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Value Investors On The Sidelines

“Dear David,” writes a reader to our Costa Rica Correspondent David Stubbs, “can you give me your thoughts on a new development in Costa Rica called Hacienda Matapalo? It sounds like it will be a great place to own both for vacation and for retirement once the project is completed, the roads are paved, and the new airport is open. But I’d like to have your thoughts…”

David’s reply gives good insight not only into the Costa Rica market right now, but also into how to shop for real estate in a foreign market in general…and four important things to consider before making any property investment in the current climate.

David says:

“I am not personally familiar with Hacienda Matapalo, but it seems popular. As you suggest, dear reader, it is in an excellent location for capital growth–near the planned new international airport and the new hospital and on the road from Quepos to Dominical that is (finally) being paved.

“The key, of course, in making an investment like this one is your level of confidence in the developer. The developers in this case are based in the United States. In the current climate, I would be careful to check both their track record and the status of their financing for this project. This would constitute a minimum level of due diligence.

“In addition, I’d like to offer some general observations and recommendations for things you should consider before buying at Hacienda Matapalo or anywhere. Your take on these things will depend on your current personal financial circumstances, your timeline for investing, and your investment perspective.

“First: Location. Today the location of Hacienda Matapalo would be considered remote, much as the Guanacaste region of Costa Rica was viewed before the new International Airport opened at Liberia. You may see the remoteness as a positive. If you’re buying for personal use…no problem. However, if you’re buying with the intention of renting or eventually re-selling for capital appreciation, realize that you’re limiting your potential market in each case. Many people are not comfortable being so far away from a first-class hospital, a major shopping mall, etc.

“Second: Timelines. The new airport is planned, yes. However, I have no confidence in any discussed timeline for completion.

“You have to understand how things go in this country and in this part of the world, in general.

“Right now in Costa Rica, one new road is being built–the new highway from San Jose to Caldera…after 20 years of discussion, planning, and promises. Twenty years!

“I have friends who live in a nice sub-development called Los Reyes. It’s difficult to access. My friends realized this when they bought 10 years ago. They weren’t overly concerned, though, because they were assured the new road would be finished ‘any time.’

“Your idea of ‘any time’ and the Costa Rican government’s idea of ‘any time’ may be two different things. Given the current financial climate in this country (see The Economy, below), I predict that the long-discussed airport will be delayed.

“Third: The Economy. Costa Rica is entering a recession. It’s nothing dramatic yet, just a gentle slide. Construction is down 10.4% in the last seven months; manufacturing is down 8.5% in nine months; hotel occupancy is down 4.4% in eight months; retail is down 1.25% in eight months.

“The majority of tourists to Costa Rica come from the United States. We are beginning to see a drop off in tourism; first quarter 2009 numbers are down a bit. More than a half-million Costa Ricans are involved in the tourism industry, directly or indirectly, so the ripple effect of any falloff in the tourist trade will spread widely.

“Meantime, exports are down, as well, as is foreign direct investment.

“Finally: Local Market Realities: The real estate market in Costa Rica is, in fact, two distinct markets–the Tico market and the Gringo one. Gringo real estate (Hacienda Matapalo would fall into this category) is heavily influenced by international (typically North American) buyers.

“With the troubles in the United States right now, the high-end Gringo real estate market in Costa Rica is taking a beating. Prices are dropping, and the number of properties listed for sale is rising. The smart buyers are watching from the sidelines.

“I know of a small group of value investors (myself included) who think that there should be some great deals in the next 12 to 24 months.”

You’ll read about them here first.

Kathleen Peddicord

MAILBAG:

“Your recent article about Yunnan, while interesting, could be quite misleading to those not familiar with China. The author states that ‘the government decided that only residents could buy property. I’m told that in Dali, though, it works the other way around–that is, you can still buy property to become a resident.’

“In fact, no one, Chinese or otherwise, can buy property (i.e. land) in China. One can only lease. And the leases are short–70 years.

“Chinese frequently spend hundreds of thousands of dollars to buy poorly built concrete shells with seemingly little concern for the fact that these will ultimately decrease in value as the building deteriorates and the lease winds down.

“There are lots of reasons to rent or purchase a home in China, but do so with eyes open to the fact that the current government actually owns the land it sits on.”

— James G., Chengdu, China

***

“Kathleen and Crew, I am wondering if you have information on good banks to deal with in Panama? I have been reading about Costa Rica, but you keep leaning toward Panama.

“If I decide to do something, I need information on a good bank to deal with from up here in the States. I hate to go down looking if I know a seasoned traveler who can tell me which ones are good and which I should avoid.

“I am a subscriber to your newsletter, and I am soaking up all the good information you are putting out.”

— Dennis C., United States

First: Panama versus Costa Rica. Yes, we favor the former. Panama right now is the world’s top retirement and offshore haven and one of the best places in the world to park investment capital (in real estate, outside the capital city).

However, we recognize that Panama is not for everyone. Costa Rica Correspondent David Stubbs considered both countries four years ago when he moved his family from Hong Kong to this part of the world. He chose Costa Rica…and makes a good case for why. Read about it here.

Second: A bank recommendation. Before I make one, I want also to make a disclosure. Yes, you could call me “seasoned.” That doesn’t mean I don’t still take missteps.

You’ve heard of Stanford International Bank, dear reader? The bank owned by the financier scammer now under indictment for fraud? Stanford has a branch in Panama City. And, about 24 hours before this branch was closed under order of the Panama banking commission, I deposited some money into a brand-new account I’d opened there a week earlier (because I was unhappy with the customer service at another bank I’d been dealing with).

No, I didn’t invest with Stanford. But I put some money on deposit in his bank.

Thinking back now…gee…you know…the customer service at that other bank…it wasn’t really so bad after all.

What was I thinking?

Current word is that deposits at this Panama City branch of Stanford Bank will be released to account-holders in another three weeks or so. The Panama bank was uninvolved in the scandal and was closed to prevent a panic.

That’s the story. And I hope it’s the reality. But I’ll believe I’m getting my money back when I get it back.

Meantime, I’m reminding myself (and now you, too, dear reader) that this is why diversification is key in all things.

I know some people who had a great deal more money than I did on deposit at Stanford Bank here in Panama City. One friend had no other account anywhere. He’s worried.

I won’t be happy if my money isn’t eventually returned…but I won’t be shocked. And, thankfully, I won’t be broke. Because I have a number of other bank accounts in a number of other jurisdictions.

No country other than the United States insures bank deposits. And the U.S. insures only to US$100,000 per institution. Bank failures are a way of life in some parts of the world. In Argentina, for example, any Argentine with money knows to keep it in accounts outside his home country.

But Panama isn’t Argentina. Panama, in fact, qualifies as a banking haven. And I recommend it as such. Still, even here, spread your bank deposits around a little.

Specifically, which banks do I recommend? ScotiaBank (where I also bank) and Multibank.

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