Mention El Salvador and people are reminded of the politics that surrounded the country’s brutal civil war during the Reagan era in the 1980s. In recent years, El Salvador has also become famous for violence by the Mara Salvatrucha, a vicious street gang that is mainly in Central America and the United States.
Despite its undesirable reputation, there is a small but slowly rising interest in investing in this country of seven million by visitors who have stumbled onto its beautiful forests, mountains and beaches and have fallen in love with its people. It must be said that these are not people following international property trends. If they were, they would have, instead, bought in Costa Rica.
“El Salvador, unfortunately, has a very bad international reputation, mainly due to the war and human rights atrocities that took place during the war...” Phill Davies, a British engineer who lives in San Salvador, wrote in an article for Escape Artist. “The people are very friendly, and helpful, and they remember what the war years were like, and do not want to ever go back to that time.”
“I believe I have found something very special here,” said Carolyn Robinson, a Canadian who has been in El Salvador for two years.
El Salvador in brief
Known as the Land of Volcanoes, El Salvador is the smallest country in the Americas and is the only one in Central America that doesn’t have a Caribbean coastline. It borders Guatemala, Honduras and the Pacific Ocean. Its official language is Spanish.
It occupies an area of 21,040 square meters, which is about the size of Massachusetts, and is predisposed to hurricanes, earthquakes and volcanic activity. A bloody civil war marred the 1980s and ended in 1992. It has a multi-party, representative democratic political system.
El Salvador has the third biggest economy in Central America and receives the most remittances, almost as much as its income from exports. It adopted the U.S. dollar as its currency in 2001. Its main economic sectors include international port services, textile production and tourism. The government has privatized parts of its banking, telecommunications and power sectors.
El Salvador’s government views foreign investment as part and parcel of economic growth and has therefore taken measures to make its business atmosphere friendly and accommodating, according to the 2006 Investment Climate Statement by the U.S. State Department. The judicial system is an area of weakness the country needs to tackle. As it stands, the system is inconsistent about applying laws evenly. Dispute settlement through its courts can be excruciatingly slow and costly. The legal system is susceptible to outside influences and rulings aren’t always enforced.
Crime is also a problem in El Salvador. Two rival gangs have expanded so much so that the country has built two separate prisons for their members, according to a 2007 article in The New York Times.
The U.S. deported roughly 34,000 Central American criminal gang members between 1998 and 2004 to Guatemala, Honduras and El Salvador, according to a 2006 article in
The Boston Globe. This touched off a cross-border expansion of youth gangs, known as “
maras,” that have increased their membership to upwards of 100,000.
All this has had effect on international investment. A 2004 Inter-American Development Bank report estimated that the crime problem in the region has scared off potential investors, possibly short-changing the region’s GDP by as much as 25 percent.
The maras are thought to be responsible for overwhelming majority of violent, drug-related and human trafficking crimes committed in the region. The murder rate in El Salvador, Honduras and Guatemala is one of the highest in the world, about 10 times more than the U.S., according to The Boston Globe. The government of El Salvador is trying to curb the problem by taking a hard-line approach but a lasting success has been elusive.
This doesn’t seem to be a problem for Robinson, owner of The Laughing Pelican, an oceanfront guest house located at Playa San Diego. At first, shesaid she found the “gates and razor wire on the top of the walls” overwhelming but she has since become comfortable as she understood her surroundings better. “[During the past] two years I have seen no incidents around me or felt threatened or fearful.”
However, she said she hears about incidents. “Every now and then we hear of a bus driver who opens the door and he is shot 7 times point blank,” she said. “The world is not a pretty place, and you can find this gang here and on Vancouver Island [Canada] and many other places too,” she added. She said she is cautious and takes reasonable measures such as not walking around alone or with guests after dark in areas susceptible to crime.
The El Salvador real estate market
El Salvador is a land of contrasts when it comes to wealth and the kind of property available varies accordingly. “Property in general, runs from poverty at its worst as a result of the nasty civil war that has been over for 20 years now, to absolutely palatial. Beautiful grounds, exquisite tropical homes, with open courtyards, pools, and a Mediterranean approach to walls and privacy,” Robinson, who also manages 20 homes for foreign clients, said.
The capital, San Salvador, has a population of two million and is short on space. Developers are investing in high rise buildings. In parts of the city, prices have grown four fold over the past 10 years, according to Global Property Guide’s latest (2006) price history on the country. Beachfront properties can be found for $10 to $40 per square meter on the low side to $100 to 110 on the high side.
There are no restrictions on foreigners buying property in urban areas but rural purchases are available only for those international investors with industrial plans. No person, regardless of citizenship, is allowed to own more than 600 acres of land.
Total transaction costs are reasonable with buyers paying anywhere from 3.78 - 4.63 percent and sellers paying 5 percent. These fees include registration and notary costs, both paid by buyers, and an agent charge paid by sellers. Instituto Libertad y Progreso keeps a computerized record of real estate registrations, making it easy to clearly identify ownership a given property. The registration process can take up to two months.
El Salvador’s taxes are on the high side, charging non-residents 25 percent on wages and revenues, including rental income, while depreciation, value added tax and operating costs are deducted from gross income. Income from commercial real estate is also liable for a Value Added Tax of 13 percent. Non-residents have to also pay a 25 percent capital gains tax when selling property, with the exception of those sold within three years of possession.
For those running businesses, a 10-year corporate tax break and the ability to import and export comes with a business license, according to Robinson.
Purchasing real estate in El Salvador
The buying process can make those who don’t speak Spanish nervous, according to Robinson. For big purchases such as real estate and cars, a tax card known as NIT is needed. Since El Salvador uses the U.S. dollar and Robinson is a Canadian, she opened an account at Scotiabank, the only one that accepts foreign currency and deposits it in U.S. dollars in El Salvador.
After obtaining the card, Carolyn said she hired an English speaking lawyer to research the title and change the registration. Her lawyer also ended up negotiating the property sale price on her behalf. He charged her only $1,200 for his services.
For potential investors, Robinson has age-old advice: “Don’t indulge in shortcuts or get rich quick schemes because there are scammers everywhere in every country,” she said.
El Salvador has a long ways to go before it becomes the next Costa Rica. It needs to work on its crime issues and reform its court system. Most of all, it needs to change its reputation. Until then, its potential will remain untapped and its ambitions to attract more international investment unrealized.
