (in real
dollar terms).


9. (SBU) Housing starts have trended upwards in the past two
years as the economy has grown and currency controls have
forced individuals and firms to invest some money locally.
Century 21 estimates that there are as many as 2000
residential projects under construction and the real estate
chamber expects 105,000 homes to be completed in 2007. While
still below Venezuela's needs, this marks a substantial
increase over recent years.


10. (SBU) Local politicians have attempted to exploit the
housing shortage by expropriating properties to turn over to
their supporters. According to the real estate chamber,
while Caracas Mayor Juan Barreto threatened to expropriate up
to 5,000 buildings, in the end only 200 were identified, and
as of yet none have actually been taken over.

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DEMAND AND SUPPLY
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11. (SBU) Given the history of inflation and devaluation,
homes are a primary means of savings in Venezuela. This has
also helped drive the price of real estate up as people look
for "safe" investments to place their money in increasingly
uncertain times. The lack of supply and almost inelastic
demand has led to a surge in prices. A one-bedroom apartment
in the upper-middle class neighborhood of El Rosal in Caracas
now costs upwards of USD 2,500 per month, a 2/3 increase over
two years ago.


12. (SBU) Real estate is essentially priced in dollars and
brokers have admitted to Econoff that the trend has been to
price in dollars at the parallel market rate (Bs. 4070/dollar
as of June 27) as most sellers are looking to get their money
out of the country. The increase in the parallel rate this
year has contributed to increased prices, as well.


13. (SBU) New residential construction has not been
paralleled by an increase in commercial buildings. Office
projects are significantly more expensive and have longer
return times (apartments can be pre-sold, whereas offices are
usually leased). Bank financing is more difficult to obtain
for office projects. The shortage of office space (in
Caracas, the real estate chamber estimates 80 percent of new
projects are residential and only 20 percent are commercial)
has also led to an increase in prices. Class AAA office

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space now sells for $3000 per square meter.


14. (SBU) Residential properties are often pre-sold and
mortgages, while limited, are becoming more commonplace.
Mortgages in Venezuela require 20-30 percent down payments
with a term of 15-20 years. Mortgage rates are below the
rate of inflation, but amounts are limited by family income,
with most banks refusing to lend more than 20 percent of a
family's annual income. Banks are required to have 10
percent of their portfolios in the housing sector, which is
actually below most Latin American peers where, according to
the real estate chamber, housing makes up between 30-35
percent of loan portfolios.

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COMMENT
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15. (SBU) Venezuela's government has been incapable of
providing adequate housing for its population for a long time
and it would appear that the housing shortage has been
exacerbated under Chavez. BRV policies such as freezing
rents and interest rates (during times of high inflation),
price controls that have led to shortages, large public works
projects, impossible labor regulations, and relying on
Uruguayan home builders instead of loosening the reins on
private sector Venezuelan firms, have all contributed to the
pitiful situation of housing in Venezuela. It is estimated
that anywhere between one and two million Caraquenos alone
live in barrio slums on the hillsides (most without legal
rights to their property) and as that number continues to
grow, associated social problems will grow as well.

BROWNFIELD