Peru Real Estate Market Continues Its Roll

Peru real estate has been on a roll since 2010, and that trend should continue on through 2012. The average price of homes sold in Lima was up …

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Peru real estate has been on a roll since 2010, and that trend should continue on through 2012. The average price of homes sold in Lima was up almost 20% in 2011, and the amount of homes sold was up over 52% as well. With Peru’s economy booming, there is no reason to think that more of the same isn’t in the cards for this year. For more on this, continue reading the following article from Global Property Guide.

Peru’s housing market has been sizzling hot the past two years, making a strong comeback in 2010.  Not surprisingly, as there was  8.8% GDP growth in 2010, followed by 6.9% economic growth in 2011 (figures from Central Reserve Bank of Peru (BCRP)).

The average price of homes sold in Lima Metropolitan Area rose 19.9% in 2011, to 262,043 Soles (US$ 99,449), according to Peru Tinsa, though this may partly reflect a change in the composition of home sales (there is no house price index in Peru).   In 2011, residential sales were up by 52.2% on the previous year to 6,000 million Soles, according to Tinsa, with a 31.57% increase in area sold. 

In 2012, the housing market is likely to continue strong, with the help of lower mortgage rates, improved public investment and Peru’s economic strength.

The districts with most projects are the high-end Santiago de Surco, with 974,000 sq. m. under construction, followed by Miraflores (681,000 m2) and San Isidro (540,000 m2).  But Lima’s best-selling homes are priced around $30,000 to $50,000, according to a Capeco study.  The districts with the highest effective demand are San Juan de Lurigancho (increase of 10.83%) and Los Olivos (10.38%), both low socioeconomic status districts.

A strong economy

In January 2012, GDP was up 5.38% from the same period last year, Peru’s 29th consecutive month of economic expansion, according to the Central Reserve Bank of Peru (BCRP), and GDP is projected to expand by 5.7% in 2012.

At the heart of this was China’s booming demand for raw materials, like copper and other metals.  Peru’s exports have also been protected from too much currency appreciation, due to frequent intervention by the BCRP.

Ollanta Humala

Ollanta Humala became Peru’s 94th president after the latest presidential elections, held on April 10, 2011.   Feared by the middle classes as a fire-breathing and unpredictable leftist, in 2000 Humala led an abortive leftist military coup against the corrupt president Alberto Fujimori, which was a disastrous failure, but gained him popular sympathy.  He is the son of an indigenous lawyer and member of the Communist Party of Peru – Red Fatherland. His brother, Antauro, is serving 25 years in prison for kidnapping 17 Police officers for 3 days and killing 4 of them in another armed rising. 

Humala is now following the path of the highly successful Brazilian road of democracy of Luiz Inacio Lula da Silva, combining a modernized economy with strong social commitment.  He considers “the divisions of left and right to be obsolete,” and defends the “state of law”.  To some extent, he seems to have won back the middle class by moving to more moderate positions. 

"I believe that President Humala is showing great courage and leadership capacity,” declares former president Garcia, “and not (as his detractors say) because he has taken a right turn, but because he does not want to lead the country into chaos and poverty."

Humala’s objective is similar to his predecessor Garcia’s – growth with equity – aiming to reduce the poverty rate to 15 percent by 2020, by maintaining a modernizing economy and business-friendly environment.  And it appears to be working – growth has been fuelled by a strong rebound in public investment (30% up at the local and regional levels during the past three months), and by strong exports.

Yields have fallen somewhat

Gross rental yields on prime residential property in central Lima are high, but have been falling over the last few years. The fall seems to reflect lower rentals, rather than increase in prices of residential property, no doubt reflecting the large amounts of new properties released into the market.

Lima’s high-end gross yields range from 6.68% (larger apartments) to 8.86% (smaller apartments), according to Global Property Guide yields research:

  • Smaller apartments of 75 sq. m. in high-end areas of Lima have average yields of 8.86%.
  • Medium apartments of 120 sq. m. have yields of 8.17%
  • Large apartments of 200 sq. m. have average yields of 7.20%,
  • Enormous apartments of 425 sq. m. have average yields of 6.68%

Gross rental yields have fallen somewhat from 2009 and 2010: 

  • In 2010, yields ranged from 7.30% to 10.66%.
  • In 2009, yields ranged from 9.46% to 13.56%. 

The continued appreciation of Peruvian Nuevo Sol (PEN) should have pushed rents up, as high-end rental prices are typically set in US dollars, but this seems not to have happened.

Still a small mortgage market

Outstanding mortgage loans rose by 22% during the year to March 2012, according to the Superintendency of Banking and Insurance’s (SBS), part of a 167.5% mortgage loan surge over the last five years.  But Peru’s mortgage market remains small at 4.4% of GDP in 2011.

In 2011, loans in national currency were up by 32.9%, while those in foreign currency rose 22.1%.   It is expected that more long-term mortgage loans will be in dollars in 2012.

Mortgage interest rates remain high

Strong economic growth has not had a big impact on inflation.  Peru’s key interest rate remains 4.25%, held there by the Central Reserve Bank of Peru (BCRP) since May 2011. 

While average lending interest rates are high at 19% for loans denominated in Peruvian New Sol (PEN), and 7.93% for foreign currency loans, the government has long provided financial aid and subsidies, such as the MiCasa, MiVivienda, Techo Proprio, and MiCasita schemes – which means that most borrowing for house-buying is at lower rates.

MiVivienda, established in 1999, provides housing loans for the middle and upper class levels (A, B and C). MiVivienda provides mortgages up to US$30,000. The New Credit MiVivienda finances the purchase completed or under construction homes whose total cost is from PEN 51,100 (US$ 19,366) up to PEN 182,500 (US$ 69,163).

Techo Propio is a program launched in 2002 directed at family groups who do not have their own houses and have never received State support to build or buy one. The total income a household earns should not be more than 1,642.5 Peruvian Nuevo Sols (PEN) (classes D and E).  Techo Propio offers loans for purchasing houses up to US$17,155.

MiCasita, on the other hand, targets middle to low-income segments. It is a full service mortgage financing company catering to first-time borrowers.

Micasa provides loans for the renovation of specific segments of the house such as converting wooden walls to brick, replacing zinc roofs or adding additional rooms, one at a time.

The benchmark rate was reduced by 525 basis points during the crisis, from 6.5% in February 2009 to 1.25% in August 2009. Rates were then hiked in ten steps during the year to May 2011, to reach 4.25%.

A legacy of successful economic management

Only Chile is now considered a more hospitable environment for investment in the region than Peru. Even during the global crisis of 2009, Peru managed GDP growth of 0.9%.   Exports have been helped by high international prices for Peru’s commodities, and lower exporting costs, averaging US$ 590 per container.

Humala is building on the successes of two outstanding predecessors. President Alan Garcia had returned to the presidency in 2006 and made fiscal rectitude the government’s No 1 priority, seeing how Chile’s restrained state spending won lower credit costs from international lenders.

The overall surplus of Peru’s non-financial public sector jumped to 3.1% of GDP in 2007, up from 2.1% of GDP in 2006 – the biggest budget surplus for 30 years.

Yet the foundation for Garcia’s success was laid by another president, Alejandro Toledo (2001-2006) who moved strongly to sign trade agreements, notably the 2006 trade promotion agreement (PTPA) with the US, which helped increase the contribution of exports to the economy to more than 20% of GDP in 2005. 

Peru continues to attract inward investment, given its low costs and economic dynamism. The absolute poverty rate has shrunk over the past 10 years from 53% to 31%, a considerable achievement.

The wind seems set fair for the near future.

This article was republished with permission from Global Property Guide.

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