Cuba’s Real Estate Market – Buyer Beware – Part II
Raul’s change in real estate policy is certainly a step forward. Billions of dollars of valuable real estate holdings that have never been valued or been for sale in an open market are now for sale. Like the country’s infrastructure, the country’s housing is in terrible shape. Leaky roofs, inconsistent plumbing and electrical systems and rotted stairways typify the housing scene. Without building materials to repair damage, the state of Cuba’s housing continues to deteriorate.
Trying to understand what property is worth in a market that regards real estate agents as outlaws and views the payment of commissions as illegal is certainly challenging. There is supply, a lot of it, and there is demand, an amazing amount of that too, but there are no legal agents, no central listing service and no legitimate tracking mechanism for selling prices.
And, here is another surprise. If you seek legal advice from a property attorney, good luck. In Cuba, property lawyers are like real estate agents, another brand of outlaw.
Oh, and did we mention that central computer systems where photographs of homes that may or may not be on the market are either not in existence or do not paint the whole picture of any one community. It is fair to say that Cuba’s real estate market resembles the Wild West. But, let’s be clear, business is being transacted.
Fidel’s brief “flirtation” with a market approach to real estate has left a few properties in Havana as “pre-existing, non-conforming properties” that can be purchased by non-Cubans. Today, any other purchase can only be achieved by Cubans or “full-time” residents. With Cubans unable to afford homes in a marketplace void of mortgage lenders, they invariably turn to Cubans living abroad to provide funding. Many Miami-based and US-based Cubans end up financing native family members. It is difficult to know who the buyer and owner really are but that is not unique to Cuba. The bottom line is there are essentially three markets; one for foreigners, one for Cubans with family backing from abroad and one for Cubans with no external backing.
So, how does a Cuban resident with an average annual wage of $240.00 purchase real property in a country without a mortgage industry? And, how are new homes built when existing homes are falling down and new construction materials are virtually impossible to get?
As mentioned, the Cuban real estate market is multi-tiered. Cubans are buying and trading properties valued at less than $10,000 while foreigners and Cubans living abroad are participating in a market where prices are significantly greater than $10,000. In fact, in the pre-existing, non-conforming areas, foreigners are paying prices comparable to US property prices, up to and exceeding $2.5 million.
Cubans living away from Cuba buy for their extended families. Foreigners married to Cubans also are buying and foreigners are buying outright in areas where foreigners are permitted to buy. This is certainly progress but again is it real?
If you are confused, it is okay. Markets tend to sort themselves out. Accept that asking prices are just asking prices, not based on previous sales or sales of comparable properties but usually more a reflection of what the seller would like to receive.
Some Cuban real estate stories are pretty unnerving. One Dutch investor bought a home for his Cuban girlfriend only to find that when she had title to the suburban $400,000 home he was no longer her boyfriend. Now, her family and extended family reside in the residence and he is persona non grata. Stories like this give new meaning to the term; “let the buyer beware.”
As for new construction of residential homes, startups and completions are slowing since a surge in 2008. This reality is described in a report from Sergio Diaz-Briquest, a US-based demographer, who says Cuba’s housing deficit is somewhere between 600,000 and 1 million residences and widening every year as more existing homes become uninhabitable.
But, make no mistake about it, for many investors, Cuba’s real estate has tremendous appeal. The sun, the amazing wildlife, the history, the culture and the potential have undeniable appeal. But, conservative investors remain cautious about Raul’s ability to navigate privatization in a country that is short of everything except rhetoric.
In 2008, Cuba’s Office of Statistics reported that new housing starts totaled 44,775. In 2011, new starts totaled 32,540. In 2012, 32,104 new homes were completed. By October 2013, only 18,000, new homes were underway for the year. The lack of housing for natives just keeps widening.
According to the National Statistics Office, 45,000 homes were sold in 2012. Illegal agents who pose as photographers in order to post listings for sale, which is legal, and who show properties for sale, which is not legal, say the real number of sales is closer to 100,000.
There are a number of schemes used to mask selling prices and deny the government its 4 percent tax from every buyer and every seller and there are a number of schemes to disguise who the actual buyer is. Prices for sold homes range from below $10,000 to over $2 million. In 2013, the average selling price was believed to be $16,000 but most non-agents would say the average sale was significantly higher. Here’s another interesting fact. If one is caught lying about the selling price, the crime is punishable by prison time.
It is worth noting that Raul also legalized the used car marketplace. However, it against the law to open a business dedicated to selling used cars. This seems to be how privatization of Cuba will come about, in baby steps without sweeping reforms. Until agents are legal and property attorneys are permitted to provide valuable services and a central selling price tracking network is in place, Cuba’s real estate market will continue to resemble the Wild West. Let the buyer beware!