Fallout and Restructuring

Venegas World Star Realty



Venegas World Star Realty was one of the largest real estate brokerages in Puerto Vallarta. Today the Venegas name is gone from the marquee, the satellite offices have been closed and the future of the brokergage is not known. It appears that World Star Realty will continue to operate out of the main office on Olas Altas in Zona Romantica, but with a much reduced footprint.



Bayview Grand - Grand Venetian



We last fully reviewed the Grand Venetian on February 10, 2007 . It was supposed to be three towers, each tower with 140 condos, and and additional 68 townhouses spread across a 40 acre site . At least until last month. Despite the fact that the third and final tower is under construction and the site layout was complete, the townhouses have been cancelled, the height of the third tower increased while under construction, and the number of units in tower three increased from 140 to 234.

We have seen projects restructured prior to construction and we have also seen slight modifications to building plans such as building 10 rooftop penthouses instead of 8. But we have never seen an as-planned building, under construction, expanded by over 80% in unit capacity.

We are not technical building experts, but we do know some things about expanding, after the footings have been laid and the first few floors have been built. First, there is no additional parking capacity. Parking has already been built. So apparently there will be two classes of buyers, one class gets inside covered parking, the second class gets outside parking. Second, the common elements for all three buildings are finished and were developed with the capacity to serve 140 condos in tower 3, but now tower 3 will have 234 units. How do the common elements get expanded? Who pays for the expansion?

However, the real confusion surrounds what we in Canada call the Declaration and what in Mexico should be called the Escritorio. It is the legal document which specfically describes what is owned, what is considered an exclusive-use common element and what is considered a common element. The townhouse site, which still exists, but will not have townhouses, now has to be "written in" as common elements to the Declarations of those properties in Tower 2 that have been finished and delivered. (This project has 3 towers which were sold in the following order: Tower 1, Tower 2, Tower 3, but they are being completed in the following order - Tower 2, Tower 1, Tower 3). We do not believe it is possible to alter a Declaration without a 100% vote in favour and we don't see it happening.

Has a condo purchase at this site been a good investment? Two years ago, I bedroom units in tower one sold for $229M. Today, one bedroom units in tower 3 sell from $190 - $220M.

Sales Softness Continues

Real estate sales continue to trend down, and the end does not appear in site. Recently released sales figures show that market volume declined by about 10 % in 2007 over 2006, and the trend accelerated in the 4th quarter with an almost 15% decline. The number of listings on the MLS rose by 10%, the first statistically significant rise in Puerto Vallarta MLS listings since they have been kept.

The north shore of Bandaras Bay, in the state of Nayarit, has been renamed Riveria Nayarit. The re-naming was done by the Mexican government's crown corporation for tourism called Fonatur. Fonatur is co-ordinating development in the area. Riveria Nayarit is adding new product to the Puerto Vallarta market far faster than it can be absorbed.

There are now 7,000 recreational & investment properties available in the Puerto Vallarta market, up from 5,500 last year. The inventory represents about 4 years supply of sales. Another 14,000 properties are planned in the next 7 years.

2007 also saw a decline in Puerto Vallarta real estate prices, although that decline shows considerable variation from location to location. The best locations in such areas as Zona Romantica or the Hotel Zone are showing 5% price declines for new product, and steeper declines of up to 10% for re-sale. Amapas which is considered a prime location is now showing declines in price, especially for re-sales, if a sale is even possible due to the infrastructure problems in the area. These declines are even occuring at signature projects such as Horizon. Nuevo Vallarta prices are down 15-20%, mostly as a result of discounts from list prices being offered at new developments. For example Grupo Real del Mar is offering discounts of up to 25% for its projects in Nuevo Vallarta.

We have studied many specific boom-and-bust markets and they all have different profiles. But there some things we have learned. When sales volumes and prices both fall, over a period in excess of one year, in an environment where credit becomes tight, it takes at least an additional 2-4 years before volumes increase and price appreciation occurs.

The Puerto Vallarta real estate decline would actually have been much sharper than experienced except for the Canadians that have entered the market since the Canadian dollar has risen to parity with the US dollar. The problem is that the influence of the Canadians is likely to be short lived. There are simply not enough of them. The state of California has more people than all of Canada.