La Ronda is just around the corner

Thursday, September 27, 2012

Ecuador Real Estate Report - Quito. September 2012.

Part one

from Hector G. Quintana
Quito Buy / On Watch
Guayaquil vs. Quito - the age old debate. Coastal vs. Sierra. Commercial Capitol vs. Government Capitol. New age architecture vs. colonial simplicity. The debate may rage, but from our perspective, both share a common trait - they are repeat “offenders” on our “buy” list. However, perhaps their most glaring difference is that Guayaquil is “on watch” for a possible upgrade, while Quito is “on watch” for a possible downgrade. The tale of Guayaquil has already been, it is time to focus on Quito.

Quito is, quite obviously, the capitol of Ecuador. It has been a growing and expanding city for years. While the commercial sector has played an important part of this growth, the primary underpinning catalyst is government sector job creation. The city is blessed with this strong element of economic growth, as well as a picturesque Sierra setting. Worthy of a capitol city, Quito offers excellent shopping, dining, cultural and social activities, rivaled only by Guayaquil. It has a colonial sector that is breathtaking and also boasts well-dispersed community parks, which bring Ecuador’s bountiful nature within easy reach of this diverse population. Quito offers many positive advantages, which have kept the city on our buy list for 3 straight years. However, a long standing problem threatens to derail the continued good news coming out of Quito.

Folks, Quito has a transportation problem. Not quite in the way Bangkok does, but not all that distinct to offer comfort to the weary traveler. However, unlike Bangkok, no ready solutions, or concerted efforts seem at the ready, for a permanent solution. I do not want to say it this harshly, but it is almost as if the growing problem continues to be conveniently swept under the proverbial rug, until some new press article or community group raises it anew. Then the problem, in typical government fashion, is “reviewed” and then gently...swiftly...kicked under the rug...again. Quito needs to come to terms with its significant transportation problem, with a limited set of solutions prevalent. Let’s look at two quick factors that underpin how serious and challenging this problem has become.

First, Quito outgrew its airport. The airport was simply not worthy of a capitol city. It was located in a horrid location, in order to promote transit to core central areas. The airport was probably the second or third worst to land in, throughout all Ecuador, making it a logistical piloting nightmare. Quito now has a brand new airport, located in an even more inaccessible locale...which may not have even resolved the strategic landing issues at all. When a solution is as bad, or worse, than the original problem, you start to understand the challenges faced by Quito’s transportation industry.

Quito authorities did not set out to establish a worse airport. I do believe, from where I sit, that better options existed. However, Quito lies in a mountain valley, where readily available land for a major expansion project, like an airport, isn’t easy to find. It is easier to build upward in Quito than outward. This geographic challenge further defines the road congestion nightmare, where, basically, one feeder road services the entire metro area, running north to south. Expanding out is not as easy as it sounds, due to geographic constraints. The talk has turned to, seriously, an underground metro system. Folks, Quito suffers from a serious earthquake problem. I will not belabor this point, but building underground metro systems, in an earthquake prone zone, while not impossible, is seldom advisable and merits great discretion and attention to detail in competing the project out to a company that will not skimp on materials, safety and project oversight. Does this make anyone else nervous, besides me? Ecuador does not have the best history of project quality control. I know I wouldn’t want to be in a subterranean metro, when the earth starts to shake, rattle and roll. I will not discount the suggestion outright, but only caution that Quito cannot afford another “solution” that only makes a bad situation worse, like the recent airport relocation. If the serious transportation issue remains unaddressed, or worsens, we would be forced to downgrade Quito to a “sell”.

However, in the meantime, there remains too much growth in Quito, with pricing more attractive than less fundamentally sound locations, such as Cuenca, for it to be ignored as a place to buy. Our suggestion is to hedge your bets accordingly, as to whether the transportation solutions are forthcoming or not. If they are, your best bet is likely to take a longer-term outlook and invest in off-plan, or new construction condos. Dozens of fabulous projects are being built, or scheduled to be built, with a projected reasonable absorption rate. The new projects, in many instances, bring enlightened architectural touches or amenities lacking in older structures, but are being “pre-sold” at prices equivalent to, or lower than, the older resale properties. Snatch one or more up and enjoy the appreciation. If you are concerned about our warnings of a possible downgrade, then look to a more immediate outlook strategy, by acquiring a rehab property in an established neighborhood, or a quality property in an up and coming neighborhood. Either option, bought correctly, should give you a safe exit strategy within 12-24 months time. If the transportation storm brews, you should be able to come in from out of the rain, without getting all washed out. Quito remains a solid buy...for now.
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