US crisis paralyzes El Salvador's real estate market
Last Updated: April 22, 2009
Thirty per cent of construction firms’ activities are on hold, due to limited bank loans for housing and other infrastructure projects, according to CASALCO (Camara Salvadoreña de la Industria de la Construccion or Salvadorian Construction Industry Chamber).
The number of loans rated as unrecoverable, or portfolio class-E, has risen 36.9% y-o-y to January 2009, according to a report by the Central Reserve Bank (BCR) of El Salvador.
Many overseas Salvadorians buy property in their home town, but few foreigners have been attracted to buy here. El Salvador is notorious for its extremely violent street gangs, known as ‘maras’. Violence between the two biggest maras was so severe that the government had to create two separate prisons for them.
Foreigners can buy property, and can hold dollar accounts, and use these accounts when seeking local financing. There are no restrictions on foreigners buying urban land, but foreigners cannot own rural lands except for industrial purposes.
After pegging the El Salvador colon to the US dollar in 1994, the US dollar was formally adopted as the official currency in January 2001.
El Salvador: inexpensive housing prices
San Salvador is not an expansive city, and buying an apartment there is not pricey. An apartment would typically cost around US$1,200 per square metre (US$115 per square foot).
Gross rental yields are a generous 8.5%, which means it generally makes much more sense to buy than to rent, and to be a landlord than a tenanct.
Taxes are generally high in El Salvador
Rental Income: Nonresidents are charged 30% tax on net income derived from leasing properties.
Capital Gains: Capital gains earned by non-residents from selling property in El Salvador are taxed at a flat rate of 10%.
Inheritance: Inheritance is subject to income tax rates in El Salvador.
Residents: Residents are only taxed on their Salvadorian-sourced income at progressive rates, from 10% to 30%.
Total transaction costs are low in El Salvador
The total round-trip transactions cost is around 8.78% to 9.63 %, inclusive of the 5% agent’s fee. Five procedures are needed to register a property, completed in about 22 to 40 days.
Rental laws are pro-tenant in El Salvador
El Salvador’s rental law and practice are pro-tenant.
Rent: Although the rent and rent adjustments can be determined freely by mutual consent, the rent court may intervene if the rental contract is silent on these terms. The tenant may also petition the court to adjust the rent if the parties cannot reach an agreement.
Tenant Security: The tenant cannot be evicted upon the expiration of the contract as long as he pays the rent. The contract can only compel the tenant to pay the rent for the whole period stated. The court system is permanently saturated.
Recession replaces sluggish economic growthEl Salvador is the smallest country in Central America with a land area of 20,720 sq. km. With a population of 7.25 million people in 2008, it is also the most densely populated country in the region.
About 2 million Salvadorians live and work in the United States (including illegal immigrants). The economy is heavily dependent on remittances, which at around US$3.8 billion in 2008, accounted for around 17% of GDP.
These US residents are being encouraged by the government to invest in their homeland, to help its economic and social development.
El Salvador’s civil war during the 1980s was the result of the gross inequality which pits a small wealthy elite against the majority of the population. The war left around 75,000 dead and caused damage worth US$2 billion.
With the signing of the Peace Accords in 1992, the country began to recover. Massive reconstruction efforts after the end of civil war pushed GDP up by an average of 6.6% from 1993 to 1995. Yet after, GDP growth never exceeded 5%, and average annual GDP growth from 1996 to 2004 was only 2.6%.
The benefits of the adoption of US dollar in 2001 were felt only while low interest rates lasted, from 2005 to 2007, when El Salvador’s economy grew by 3.97% per annum.
In 2008, GDP growth slowed down to 3.2% due to the financial meltdown and economic recession in the US. The economy is expected to shrink by as much as 1.5% in 2009, before recovering in 2010 with a 1% GDP increase.
Calamities routinely hit the country. Hurricane Mitch caused devastation in 1998, leaving 300,000 people homeless. Then two earthquakes in 2001 damaged a further 20% to 25% of the housing stock, with 174,000 houses wrecked, and about 1.5 million people left homeless.
After the end of the civil war in 1992, the right-wing Arena (Alianza Republicana Nacionalista) Party dominated the political scene.
That period came to an end with Arena’s defeat in the 2008 presidential election. Mauricio Funes of the left-wing FMLN (Frente Martipara la Liberacion) Party narrowly won, with 51.2% of votes over Arena’s candidate. He will take office in June 2009.