Real Estate in Cuba in an Era of “Updating the Economic Model”

1. Real Estate in Cuba in an Era of “Updating the Economic Model” Kerry D. Vandell Dean’s Professor of Finance and Director Center for Real Estate

2. Cuba: A country in transition • Factors influencing the 1959 revolution • The post-revolution years: Geo-politics and Soviet aid 1962-1989 • The “Special Period” after the Soviet era 1989-93 • “Making do” 1993-1999 • Venezuela and Chavez step into the vacuum 1999-2013 • The “Readjustment of the Socialist State” 2007 - present

3. The Cuban government and economy: a snapshot • One of the “purest” of Marxist states remaining • Effectively, the Communist Party has a virtual monopoly on political and economic power • Virtually all control of economy in the hands of the government • Centralized State-directed allocation of all resources related to social policy objectives: • Free universal education • Free universal health care • Adequate housing for all • “Classless” society by social and economic status

4. The accomplishments: education and health

5. The problem(s): • Globalization and a One-World Economy: No place to hide • Economy not sustainable without continuing subsidies, remittances, offshore investment • Inadequate incentives for productive activity • Low birth rate • Necessary “client state” status • Starved for capital investment • Potential social unrest

6. Some statistics: a social/economic profile • Population: 11.1 MM (About the same as Ohio) • Size: 42,426 sq mi. (About the same as Tennessee) • Population growth rate: -0.1% • Ethnic groups: 65% white, 25% mixed, 10% black • Expenditures: $47B • Revenues: $44 B • External debt: $22 B+$21B owed to Russia, $1B owed to Romania, Hungary • Exports: $6B • Imports: $14B • Inflation rate: 4.7% • Labor force, state sector 78% • Unemployment rate: 3.2% • Population below poverty line: 1.5% • Currency: 24 Cuban Pesos (CUP) = 1 Cuban Convertible Pesos (CUC) = 1 US$ (Official Exchange Rate 1CUC=1CUP) • GDP: $114.1 billion (2010 est.) (ppp), $57.49 billion (2010 est.) (oer) About the same as Arkansas (ppp) or Maine (oer) • GDP per capita: $9,900 (2010 est.) (ppp), $4200 (oer) (About the same as Tunisia (ppp), 111th in world) • GDP by sector: Ag 4%, Ind 22%, Serv 74% • Labor Force: Ag 20%, Ind 19%, Serv 61% • Average monthly wage: $US 20 • Monthly pension: $US 10.50

7. Some statistics: Trends in GDP per capita OER PPP

8. Some statistics: Low birth rates

9. Some statistics: Trends in real monthly wage

10. Some statistics: The decline of manufacturing and agriculture

11. Some statistics: balance of trade

12. Monetary policy: A dual-currency economy • Most employment paid in CUPs: Factory workers at 400 CUP/mo. and doctors at 700 CUP/mo. • Nonconvertible. Government shops (bodegas) provide staples at low prices but little else • Those in tourism sector and with remittances have access to CUPs and US$. Restricted to Dollar Stores and private shops/restaurants (paladores) with higher-end goods at marked-up prices. • Doormen in hotels make more than MDs, requiring many with doctorates to work second jobs as taxi drivers, etc.

13. How does real estate fit into the picture? • Agriculture • Transportation and infrastructure • Tourism • Historic restoration • Housing

14. Agriculture: A flawed policy • Once dominated by sugar, tobacco, citrus • Government quotas misjudged world marketplace • Many abandoned sugar mills • Compounded by monetary policy problems: The sugar industry receives earnings for its exports converted at par, but must purchase many inputs in dollars. • Much land lying fallow: perverse pricing • Farmers may own (lease) small plots, but government quota at low price takes precedence, then allows surplus on open market • Cuba now imports 80% of food • Once cattle (and beef) plentiful, but now scarce. Higher penalty for rustling than murder • Policy intends to make Havana self-sufficient with organic farming in small plots near the city. Restrictions reduced. Little impact thus far

15. Sugar cane production: 2001-2007

16. The Portugalete Sugar Mill

17. Havana organic farming

18. A bodega vs. an open market

19. Transportation and infrastructure: Joint ventures lead the way • Roadways little-used. The Machado regime built the La Carretera Central (Central Highway) in the 1930’s, later became theSoviet-era Autopista Nacional (A1) from Havana to Santiago, intended originally for defense • Auto purchase using loans forbidden in 1959, resulting in few purchases until the recent reforms. Many mid-century American autos remain. Have significant tourism significance • A “ghost” transport system in need of demand • Railroads have fallen into disrepair. Being gradually replaced by Chinese diesels. Little passenger service. Little freight service • Air travel: International Terminals, in Havana (José Martí International Airport) and Santiago (Antonio Maceo Airport). Increasing traffic from tourism and after new rules for resident travel.

20. Back to the past: A classic Havana street scene

21. The La Carretera Central (Central Highway), now the AutopistaNacional (A1)

22. Common modes of transport in Cuba

23. Infrastructure: The Port of Mariel • Intended to attract marine freighter traffic coming through the widened Panama Canal • A joint venture. Built by Grupo Odebrecht of Brazil, to be managed by PSA International of Singapore • A possible model for infrastructure FDI in Cuba

24. The evolving port of Mariel

25. Tourism: A driver of economic growth • All hotels, tourist facilities seized after the revolution • Many (especially older) still government owned (e.g., Hotel Nacional in Havana, duPont mansion in Varadero) • Newer ones are joint ventures with European, Canadian, Mexican partners (e.g., Hotel Meliá Varadero) • Government today typically farms out marketing, management, development, debt position. But not equity

26. Joint ventures in tourism • In 1987, decree to permit joint ventures in the tourism sector with foreign investors. • Tourism institute became a government ministry • New state corporation, Cubanacan, created to develop the industry and to enter into partnerships (one-third of tourism revenue) • First tourism joint venture created in 1989 with the Hotel Sol • Now three other conglomerates: • Gran Caribe (one-fourth of the island’s hotel capacity) • Gaviota (owned by the armed forces) • Habaguanex: operated by the Office of the Historian in Old Havana, profits used for that area’s restoration (see later)

27. Hotel Nacional de Cuba, Havana

28. The duPont Mansion Hotel (Mansion Xanadu), Varadero

29. Hotel MeliáVaradero: A joint venture

30. Varadero Beach

31. Caya Largo: an emerging destination

32. Ecotourism is also on the rise

33. Historic redevelopment: La Habana Vieja (Old Havana) • Habaguanex created 1994 as government-owned conglomerate to restore Habana Vieja (and later expand to other historic districts) • Free trade zone (1995) allowed Habaguanex to by pass customs and Ministry of Foreign Investment regulations that govern joint ventures • The only Cuban entity with complete control of resources and expenditures/investments, including formation of joint ventures • Office of the City Historian oversees Habaguanex: Eusevio Leal one of most powerful individuals in Cuba

34. Eusevio Leal: Historian of the City of Havana

35. La Habana Vieja “before”

36. La Habana Vieja “after” (in process)

37. Housing: A market in flux • After the revolution, all Cuban families “owned” their units, but could not sell them; must barter or trade for equal value • New housing supply entirely dependent upon state allocations of capital, dictated by centralized planning, not “the market”. No private market. The result: low allocation to housing • A period of Soviet-styled worker housing until the fall of the Soviet Union. Housing shortage always present, but became dire in early 1990’s • One result was much doubling-up of households: “multi-generational” housing

38. The Cuban housing market (cont’d) • Reforms came in November 2011, permitting buying and selling of property. “Owners” owned the improvements only. Land was held by government, but ground rent was zero • Most desired property concentrated in most significant stock/locations (e.g., large architecturally significant homes readily accessible to the central core in the west side of Havana in the Vedado, Miramar, Central Havana, Víbora and Cerro neighborhoods) • This stock, however, was sometimes occupied by many families

39. The Cuban housing market (cont’d) • Market prices are in great flux, complicated by political risk • Eligibilty to buy is constrained • Must be resident citizen, or foreign permanent residence • Buyers will be required to swear under oath that they don't own other property. Prohibition of the ownership of more than one residential home and one vacation home • Foreigners who are permanent residents can buy in the same locations as citizens, though they usually are asked to pay a higher price

40. The Cuban housing market (cont’d) • Foreigners who do not live on the island are limited to specific condominiums and must use registered companies for their purchases, though such purchases are not subject to the standard 4 percent tax on residential sales • Resort-style vacation homes for foreigners expected since the government legalized leasehold land ownership by foreign companies • Problems: • Brokers until recently not permitted legally • Central market for exchange evolving

41. The Cuban housing market (cont’d) • No mortgage market. Banco Internacional de Comercio, S.A., wholly owned subsidiary of the Central Bank of Cuba, can now make consumer loans for appliances, and even autos, but not yet mortgages for residences • The result? Known places to gather for exchange. Informal arrangements for satisfaction outside of the Cuban legal system, a “gray market,” price suppression • Nonetheless, the market is evolving: • Brokers now legal • Construction companies can register as private entities • Property listings online

42. How can Americans take advantage of this opportunity? There are 3 Ways for Foreign investors to buy Real Estate in Cuba: • Marrying a Cuban, which allows the foreign citizen to become permanent resident, thus being allowed by law to buy a home from local Cuban owner • Buying directly from a current foreigner who owns a home, or an apartment in Cuba. During the 1990’s decade and part of the next one, Cuban law permitted for short time the construction of some condo buildings where foreigners could buy an apartment. Those who did, and bought at fair rates during those times, are now able to sell to other foreigners who are not residents in Cuba • By law, the market is open only to Cubans on the island or those living temporarily abroad. But foreigners, including Cubans living in the United States or other countries, are buying properties in the names of Cuban spouses, family members or friends. Most of them are buying Ocean front properties or houses in Havana Downtown

43. Housing has low priority in the Cuban budget

44. This is evidenced statistically

45. Most housing is not this bad

46. Soviet-era housing projects

47. Art deco: West Havana

48. The high end

49. Permuto: The informal residential real estate market

50. So what can we conclude? • Cuba is in sore need of capital and FDI • Will gravitate to those opportunities most promising, so long as regime is not threatened • Move toward elimination of dual currency • Restructure agricultural pricing incentives • Infrastructure and transportation will respond to market reforms • Tourism a major opportunity. Joint ventures, so long as properly structured, may be appropriate • Must provide incentives and eliminate barriers to private firms. Use taxation to reduce windfall gains • Must develop market for consumer credit, including mortgages • Possible “Grand Bargain” : Allow Cuban expatriates to invest and buy homes and property (including their own) in exchange for forgiveness for any possible claims against them. Amnesty and normalization