Since the White House announced plans to normalize diplomatic relations between the US and Cuba in December 2014, the Latin American nation has seen a surge in interest in its property market among real estate investors.
According to a July report from law firm Akerman, 32 percent of industry executives anticipated that Cuba would see the greatest increase in US investment among Latin American countries this year. This was up dramatically from only 8 percent of respondents in the previous year’s survey.
“Cuba was forbidden fruit that had been untapped for 60 years,” explained Pedro Freyre, chairman of Akerman’s international practice. “It offers all sorts of possibilities – hospitality, low-income housing, golf resorts, beach resorts – you name it, the potential is there, and you’re 90 miles from the US.”
US investors, however, face multiple hurdles when it comes to buying Cuban real estate. “Right now, there’s very significant legal barriers and financial barriers existing on both the US side and the Cuban side,” said Freyre.
Under the US trade embargo, US citizens and entities cannot do business with Cubans and the Cuban government unless they’ve been issued a general license or specific license from the US Department of Treasury’s Office of Foreign Assets Control. Licenses are only issued, moreover, if OFAC determines the request to fall within US policy objectives. The application is also time-consuming, expensive and complicated, he said.
Meanwhile, in Cuba, local citizens and businesses are subject to Law 118, which theoretically could allow a foreign entity to invest in the country’s real estate, but typically leads to investments being tied up in a long and rigorous vetting process, Freyre said.
Another wrinkle to investing in Cuban real estate is some $8 billion in US claims relating to Cuban properties that had been owned by US citizens but were confiscated by the Cuban government, which never paid compensation to those owners. If a new investor wants to buy property in Cuba, they will need to be careful that the asset they are looking to buy is not subject to such claims.
Increased US investment in Cuban real estate would require both the lifting of the US trade embargo with Cuba and reforms in the Cuban legal system. Although lifting parts of the embargo was proposed during the current legislative session in Congress, ultimately those proposals did not advance. Meanwhile, the Cuban government has embarked upon limited reforms to allow for greater foreign ownership of assets, including a more transparent and functional real estate code, but those reforms are still far from being enacted, he said.
The investors who have shown interest in Cuba thus far “would be the first movers who are looking to position themselves,” said Freyre. “They’ve evaluated the risk, and they’re willing to take the risk to be first in the market and plant their flag. It’s not widespread.”
Indeed, a number of Latin American-focused general partners told PERE that Cuba is not on their radar. “We have no interest there,” said one Latin America-focused general partner. “I would imagine the lack of defined property rights would be a considerable deterrent for many others as well.”
Meanwhile, Thomas McDonald, managing partner at Jaguar Growth Partners said that his firm remains focused on larger, scalable businesses in larger Latin American markets such as Brazil, the Andean region and Mexico.
In addition to a lack of available existing institutional quality assets, “they’re very early in their emergence of a middle class, so a lot of the drivers that are there throughout Latin America, meaning increasing consumption and what that does to the logistics and retail sectors, those are in their infancy in Cuba,” he said.
Freyre, however, is optimistic about US-based private equity real estate firms investing in Cuba in the future. “If you asked me the question five years ago, I would have said that nothing is on the horizon,” he said. “After what’s been going on in the past 18 months, it’s now on the horizon. But it doesn’t mean it’s going to happen overnight.”