Updates

Penninsula and Grand Venetian

The beaches of the Penninsula and Grand Venetian abut the Pitiall River. The Grand Venetian also abuts the beach of the Holiday Inn.

This weekend, about 40% of the Holiday Inn beach and waterfront collapsed into the Pacific Ocean. The collapse covers an area about 50 meters wide and 150 meters long. Initial assessment is that the collapse was due to the diversion of the Pitiall River recently completed in order to build the Grand Venetian and Penninsula projects. The river diversion resulted in a water table that was supporting the sand and rocks of the waterfront above it to dry up.

The collapse is yet another risk added to the Penninsula and Grand Venetian Projects.

Icon Vallarta

We were advised by Icon Vallarta that Tower 1 was sold out. We have now been advised that 36 prospective purchasers of the 112 units in Tower 1 have asked for their deposits back. We have also been advised that the sales contracts for Tower 1 were provided to purchasers with a condition that they be signed without a lawyer's review. And that the sales contract includes a provision allowing closings to be pushed out from the initial deadline of December 2009, for a full year without penalty to the developer.

We continue to recommend that any purchaser of Icon Vallarta request their deposit be returned.

Friday, November 16, 2007


Icon Vallarta

The marketing fact sheet reads "Icon Vallarta designed by Yoo by Stark another Related Group project co-developed with Grupo Chartwell."
If that marketing blurb wasn't confusing enough, so is trying to get discloure about prices, condominium budgets, delivery schedules and financing.

The Related Group is a Miami based, privately-owned, development company with several successful projects in Florida. Related has decided to expand in Latin America through Related International. Given the nature of the US housing market, particularly in Related's core market of South Florida, Related might benefit from focusing only on selling unsold inventory in South Florida.

Related's business model is to introduce a multi-phase project with low prices and low deposits on day 1, and then increase prices on a daily basis. Related keeps deposit requirements as low as their bank will allow in order encourage speculators and create the impression of selling out as fast as possible. The result is that Related is selling to clients for whom they know will lack the financial resources to close or simply have no intention of closing. This business model is precisely why the US housing market is now in so much trouble. Buying into a Related project is like buying a plane ticket. The guy beside you might have paid 50% what you paid, or 200%. And everyone paid with a credit card. But many of the buyers won't be able to make the monthly credit card payments. Related's target market in its key South Florida market are speculators. These are investors who hope to buy condos for as little down as possible and then sell them before they ever have to pay for closing. If prices go up, these guys flip and make money. If prices drop, they walk away from their deposit and the developer gets to sell into a declining market through an auction system. It is estimated that 50% of all condominiums in the Miami area that are completed within the next 18 months will be in Related projects. And many of these Florida condos will never be occupied. The problem is that Florida real estate prices are plummeting, down 30% in the past year in some markets. Related will be left with a large number of units where investors either walk away from their deposit or simply lack the financial resources to close. Related will have to sell those units via auction. And auction prices are typically 40% below original sale price.

Icon Vallarta was planned before the recent problems in US real estate surfaced. Icon is supposed to be a 3 tower, 336 unit project. Related used the same business model to "sell out" Phase 1 in Icon Vallarta as it used to sell its recent Florida projects. Published entry level prices were $240M to $300, but we are aware of buyers paying as little as $190M. Although Related claims to have sold out Tower 1, Related will not provide any information about the profile of the buyers or how many buyers purchased multiple units. We are of the opinion that some of the building contractors bidding on construction were required to buy units in Tower I to secure construction contracts. Usually the contractor is required only to place a small deposit and to defer all further payments until closing. This type of purchase does not have to be disclosed in Mexcio. It artificially creates demand and creates the false impression that there are many interested purchasers.

We have attempted to get full pricing disclosure from Related for Tower II. The best we can acheive is being told that buyers in Tower II will be offered units from $300,000 to $1.3 million. Related will not put anything in writing. Delivery of units in Towers I and II is expected sometime in late 2009 to middle 2010. No budgets have yet been developed. Related will say nothing about financing other than a $10,000 deposit is needed at the time a contract is signed. Related appears to require about 30% prepayment over the construction period, with 70% at closing.

Related's marketing material references a designer called Yoo by Starck who Related claims is world renowned. I asked my New York-based, self-described design-nerd expert about Yoo by Starck. He had no idea what I was talking about.

The project will likely be built, so construction risk is limited. But everyone will eventually be taking write downs on this project when it is completed in 2-3 years. Better to wait 3 years and buy for 30% less than existing rumoured prices today.

Even experienced speculators will be taking a hair cut on this project. US investors have bought into Tower I relying on their US experience as speculators They will eventually find out that when they flip/close, they are going to have to pay 8% in closing costs (compared to 3% in the US), as much as 8% in real estate sales commissions (compared to 4-6% in the US) and be liable for the new capital gains tax, only last year introduced to Mexico.

I have only ever reviewed two condominium projects more risky than Icon Vallarta. They are the Toronto Sliver project, now renamed 5 King Steet, which was built and is now under a complete financial restructuring, and the Toronto Sapphire Tower, which failed and will not be built.

Recommendations:

Existing Purchasers: Request initial deposit be returned

All Others: Pass

Sevla Romantica

Sevla Romantica is a 90 unit, series of low rise buildings in the heart of Old Town and Zona Romantica. The project can now be considered complete.

The project was pre-sold starting in 2004 with very attractive initial pricing. Studio units sold for about $109M and 1-bedroom units for $225M, unfurnished. By mid-2006, furnished studios were selling for $200M+ and 2-bedrooms for $240M. Prices have been stable for the past year, maybe up slightly for studios, down slightly for 2 bedrooms. Prices have remained high because this is a very attractive rental building. Very few listings and sales have been reported.

Since the project is complete, there is no delivery risk. We have no reports of any construction deficencies. However, the final building in the project is not brand new, it is a reconstruction of an existing building and requires its own inspection before an offer is made. Maintenance fees are about $250 monthly for 2-bedroom units. Operating risk (the risk of maintenance fees rising faster than inflation) is low. Almost all common elements are outside and require low maintenance. On-site staff requirements are very low.

There is a semi-formal rental program and rental opportunities are far higher than average. Two-bedroom units are, in some cases, generating over $20M net income per year.

Parking spots are deeded. We have a report of one owner selling with the claim that buying a parking spot is not necessary since there are many "empty" spots to use. These spots may be empty but they are owned, and simply owning a condo in the building does not allow an owner access to "empty" parking spaces. Parking in the area is very limited so if a parking spot is needed, insist on it being part of the purchase with a deed provided.

We are waiting for confirmation that condo deeds have been provided with no conditions, prior to issuing a recommendation.

We expect to recommend hold/buy with a requirement that the final building have specialized inspection.

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.