Molino de Agua

We last full reviewed Molino de Agua in January 2007 and published an update in August 2007.


A number of developments have considerably reduced the risk inherent in this project.

This project, at the mouth of the Cuale River, in Old Town Vallarta, continues to benefit from a AAA location. Physical infrastructure including roads, commerical stores, and the expanded boardwalk have already been completed. The beach location is AAA.

Berry Developments, out of the US, began construction ahead of time. The project is about 50% complete, and the first units should be delivered by December 2008, about 6 months ahead of schedule.

Berry has greatly reduced environmental risk by not building below grade. Parking and storage is inside, at ground level. This type of structure greatly reduces the risk of water damage, reduces operational risk and provides excellent views from units as low as the residences on the 3rd and 4th floor. The Cuale River has also been tested under tropical storm conditions and there should be no risk to Molino de Agua.

The developer has led the market in adjusting prices due to a weakened market. Price reductions of 15-18% were implemented. A 3-bedroom unit on the 1st residential floor, has been repriced from $605M to $505M.

Berry Developments is requiring a 35% deposit and will not finance the deposit. However, Berry is allowing the 65% balance to be paid at closing.

A formal rental program has not been established. However, due to the excellent location of the project, rental income opportunities will be well above average for the Puerto Vallarta market.

Maintenance fees are estimated to be $500-$600 per month for a 3 bedroom unit.

We are of the opinion that based on location, building schedule, pricing, financing and rental income producing opportunities, this project will outperform the market both for price appreciation and income.

Recommendation*: Hold for existing owners and/or buy (except for penthouse units)

*Recommendations are general in nature only and will be impacted by an investor's specific circumstances.

The Peninsula Phase III

The Peninsula is a three tower residential, hotel and commerical project on reclaimed land at the mouth of a river in the hotel zone of Puerto Vallarta.

Phase I and II of the projects have been sales successes. Phase I has been delivered but despite a formal request, we cannot determine if deeds have yet been provided. Phase II will be delivered shortly. Phase III is scheduled to be completed sometime in 2009, but sales contracts will allow for a 6 month delay.

There are simply too many risks with Phase III to attempt to cover in one posting. The building will be a combination of traditional condominium, fractional and hotel units. Condo and fractional units will compete for rentals with the hotel. Buildings of this nature have very high operational risk.

The reclaimed land used for this project has yet to be tested by a tropical storm. Leaks have been reported in the commerical structure that abuts the residential buildings.





This is the only project in Puerto Vallarta that has not adjusted its prices down in wake of a market slowdown. The result: only 3 of 80 units have sold in the 6 months the project has been marketed. Price risk is not acceptable. This project will have to reduce pricing in order to avoid a substantial mark down of unsold inventory at the completion of construction. An Intrawest project had a similar market and pricing profile. At completion, list prices were reduced by 25% across the board to use up unsold inventory.





Recommendation*: Pass

*Recommendations are general in nature only and will be impacted by investors specific circumstances.

Punta Esmeralda

Punta Esmeralda is a 20 acre project of villas, townhouses and condominiums north of Puerto Vallarta, between Bucerias and La Cruz.

The location offers many natural attractions but is about 45 minutes from downtown Puerto Vallarta, longer during peak periods. Road and commerical infrastructure, including stores etc. is very weak in the area.

The project is mostly completed with some condominiums in 2 low rise buildings (6 stories)available along with very expensive villas and town homes. Delivery risk is low. Homes will be completed and delivered when promised.

The developer, Real del Mar, is offering both discounts from list price and financing options, usually combined. The developer may be open to flexible financing and discounts. Financing risk is normal and can be reduced to low depending on the financing package selected.

Environmental risk is lower than normal for Banderas Bay. The project is well above sea level.

The projected maintenance fees of $370 per unit for the condominiums appear to have been set very low. This project has considerable common areas and facilities.

There is no formal rental program but the developer will assist with rentals in the short term. This project will likely generate very limited rental income.

The entry level price for an 1,800 sq ft. condominium is about $345M after discounts. We believe that prices will be very soft for the entire market area north of Puerto Vallarta, and this project falls into that area. There are well over 2,000 units presently available in that market area which is a pipeline of about 4 years supply. There will be no price appreciation in the short term (out to 12 months), and it is unlikely there will be price appreciation out to 3 years.

Recommendations*

Existing Owners: Hold

*Recommendations are general in nature only and will be impacted by investors specific circumstances.

Friday, October 26, 2007

Puerto Vallarta Real Estate Trends

As the high season draws near there are number of key trends investors should consider:

Buyers market - there are 3 years of supply presently for sale, under development or in the pipeline. And pipeline is growing much faster than sales.

Softening prices - virutally every new development has either reduced price or introduced significant discounts from list. Icon Vallarta has dropped its entry level product from $240M to $190M, Grand Venetian from $220M to $190M. Villas de Colina II has been repriced from $450M to $385M. Molina de Agua is down 15% since last April. Punta Esmeralda is offering discounts of 9-15% from list as well as very flexible financing. An exception is Tower 1 at The Peninsula which has increeased prices slightly, but has pre-sold only 3 of 80 units in 6 months.

Financing options - the mortgage brokerage business has experienced slower growth than expected. Developers are much more often now offering financing options. Cash is still king.

Shakeout - projects such as Monte Verde have been pulled from the market due to slow pre-sales and the absence of full permits. At least one mortgage broker has closed. Real estate offices are closing. GMAC has indicated it will retreat from lending in Mexico. However, New Earth Capital, a very experienced California based brokerage business, is entering Mexico.

Continued absence of full disclosure - sales offices and developers continue to fail to provide full disclosure, whether it be strata (condominium) legal structures, proper deeds subsequent to closing and selling prices.

Absence of infrastructure development - despite continued promises, the governments of Puerto Vallarta and the states of Jalisco and Nayarit are hesitant to invest in infrastructure. Property owners in Amapas will not get new roads for at least 3 years and the nearly 600 new owners will have to compete with construction vehicles, on a one lane cobblestone road to reach their homes. Nayarit owners face a bigger issue. Their only fresh water source, the Ameca river, came close to drying up last winter. There are at least 10 new developments in Nayarit that are served by just one road which I can only navigate in a truck despite it being paved. In addition, Nayarit owners still must drive 10-15km to reach a drugstore or foodstore. The one jewel is the new airport which was recently privatized and expanded.

Canadian dollar parity with USD - Canadians can now afford to buy in Mexico. Many are entering the market. My lawyer has advised that his Canadian client list has grown by more in the past 3 months than it did in the past 3 years.