Valuable Puerto Vallarta Real Estate Article

Globalization, in an economic sense, is the movement by countries companies, organizations and people toward a single market environment. Historically, people have understood an economy as a system functioning within a single country. Today, world economies have evolved into regional and supranational networks.

The Eurodollar is giving strong competition to the US dollar, and the Mexican pesos.

The net effect of the shrinking economic world is that all the “sub economies” of individual countries are tied into a single network of supply and demand for products services, capital and resources. Included in this global system of supply and demand is the demand for real estate.

The impacts of globalization on real estate are that global investors now enter and leave various local markets to create business opportunities and seek investments.

The National Foreign Trade Bank (Banco Nacional de Comercio Exterior) reports that eight new projects were finalized in June, involving 25 million dollar investments by companies in Korea, the United States of America, Canada, Italy and Taiwan, which will generate 915 new jobs in Mexico. Jalisco is one of the states receiving this benefit. Others are Coahuila, Nuevo León, Puebla and Yucatán. The Investments include making of jams, men’s suits, fresh produce, railroad cars and engine valves.

The liberalization of investment and ownership laws: A presidential decree in l990 emended the Land Reform Act of 1917, making it easier for foreigners t own and use Mexican real estate. In addition, an update of the Foreign Investment Law in 1993 allows foreign nationals to own agricultural land in Mexico. There is a recent further change in the Foreign Investment Law, which is still to be interpreted.

The North American Free Trade Agreement (NAFTA) continues to harmonize trade regulations and encourage foreign investment, especially from the USA and Canada, in order to establish businesses in Mexico. The increase of foreign enterprises in Mexico may be accompanied by a rise in the demand for residential property for foreign owners and investors.

REAL ESTATE AND CAPITAL FLOW

Most expanding markets in the world today require foreign capital. México is no exception.

“Good merchandise finds a ready buyer.”
Plautos, c.200B.C.

The underlying forces that direct capital flow are:

1. Supply and demand
2. Investment return.

On a global scale, investors examine and invest in markets that best match the risk and return objectives for their portfolios.

Capital flow is a complex interplay of foreign exchange instruments that move currency assets, credits and debt around the world almost instantaneously.

“All currency is neurotic currency.”
Norman O. Brown, l966

CURRENCY

urrency exchange rates provide a general insight into a country’s economic and financial performance as compared to another. With all other factors being equal, if a country outpaces another in growth of gross domestic product (GDP) and positive trade, that country’s unit of currency will be worth more than the other’s.

Mexico’s inflation rate has been at manageable levels for several years. Tough extraordinarily low after the devaluation in 1994, the value of the peso has remained relatively constant since then. In addition, the economy has experienced GDP growth, a rise in the stock market, and privatization.

When a currency improves or gains against another, its change rate falls. The stronger currency is worth more so it takes fewer units to purchase the weaker ones.

For example, if the Canadian dollar strengthens against the Mexican peso, it will take fewer Canadian dollars to buy pesos. In other words, someone holding Canadian dollars can now buy more Mexican goods with the same amount of money.

If the currency unit weakens, the exchange rate increases and it takes more Canadian dollars to buy the sane amount of Mexican goods.

If the currency unit strengthens, the exchange rate decreases and it takes fewer Canadian dollars to buy the same amount of Mexican goods.

In many cases, investors buy real estate, not because of the features of the property itself, but because the trend of the investor’s local currency against a foreign currency is favorable.

MARKET ASSESSMENT

To understand the economic, capital and currency conditions in an international market, it important to consider any cultural or policitcal infulences as well as local real estate practices.

From an investment perspective, it is important to be able to distinguish between favorable and unfavorable financial climates. A favorable aspect of a climate could include the stability of a population’s equilibrium, free market philosophy, social harmony, democratic institutions, adequate infrastructure or underlying economic strength.

According to the National Association of Realtors, 2003 Mexico is 1,972,550 square miles with a population of 103.4 million and Gross National Product of 920 billion dollars.

This article is based upon legal opinions, current practices and my personal experiences in the PuertoVallarta-Bahia de Banderas areas. I recommend that each potential buyer conduct his own due diligence and review. Operadora de Fondos Lloyd, S.A. and the National Association of Realtors have furnished information for this article.