I have traveled the world as a venture capitalist, successfully investing in businesses and projects of many types including here in Colombia. I have seen many countries’ economies turn and others crumble in the course of my thirty years on Wall Street.
During the last seven, I have watched a mismanaged economy like Brasil’s turn 180 degrees on its own and grow to one of the top seven leading economies in the world. Others, such as Colombia, have also worked hard to get their house in order with a focus on education and an open free-trade stance that can only benefit its cheap labor force and reduce the cost of living for its citizens. However, in Colombia’s case, some of the success is masked by the aid provided by the United States as well as the re-patriotization of money often from the ill-gotten gains of the illicit trade Colombia is so famous for.
To see a good example of this underground economy, one need only look at Colombia’s “Riviera” and charming UNESCO city, Cartagena. Of all the real estate bubbles I have studied in the world, this one could be the biggest. And when it pops, there is very little visibility as to where the floor is. Cartagena could see price declines in excess of 50% in its “new Miami” – Boca Grande, and far greater in the old city of El Centro where prices have risen beyond the most insane logic. The concept of return on investment or cap-rates have been thrown out the window and mania has taken on new meaning – all in a city where unemployment is far higher than most parts of Colombia and, as a resort area, offers little beauty in its beaches. To say the market is artificial is an understatement.
To understand Cartagena’s real estate market, one must go back and look at it’s neighbor Panama City and its boom in high rise condo buildings. Nine years ago, as the buildings began to rise from the mud on the eastern shore of this city on the Pacific, one need only look up at night and notice something very odd about all these massive high-rise condo buildings – they were all dark. No one lived in them!
Sure, they were all sold and, as construction of new ones where announced, they were sucked up in purchases of not just one, but 5 at a time. The intriguing thing in Panama was where the demand was coming from. It was like a vacuum that was attracting ill-gotten money trying to find its way back from the States and other parts of the developed world, but unable to get across the border into Colombia.
Colombians can easily travel to Panama unlike the US and other parts of the world and it is close to home where they speak the language. Banks from all over the world set up shop in the form of subsidiaries in Panama City in an effort to get a share of the action. Publishers, such as Escape Artist, cranked up the marketing machine claiming the new “mecca” had been found with great tax benefits, while all the while cutting deals with developers in exchange for turning up the cheerleading to “buy-buy-buy”. But that bloom is off the rose as buyers have begun to realize, like a game of musical chairs, there is no place to sit down when the music stops. There are no buyers left to buy, simply because it is not a great place to live, earn a living, or even vacation beyond a few days in ones life.
Just a short hop across the border, these folks have found a new market to pump. Outfits like Juan Paul Realty hype their news letters claiming “Utopia” is here on the Colombian Caribbean coast in Cartagena. They promote investment opportunity offering statistics with little factual evidence of sustainable economic support. As the threat of guerilla groups faded with the aid of the US, travel by road within Colombia reopened spurring demand for vacation homes in Cartagena by the rich from Bogota, Cali, Medellin and other Colombian cities where people earn their livings.
Buildings went up so fast and with such little oversight that at one point the tallest in all Colombia, and first steel structure on the sandy terra of Boca Grande, had all of its 50 floors fully erected prior to suddenly tilting over several degrees like a giant leaning tower of Pisa and authorities were forced to dismantle it to the ground. With barely any foundation or footings it nearly collapsed on the city much like present prices will soon enough.
Much like Panama City, most of the high rise condos have an erie darkness to them a night. Upon a recent visit to one building I was informed that all are sold, but many un-occupied. A friend and local furniture store owner revealed that one customer last year came in and bought furniture for all four condos he recently purchased in the same new building and, as far as she knows, none have been ever used.
Another interesting trend has been for money to buy up historic buildings in El Centro, which sold for less than US$50,000 six years ago, for total renovation into petit hotels. Most of these hotels have room prices equal to the best hotels in Paris, NYC or London. In many cases, money was not invested with the intention of operating a hotel, but merely to find a place to park money and occasionally entertain one’s elite friends. Most remain shuttered after renovation and show little desire to find guests. Simple analysis could determine that these are not businesses with any real interest or ability to obtain any kind of return on invested capital. It is difficult to make money with so few rooms.
Other old buildings have been converted to condos with prices commanding 600-1000 dollars a square foot, which is equal to London rates. Certainly not a bad return if you can find a buyer, especially when costs don’t even approach $100 per square foot. If this is not enough, the classic sign of a market peak is that Caldwell Banker has moved to town. The phenomenon of rising prices and declining sales is a classic sign of a market in transition. Along with Colombia’s over-valued stock market I don’t see this ending well.
Throughout this gentrification in the last several years, a sad byproduct has occurred as it always does; the poor, of which Cartagena is mostly made up of, have been pushed out of the coastal and downtown historic area and the city is dark and quiet as a church mouse at night other than during the holidays. The charm of the fabulous Cartagenero culture and its super friendly and happy people is not to be seen, displaced by often closed upscale fashion stores which turnover often. For the visiting tourist, most claim it is a boring place at night – certainly not NYC, Paris, Rome or Miami where real estate prices, as well as prices for everything else, are a bargain when compared to those of Cartagena.
Author Peter Koslowski is managing director of Windward Venture, a Boston-based investment group