Argentina defaults again; currency restrictions hurting property market
Last Updated: August 14, 2014
In 1989, Argentina experienced a period of hyperinflation, with annual inflation reaching almost 5,000%. Combined with power cuts, this led to the downfall of Raul Alfonsín’s presidency. A similar crisis in 2001 forced another president, Fernando de la Rua, to vacate his seat, leading to what is now considered the largest ever sovereign default, amounting to US$ 95 billion.
Now Cristina Fernández’s popularity is plunging and the economy is paying the price for her populist policies. Inflation is a major problem. The country’s economic outlook is bleak. The peso has been crashing.
In January 2014, Argentina devalued its currency by 19% as it struggled to hold onto dollar reserves.
On 31 July 2014 came Argentina’s debt default. This is a complicated matter – Argentina has the money, but vulture fund Elliott Management’s victory in a U.S. court has rendered technical default Argentina’s only way out of a painful situation, for now.
Uncertainty about the Argentine peso is jinxing the country’s property market. On one hand, sellers demand to be paid in dollars, proven safer than the peso. On the other, buyers are prevented from acquiring these dollars by strict currency controls.
Prices in Buenos Aires were down 10.3% in May, compared with the previous May, to US$ 1,693 per sq.m.. Sales declined 15.4% y-o-y in May, to 2,898 transactions, according to Reporte Inmobiliario, having already declined significantly the previous year.
Argentina residential prices not much changed; very attractive rental yields on Buenos Aires houses
No strong movement in residential apartment prices has taken place in Buenos Aires, Argentina, over the past 2 years. If anything, the trend is toward some upward movement (following some increase in rents). The average apartment in the centre of Buenos Aires now sells for around US$2,468 per square metre.
Rents have been rising. During 2009 they fell significantly in terms of US$, but now they are stronger again. Average apartment rental yields are around 6% to 7%.
House prices have been a little weak, and US$1,100 per square metre is a typical price now. The result is that gross rental yields of Buenos Aires houses is rather attractive from the perspective of landlords, at over 9.5%.
Rental income taxes are
punitively high in Argentina
Rental Income: Rental income is taxed as regular income. For nonresidents, the tax is 14.70% of the gross annual rent. In addition, rental values exceeding ARS1,500 (US$158) per month are assessable for VAT at 21%, except for rentals of residential properties, properties rented to the Argentine State or rural properties affected to farming activities.
Non-residents also pay a tax on Personal Assets, Real Estate Tax and other charges.
Capital Gains: Capital gains earned by nonresident individuals are not considered as income, and are not taxed at the standard income tax rate. However, capital gains earned by companies are subject to corporate income tax at the rate of 35%.
Inheritance: There are no inheritance or gift taxes in Argentina. except for an inheritance tax levied on properties located in the province of Buenos Aires.
Residents: Individuals who are residents of Argentina are liable to tax on their worldwide income at progressive rates.
Low transaction costs but with several complications
The total roundtrip transaction cost is between 9.93% and 11.64% of the property’s value. This includes notary fees (1% to 1.50%), stamp tax on property sales (3.60%), and the real estate agent’s fee (3% to 4%, plus 21% VAT).
For middle to high-end real estate, property transactions are done in US dollars with the amount paid in cash. However, getting US dollars is costly. It is possible to lose 1% to 2% of money value going through the official conversion process.
Pro-tenant rental market
Argentina’s rental market is pro-tenant.
Rents: Rents can be freely negotiated. Rent must be payable on a monthly schedule and cannot be indexed for inflation during the lease term.
Tenant Eviction: Amendments approved in 2002 have greatly shortened the time for landlords to recover property from non-paying tenants. Tenants can only be evicted through judicial proceedings, even at the end of the lease period.
A rough road aheadAfter the country lost its longstanding legal battle with US hedge fund creditors, it is now returning to courts again, this time against the United States.
Argentina has asked the international court of justice (ICJ) in The Hague to hear a lawsuit against the United States over an alleged breach of its sovereignty, after a US court judge blocked it from paying its restructured 2001 debts, leading to the default of July 2014, the 8th default in Argentina’s 200-year history.
Argentina’s last default is primarily rooted in its earlier monetary policy. In the 1990s, the government decided to peg the Argentine peso to the US dollar. But this meant that during economic shocks, Argentina can’t use its usual monetary tools to control the economy.
When Europe’s and Brazil’s currencies fell so much in 1998, Argentina’s exports became severely expensive and Argentina desperately needed a weaker peso. This, of course, couldn’t be achieved without abandoning the dollar peg. It was then forced to reduce wages to cut prices. But this only pushed unemployment up and tax receipts down.
The government turned to fiscal policy – raising taxes and cutting spending to reassure investors about the deficit. But this made the slump even worse.
By late 2001, unemployment was over 20% and Argentines were rushing away from the peso. The government tried to stop the run by limiting withdrawals. But this only started violent protests which later caused the resignation of then president Fernando de la Rua. This led to a US$ 95 billion default, cutting off Argentina from international capital markets and hampering growth.
Argentina tried to make up on its obligations. In 2005 and 2010, it offered the holders of its defaulted debt new “exchange bonds” that paid 35 cents per dollar on the original debt. About 75% of outstanding bonds were exchanged in 2005. Then in 2010, there was a new offer to the remaining holdouts that brought participation to 93%.
The remaining 7%, led by Wall Street billionaire Paul Singer, refused to settle and sued Argentina in the US courts for full repayment. After a stretched court battle, the group got District Court Judge Thomas Griesa to rule that Argentina could not pay the creditors who had accepted its debt restructuring until it fully paid those who had rejected it. Unable to meet the creditors’ demand, Argentina was forced to enter its second default since 2001.
Economists expect an outflow of dollars if Argentina does not come out of this quickly, putting more pressure on dwindling central bank reserves, now less than US$ 30 billion.
However, no one expects a recession anywhere near as deep as in 2002, when GDP fell 10.89%.
Some even see the present situation as a buying opportunity.
According to Timetric, there has been an influx of international house buyers buying at 60% of the original value, due to high inflation, lack of local demand and discount for dollar purchases. This tangible investment can then be sold at a later date when the economy shows signs of stability.
Presidential elections may also encourage such investments. Since Cristina Fernández can no longer run for reelection in October 2015, there are hopes of more moderate economic policies from her successor.