Santo Domingo Real Estate: An Investment & Economic Hedge

santo domingo real estate, apartments,
                    condominiumsRenowned gold investor and financial adviser Mr. Jim Sinclair recently gave a speech in Hong Kong (May 2014) regarding the current state of affairs both politically and economically.  One of the points he highlighted was that the US Federal Deposit Insurance Corporation (FDIC) is basically so low on reserves that a future bail-in is not hypothetical but almost guaranteed (a bail-in meaning that they confiscate your account money out your own bank account to make the bank solvent again, with you never to see that money again).

To clarify this, we have pointed out in some of our own articles recently that the FDIC has about US$ 47 Billion Dollars (December 31, 2013 figures) in the bank insurance fund, which translates into reserve coverage of LESS THAN ONE PERCENT of all insured deposits. It has been estimated that 90 percent of the US banks are financial institutions with less than US$1.5 Billion in assets. However, the remaining 10 percent are banking behemoths, such as JP Morgan with an estimated US$2 Trillion Dollars in assets.  Just 5 US Banks are calculated to hold more than US$8 Trillion in assets collectively (as of 2011 figures), and among those five are: JP Morgan Chase & Co., Bank of America Corp., Citigroup Inc., and Wells Fargo & Co.  So, what that means is IF just one of those large banks go bust, the entire FDIC insurance fund is WIPED OUT.  It would take about 30 of the smaller banks (with about US$1.5 Billion in assets) to go under in order to also wipe out the entire FDIC Deposit Insurance Fund.  To put that into perspective there are in excess of 7,000 banks supposedly covered by the FDIC insurance program.  So, what that means is, IF ONLY ONE HALF OF ONE PERCENT of the small banks go under, the FDIC Deposit Insurance Fund would be kaput.  Again, LESS THAN 1 PERCENT.  So, they have LESS than one percent on deposit in terms of reserves to cover ALL the banking deposits in the US, AND aside from that, it would take LESS than one percent of the banks to fail to wipe out the reserves anyway.  Think about that for just one moment.

Consider Investing Outside Of Your Home Country As a Safety Precaution

The point is that Jim Sinclair had suggested in his speech that people consider possibly moving their money out, and start banking with the BRICS (Brazil, Russia, India, China, South Africa) as a form of insurance or protection against a possible future US bail-in event.  We can extrapolate that out to mean or suggest the emerging or developing market nations as a group, which includes the Dominican Republic, Malaysia, Singapore and Ecuador just to name a small few as examples.  While we cannot say for sure if a bail-in type scenario will occur in the US sometime in the future, we can certainly say that diversification is always a good idea.  In other words, we think it foolish to put all of your faith in one bank or financial institution, one currency, one asset class, one country and one passport.  None of us know for certain what will happen or what politicians might do.  But we do know that politicians lie, whereas the accounting and statistics do not (assuming we are talking about true and honest accounting and not made up or incorrect figures thrown out to hide the actual state of affairs).

In terms of the idea of banking abroad or in another country, the recent monkey wrench on the radar screen everyone is talking about is the US FATCA law, requiring foreign banks to report accounts owned by US citizens (and if they do not, face a 30 percent with-holding penalty against the bank that does not report).  Of course, if the bank does not report then how do they know the amount to calculate the 30 percent?  In addition, most people do not understand that the law says that the reporting only occurs when the foreign account owned by the US citizen has a year end balance of US$50,000 or had a balance of US$70,000 or more anytime during the year.  We honestly do not know if all the foreign banks understand all this, or if they will simply report everything, if they will report at all.

Assuming someone is concerned about this, then the real issue becomes how do you invest abroad or have a foreign asset (meaning non US based) worth more than US$50,000?  The answer is a non-reportable asset, such as real estate.  But if you decide to invest money into real estate, then you need to consider the market and country you are investing in.  Meaning, does the country use the US Dollar as their national currency and thus any negative issues with the US Dollar effect them as well? The country list for that question (that uses the US Dollar as their national currency) includes Panama, El Salvador, Ecuador, The British Virgin Islands and The Turks & Caicos.  Is the local real estate market in that country on solid footing in terms of NOT having been involved with a previous crisis of cheap money, liar loans, underwater mortgages, etc? Ireland, Spain, The UK and The United States all come to mind there as having had this situation.  Is the local real estate market over priced in general or over priced in relation to neighboring countries?

Dominican Republic Real Estate As An Investment Hedge

In terms of this idea of holding value or having one of your assets in real estate, we still think the Dominican Republic is an ideal country to consider for this and we will tell you why.  First off, the Dominican Republic still offers some of the lowest real estate costs when compared to the rest of Caribbean.  Even if you compare real estate costs in Panama (which is technically Central America and not the Caribbean) per square foot or meter, you will usually get double for your money in the Dominican Republic.  For example, you might see a condo apartment advertised in Panama City for US$175,000 and you might see the same price for something similar in Santo Domingo, The Dominican Republic.  However, check the square footage of the Panamanian Condo and compare it to the size you are getting in Santo Domingo.  Chances are the Santo Domingo property will be anywhere from 30 to 50 percent larger and possibly have more amenities.  If you investigate real estate prices in Caribbean jurisdictions such as St. Martin, The Bahamas, St. Kitts (just to name a few), once again we think you are going to find a drastic difference in prices PLUS what you get for your money in the Dominican Republic in comparison with regards to size and amenities.

With regards to the health of the local real estate market, the banks in The Dominican Republic have always been very strict about lending practices, which is why there is no glut of foreclosures as has been the case in other countries (Spain, The United States).  You can certainly apply for a mortgage in the DR, but the expectation is anywhere from 20 to 30 percent down payment as a minimum. And the interest rates remain higher as they are not artificially manipulated but are true market rates.  Interest rate terms for mortgages can range from 9 up to 18 percent in Pesos, and these are adjustable rates.  So, the point is that because of this, buyers actually have to qualify for a mortgage in the Dominican Republic and it is very rare to see anyone walk away (the buyer has too much invested in the property, literally).  In short, for these reasons, we have not seen cheap money or sloppy business practices by the local banks in the Dominican Republic fueling a bubble as has been the case in other countries.  Any appreciation or activity in the local real estate market has been due to market demand, not foolish banking.

When investigating real estate options in the Dominican Republic, we can say there are really two distinct markets: the tourist market and the local market. Meaning, The Dominican Republic has always been a country known for tourism (although the main sectors of the economy also include banking, agriculture, telecommunications – which is to say tourism is not the only thing driving the economy).  With regards to the tourist market, we are talking about specifically homes or condominium apartments in beach front tourist areas of the country. With regards to the local market, we are referring to properties in Santo Domingo, Santiago and of the rest of the country.

In terms of the tourist areas, while many people may fall in love with the idea of living in a beach front setting, the fact of the matter is that real estate will usually cost more, and cost of living will be higher as well.  Part of the reason for daily living costs (such as food shopping) being higher is the fact that local permanent population tend to be small in comparison to tourists, and while there may be smaller convenience store businesses, usually you will not find the larger and less expensive supermarket chains represented.  And of course tourists staying in an all inclusive resort are not going to go food shopping or spend money on furniture (or other things).

Why Invest In Santo Domingo Real Estate ? 

In contrast, urban areas such as Santo Domingo (the capital city and largest populated city with about 4 Million inhabitants) and Santiago (the second largest city) are going to offer a wide variety of shopping, medical care facilities, bi-lingual or English only private schools, and a number of other amenities as well.  With larger variety of buying options comes competition and lower prices.  As such, whether trying to find a good private bi-lingual school or the best price for tomatoes, cities such as Santo Domingo will offer a wide variety to choose from.

In terms of real estate options in Santo Domingo, again a wide variety also exists to fit any budget and we can say your will get more square footage for your money with a condo apartment in Santo Domingo than you will looking at something similar in a tourist area.  As an example, you can expect to pay about US$120,000 for a 1-bedroom 1,000 (or more) square foot apartment in a higher end more upscale area in Santo Domingo (with secure parking, 24 hour security, gym facilities for tenants, etc.).  For a 2 or 3-bedroom 1,500 to 2,000 square foot (or more) apartment in a more upscale building, you can expect to pay anywhere from about US$165,000 up to maybe US$230,000 all depending upon size, location and so on.  And if your budget is more modest, there are new apartments and single family homes to be found in the US$80,000 to US$120,000 range.  Likewise, you can find very nice single family homes similar to what you might find in a Florida private residential development for roughly US$250,000 to US$350,000 and condo penthouses of 3,000 square feet (or more) for perhaps US$300,000.  There is not enough space to highlight everything, but the point is when clients ask: Is there any affordable real estate in the Caribbean – our answer is YES, in The Dominican Republic.

Getting back to the investment point of view, we think it important to consider real estate as one asset class to consider, albeit one that is NOT correlated to the US or European stock markets, currencies, etc. in order for it to make sense.  In other words, the idea is to own an asset class that is somewhat isolated from the current and future problems that might exist in other markets, and one not dependent upon the future movements of the currencies or economy in such other countries as well.

Not to go off on a tangent, but there is one interesting phenomena taking place regarding new construction in Santo Domingo.  Which is to explain that 20 years it was almost impossible to find a new condominium apartment building with one bedroom units (builders just did not build them).  And previously the norm in The Dominican Republic was that young people graduated university but lived at home with parents until such time they did get married and could afford a 2 or 3 bedroom rental (with the long term view of owning rather than renting).  Today, what we are seeing is a larger number of new higher end buildings going up with one bedroom units and this tells me something.  It says to me that the younger single people are more likely to be able to afford and buy (or rent) a new one bedroom unit today, which means to me more affluence in the economy than what existed say 25 years ago.  In the United States today, just as a contrast, younger people are graduating university and cannot even find a job, and or regardless if they do, they are living with the parents. This represents a notable change from what was considered the norm 25 years ago. In brief, what is going on is that the United States is moving backwards economically speaking and the Dominican Republic is moving forward.  It is a small thing and something not obvious from the government statistics, but very telling none the less.

In summary, we still think buying real estate in a location such as Santo Domingo is a good idea because:

1. Real Estate costs are lower than many other jurisdictions in the Caribbean and thus more room for appreciation.

2. The Dominican Republic has an economy still growing and can be less dependent upon the United States or Europe, especially if it continues to develop it's cross border trader with countries such as Brazil and India (we reported to clients previously that such trade was up a few hundred percent in recent years).

3. A Real Estate purchase in The Dominican Republic can also act as a conduit towards the faster tract Investor Residency Process (allowing for citizenship application after 6 months).

4. Real Estate is a non financial asset and therefore not reportable under the current initiatives being pushed by the US (FATCA) and some European nations as well (GATCA).  In other words, if you wish to invest US$200,000 or more, real estate in the right market is a sound idea.

For more information about the Investor Residency Program and using a real estate purchase in the Dominican Republic to qualify, please contact us accordingly via our reply form.