New Market Report: Peru Real Estate Report Q1 2014

From: Fast Market Research, Inc.
Published: Fri Jan 17 2014

We believe that the real estate sector in Peru will continue to experience strong growth in the next few years as a result of substantial investment in new infrastructure projects, the continued expansion of Peru's export sector as well as a continuing trend of increasing levels of foreign direct investment (FDI). As a result, demand for commercial real-estate should continue to steadily increase.

We believe the current rising demand for office space will exert an upward pressure on rents, particularly since Peru is facing a shortage of office space with Lima's office vacancy rate of 1.1% among the lowest in the world. Over the long term, we anticipate net yield on commercial real estate investment in Lima and Arequipa to remain between 5 and 7 percent, the vacancy rate to stabilize at between 8 and 10 percent and growth in the construction industry to increase at roughly 7.5% per year over the next five years.

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While our growth outlook for Peru's commercial real estate sector over the next few years remains relatively strong, there are indications that real estate prices in Peru may be reaching their peak. After forecasting that the Peruvian economy would likely expand by 6.3% in 2013, in November 2013, Peru's central bank substantially lowered its economic growth forecast for 2013 to between 5.2 and 5.3 percent. This gloomier forecast coincides with softer demand from China for mineral exports as well as a slow-down in the construction and retail sectors. Demand for investment in Peruvian real estate may be negatively impacted by these trends.

Furthermore the reason prices for real estate increased in the first place, was that land in Peru was comparatively cheaper than in neighbouring countries. This resulted in a spike in demand for real estate in Peru. However, in recent times the price of land in Peru has caught up with prices in neighbouring countries. Losing this comparative advantage may result in a decrease in demand for real estate.
According to a report in the Financial Times in August 2013, business confidence in Peru is at its lowest level for two years, with the country set to post a trade deficit in 2013; the first time this has happened for over a decade. Investor confidence in Peru's real estate sector over the next few years is therefore unpredictable and could be negatively impacted by waning Chinese demand for commodities. In turn this may lead mining companies to cut or delay capital expenditure plans. Given this economic context, growth in the construction industry has fluctuated over the course of 2013. Nonetheless, the decision of Peru's central bank to cut the benchmark interest rate by 0.25% in November, should ensure that commercial real estate in Peru remains an attractive investment

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