Michelle Seaton
01/01/2008
Over the course of 30 years, Hal Wright has developed more than 300 hotel properties at locations across the United States. For the last nine years, however, he and his partners have concentrated on building and selling oceanfront homes in Costa Rica. "Where else can you build a beautiful palace on the beach for a six-figure price tag?" he says. "Our customers want drop-dead gorgeous views in an unspoiled environment—monkeys in trees and no Wal-Mart." Millions of these people are out there, Wright says.
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PUNTA MITA, Mexico, near Puerto Vallarta, was a largely abandoned tract of land 15 years ago. Now, development is underway that will result in some 800 high-end residential units and three luxury hotels. |
Many people—retirees, young vacationers, affluent families looking for multigenerational vacation homes—are ready to flee the tempestuous U.S. housing market and settle down part time in a place with ready access to the beach, temperate weather and maids who will work for a few dollars a day. Building costs for the beach homes these buyers want are minuscule compared to those for oceanfront houses in the United States. Wright says that in the more than 100 units of luxury housing he has built in Costa Rica, construction costs have run roughly $100 per square foot; similar projects in Florida today would cost a minimum of $250. This is in part because labor south of the border is so cheap; contractors can hire workers for much lower pay. Total expenditures, including land, run less than $200 per square foot, Wright says, but the units, when complete, sell for more than $300 per square foot.
TOP VIEW |
First Come, First Served
As an example of the kind of development springing up in Latin America, consider Punta Mita, Mexico, a small peninsula a few miles north of Puerto Vallarta. Just 15 years ago, this was a largely abandoned tract of land. Densely overgrown with vegetation, the peninsula’s 1,500 acres of low hills held value only to the few dozen squatter families who had cleared space for their homes and small farms.
Still, Punta Mita featured pristine ocean views and nine miles of undeveloped beachfront. The family that held title to the land sold the entire parcel for an undisclosed sum in the early 1990s to DINE, one of Mexico’s leading builders of luxury housing. DINE spent $150 million to clear vegetation, build roads and bring in utilities; then it parceled out several choice lots, on which the company built impressive oceanfront villas. It also invited Four Seasons to build a resort on the site. In 1999, the Four Seasons at Punta Mita opened with fewer than 100 rooms, quickly reaching more than 80 percent average annual occupancy.
That same year, DINE offered 20 lots of oceanfront land, called Ranchos Estates, that varied from 1 to 1.5 acres. The prices started at $1 million each, cash only, but the lots sold quickly—almost instantly—with many buyers snapping up more than one lot.
The developers are only too thrilled to recount stories about people who bet early and won big. As the development’s allure grew, the Four Seasons added more rooms, including beachside villas that rent for $9,000 a night in high season.
DINE has several other projects in Punta Mita, including the
Las Palmas condos, which list for $1.175 million and up and offer access to a
golf course designed by Jack Nicklaus. Another effort, El Encanto, features
single-level condos that have only a sliver of ocean view, but boast plasma TVs,
tricked-out kitchens and more bathrooms than bedrooms. These cost $1.45 million,
and have been sold and resold. The St. Regis hotel will open in Punta Mita this
year, and a third hotel will open in 2010. A private airstrip and a small
planned village in the hills are also on the drawing board.
The flow of money seems endless. As long as there is a bit of
land to sell, there is money to be made. There is so much construction here that
every morning at 8:15, 1,500 workers from Puerto Vallarta show up in the backs
of flatbed trucks, waiting to clear the security gates to begin gardening,
building and cleaning for the day. Most of the laborers earn about $7 a day.
In five years, when the build-out on Punta Mita is expected to
be finished, this once-sleepy peninsula will feature 800 residential units in a
mixture of four-star hotel suites, luxury villas, golf homes and beachfront
mansions. The least expensive hotel room will cost more than $1,200 a night in
low season, and the largest villa will cost tens of millions of dollars.
Beach Bubble?
Investors funding and building developments like Punta Mita
have, to date, enjoyed a strong run. The dramatic appreciation that has defined
this gold rush, however, leads one to wonder whether a bubble is about to burst.
Some investors, especially those who have lived and worked in these nations for
years, think the peak may have been reached. Jeff Vance, who owns property
in Panama, says that Panamanian builders are no longer buying new plots of land
to develop because they think prices are too high. "They are saying, ‘This piece
of land was $10,000 a few years ago and now it’s $100,000. It’s too much.’"
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TOURISM OFFICIALS cheer the planned Trump Ocean Resort in Baja California, Mexico, but some developers worry about profits. |
The niche opportunity now runs the risk of becoming overexposed. For example, there is the arrival of Donald Trump. In 2004, the real estate development company Irongate, based in Los Angeles, purchased property on Rosarito Beach in Baja California, Mexico. Then Trump signed onto the project as a brand name, and Irongate held sales events in the area to attract buyers interested in the residences, which range in size from studio condominiums to units with two bedrooms. "We’ve sold $115 million in one day," says Trump, who, with characteristic modesty, labels it "the biggest sale in Mexican history."
The arrival of Trump on the investment scene means one of two things, depending on one’s perspective: Either the land rush in Latin America is solid, or it has peaked and is in decline. Tourism officials are thrilled that Trump has brought his name and publicity machine to the real estate scene in Mexico, but some developers believe too much publicity and development all at once will threaten the steady profits they hope to reap over a period of many years.
Letvia Arza-Goderich, a member of the Mexican Tourism Development Association and a lawyer with the Los Angeles firm Ballard Spahr Andrews & Ingersoll, is betting on the side of a solid land rush. "The fact that Trump is investing in these properties means that this is not a reckless investment," she says. "It’s a phenomenon. Whenever Trump comes near a place, not only does he facilitate sales there, but the neighboring properties benefit. Their sales improve as well."
The Next Big Market
Investors hoping to get in early should know that land is going
fast. In fact, in Mexico, Panama and Costa Rica, the best tracts may already be
spoken for. Aggressive investors in turn have swung their attention to new
frontiers in Latin America, with varying degrees of success.
In Mexico, Panama and Costa Rica, the best tracts of land may already be spoken for. |
The trouble is that many middle-aged tourists remember the horrible civil war that devastated El Salvador throughout the 1980s; fighting ended in 1993. In the conflict, 70,000 people died or disappeared, and much of the country’s infrastructure was destroyed. Rebuilding efforts suffered major setbacks when natural disasters hit: Two earthquakes—a 7.7 and a 6.6—struck in 2001, and, in October 2005, a volcano erupted and a tropical storm caused floods and landslides.
Some developers have passed El Salvador and headed right into South America. The Related Group has one project in Argentina, two in Uruguay and one in Colombia. "We’re trying to grow the South American division rapidly," says the Related Group’s CEO, Jorge Perez, who plans to build 6,000 units on the continent.
The jewel of this South American division will be a planned resort community in Cartagena, Colombia. Perez calls it the most beautiful historic city in the Americas. Cobblestone streets that are centuries old are inside the walled city. The Related Group owns land just outside the walls—right on the beach, where Perez plans to build a five-star hotel, condos and a casino. Perez knows that Americans won’t go to Colombia for vacations. He does not concern himself with that market. Instead, he looks beyond North America and across the Atlantic into Europe, where another group of wealthy tourists is looking for resort housing on a tropical beach. That, he says, is the next big market.
Michelle Seaton is a senior correspondent for Worth.
Additional Information
Local Roadblocks
Getting Clear Title to
Land
Security and Gated CommunitiesIn the future, there may be unpleasantness associated with being the foreigners who come in and buy up the beach, developer Hal Wright says. "In Costa Rica the government knows that tourism is going to be the source of improving the balance of payments. Still, there’s a certain amount of resentment."
Punta Mita is a gated community in Mexico, a nation where an estimated 40 percent of the population lives in poverty. Razor-wire fences define boundaries where land owned by the Mexican development company DINE meets community land. Every subcommunity of homes has its own security fence, with posted guards who question everyone intending to pass. These security precautions exist in part to keep tourists from wandering among the private villas, but also to limit access to guests and their possessions by the thousands of workers who clean rooms or sweep walkways for a few dollars a day.
Although anti-American sentiment in Mexico and most other Latin American countries is much weaker than in Venezuela, a large number of unemployed or underemployed people working for wealthy tourists is a political tinderbox that could ignite at any time.