December 2, 2006

Located in the Central American Isthmus, Costa Rica has a total area of 51,060 square kilometers, a population that barely surpasses 4 million people, a gross domestic product (GDP) that amounts to approximately US$17.5 billion, which translates into a GDP per capita of US$4,410 which will experience and estimated annual growth of 6%. Given these facts, it would be fair to say that Costa Rica is currently a developing country; however, the truth is that in spite of that, Costa Rica offers very attractive real estate investment opportunities. Costa Rica is characterized by an impressive scenic beauty that holds approximately 6% of the world's biodiversity, more variety of butterflies than the whole continent of Africa, coasts in both the Pacific and Atlantic Oceans, and a majestic stretch of mountains and volcanoes that crosses the country from tip to tip.  
 
These characteristics put into proper use, have made of Costa Rica a world leader in tourism as well as tourism the largest generator of attracted foreign currency for the country, achieving an annual growth rate of 17% for 2004 and consolidating itself as a main pillar in the national economy along with coffee and banana exports, high-tech products and the services sector. In 2004 Costa Rica received more than 1.4 million tourists whose total spending amounted to more than US$1.5 billion, equivalent to 8.7% of the country’s GDP and a quota of 23% of the exports.  
 
During the past couple of decades, Costa Rica has experienced sustained economic growth (average annual growth rate of 4.5% during the 1994 - 2004 periods) and an important growth and activation of the real estate market. Commercial, residential and tourism related real estate have been at the front end of the growth seen in the sector and have had an increment never experienced before. The increase in real estate development can be observed in every part of the country, but it has been the province of Guanacaste that has taken the largest bite of the growth pie. Size of Commercial Real Estate Market Given the fast growth of the real estate market and the lack of proper management and control of such information by the central government and its sector entities, it is very difficult to determine the exact size of the current real estate market. Nevertheless, there is some information that may give us a good idea of what is the possible size of the market and the speed of growth it is experimenting.  
 
According to Stewart Title Costa Rica (STCR), in the first semester of the year 2005 STCR has guaranteed real estate transactions for an approximate value of US$155 million, this amount being equivalent to almost 20% of the total amount guaranteed by STCR since 1997, giving us a good idea of not only the growth seen in the sector but also in the sophistication of the market, translated in the use of title guarantees such as the ones given by STCR. In accordance to our prior statement, 70% of the transactions guaranteed by STCR are related to properties located in the province of Guanacaste, where the vast majority of the tourism related growth is taking place. The growth in this province is mainly due to the consolidation of the Liberia Airport (according to the Costa Rica Tourism Board the Liberia Airport receives more than 45 weekly flights) and the strong development of the northern part of the province, especially the Tamarindo and Papagayo areas. The front runners in this development are the Four Seasons Resort Costa Rica at Peninsula Papagayo, Hotel Paradisus Playa Conchal, Tamarindo Heights and Hacienda Pinilla with their respective real estate developments, among others.  
 
In 2004 Guanacaste totaled 431,000 square meters of new construction, an 88% annual increase to the 229,000 square meters for 2003. Also with a similar growth to that of the tourism sector above mentioned, the central valley has sustained an important growth in commercial, business and residential developments, being witness to an amazing expansion of the mall phenomenon, business complexes and residential developments. In connection to a high growth economy and great investment attraction, the necessity to develop modern business centers, commercial sites attractive to the larger international companies and residential developments to house the growing population and higher income segment, has generated an exponential growth in the real estate sector in order to catch up to the ever growing demand of the past decade.  
 
Growth in construction for 2004 averaged 18.6% with the vast majority of this growth concentrated in the more commercial area found in the central valley, where it averaged 40% for the same period. Construction expenditure for the central valley totaled an estimated US$240 million, representing 35% of the country's total US$675 million estimated for 2004. Real Estate Market Fundamentals Overview Different types of real estate can be purchased in Costa Rica, these types include but are not limited to fee simple, condominiums, concessions in the shoreline zone, and time share ownership.  
 
Fee simple property in Costa Rica is the same as in the United States, which means that fee simple ownership gives the owner of the property the absolute right to materially own the property, use it, enjoy it, sell it, encumber it, lease it, and improve it, among other things. Condominium ownership may include single family residence projects, finished lot projects, vertical and horizontal property condos among others and basically is the same as fee simple ownership but with certain limitations established by law and the developer in order to protect the integral overall look and feel of the condominium property. A condominium owner owns a portion of the whole condominium and therefore must abide by the before-mentioned bylaws that can only be changed through a condominium assembly by an unanimous vote.  
 
Concession in the shoreline zone, also known as concession property is the right given by the government to use and enjoy the area subject to concession in the shoreline zone for a limited period of time. The shoreline zone is comprised of the 200 meters starting at the mid tide point going inland, and is divided in public zone, comprised of the first 50 meters and the concession zone comprised of the following 150 meters. The public zone is as its name expresses public and cannot be titled in any way, but the concession zone can be given in concession, which means that its use and enjoyment can be given, through a figure similar to an operational lease to a Costa Rican individual or company for a predetermined number of years; concessions are usually given for periods anywhere from 5 to 20 years and can be renewed for a similar period.  
 
It is important to keep in mind two important issues: That the concessionaire has priority in renovating the concession, and that according to the law, said concessionaire has to be Costa Rican or in case of a company, over half of the stock of the company must be owned by a Costa Rican This means that if a foreigner wants concession property, he must enter into a partnership with a Costa Rican citizen where the Costa Rican national appears as the majority stock holder of company requesting or holding the concession land. An exception to this prohibition applies to foreigners who have resided in Costa Rica for at least five years and alternative mechanisms can be analyzed on a case by case basis. Additionally, another exception to said rule is concession at the shoreline of the Papagayo Gulf in the Guanacaste province, where due to a special law foreigners can be recipients of concession land directly. Time-share ownership gives the right to use a property for a determined period of time during the year, meaning that a single unit is subdivided into parts of days or weeks and sold individually.  
 
Analysis of REIT like Industry A more complex lifestyle derives into the search of a more sophisticated solution to problems consequent to today’s fast paced living, and in Costa Rica this has originated a need for the development of complex business centers, malls, and residential vertical and horizontal condominiums that have been set across the vast majority of the central valley. This new general modus vivendi has generated an exodus from the small office in the center of town to the more luxurious and user-friendly business complex, from the common neighborhood to the more secure condominium, and from the local store to the international mega store found in one of the many malls surrounding the Capital. This exodus has caused a boom in the residential and commercial real estate market, and with the lack of a proper REIT like figure, the rising of a new investment vehicle and funding source known as the real estate investment fund (REI fund) has taken place in this market. Real estate investment funds are relatively new in Costa Rica, but have had a huge impact in the growth and direction of the real estate sector. Real estate investment funds have become not only a sound investment for individuals and companies, but a dynamizing and guiding instrument for the sector in general.  
 
REI funds have forced the market to fix the correct prices on properties by introducing an institutional buyer in a market that traditionally has been in the hands of the sellers. REI funds have played a crucial role in the growth and sustainability of business complexes and commercial developments, providing a mid term exit for real estate developers and therefore a more attractive return over their investment. REI funds have become a preferred investment vehicle, meaning that new REI funds will continue to emerge.  
 
To this date, more than 2,000 high net worth individuals and organizations have allocated investments through REI funds that add up to approximately five hundred million dollars . REIT Regulations Real estate investment trusts do not exist in Costa Rica as such, but as mentioned before, a similar figure, is found in the REI fund. Authorized to operate in January 2000, REI funds are collective investment instruments that invest in real estate and real estate related opportunities producing high fixed returns to their investors through long term leases.  
 
REI funds have important advantages such as the ability to diversify risk, optimize returns, maintain an adequate level of liquidity within the investment portfolio and facilitate the participation of individual and small investors. REI funds are managed by an administrative corporation duly registered, licensed and supervised by the Securities Regulator. The fund's ultimate goal is to successfully invest in real estate products for sale or rent. REI funds in Costa Rica are closed funds, meaning that they can only emit a predetermined amount or value of equity stock that is guaranteed in an equal manner with the fund's managed and owned assets. REI funds are also attractive for the fiscal incentives applied to the capital gains tax, reducing it to an imposition of 5%.  
 
Two additional figures that complement REI funds and help dynamize the real estate market, even without real estate investment trusts, are the guarantee trust and the flexible treatment given to condominiums. Costa Rican legislation treats the trust in a very flexible manner, going to the extent of allowing its inception to be done via a private contract among the parties. Additionally, there are no licence requirements to act as Trustee and no filing is required in public records. Such contract is undersigned by the settler and the trustee, and in the case of the guarantee trust, incorporates into the trust a guarantor function in relation to one or various assets. In the guarantee trust, the figure is used to keep in custody a certain asset and only execute the release of such in accordance to the compliance of predetermined conditions, allowing the figure to be used in relation with complex real estate transactions.  
 
In relation to condominium laws, Costa Rican legislation is very open and gives the parties a lot of flexibility in establishing internal condominium regulations, leaving it to almost solely to their determination and with little formalities. In a broad sense, condominium legislation is very similar to that of the United States, and has facilitated the growth of the real estate market by giving similar conditions to those already experimented in other more mature markets to individuals, financing vehicles and financial institutions. Foreign Investment in Local Real Estate Foreign investment in local real estate has also played a mayor role in the growth of the sector.  
 
Foreign investors have become key players in jump starting the growth observed in the past decade through their investments as developers in the establishment of nucleus real estate circles such as, but not limited too, shopping malls with hotels and office centers in one site, beach and city hotels with golf courses and adjacent residential compounds, and the development of more elaborate and sophisticated residential and commercial complexes. These investments in the precise locations have turned average areas into prime real estate, generating a development boom in the vicinity. Foreign investors have also played a major role in serving as financing vehicles and passive capital partners for local developers, facilitating access to working capital as well as better business practices in some cases.  
 
An important participation of the total foreign investment in local real estate has also come from the more than 11,000 foreign residents who have retired in Costa Rica, buying and developing properties for their use and enjoyment. Most of these retirees come from a high socio-economic bracket and therefore are mostly very sophisticated, generating a new segment in the real estate market. The number of future retirees continues to grow because of the positive climatic, social and economic conditions Costa Rica has, and therefore this segment will continue to be a major contributor to real estate investment. Real estate foreign investment will only continue to escalate as better conditions are given to investors and retirees, as the sector growth increases and novel prime locations arise, and as the demand for tourism related developments continues to grow.  
 
What Lies Ahead Given its strategic location in the center of the Americas, its educated and highly productive workforce, a continuing political, social and economic stability, preferential access to strategic markets, its international standard business infrastructure and high quality of life, Costa Rica’s future seems to be in strong shape. The sustained growth experimented in the past decade will continue with a boost from the more than likely approval of the Central American Free Trade Agreement with the United States (CAFTA), a new fiscal reform and a continuing strong growth of the tourism sector, which is expected to be at least 10% for 2005. This growth will translate into investment and will have a direct impact in real estate, creating a stronger sector, forcing better rates, a wider variety of real estate related products and the birth of more elaborate and dynamic financing vehicles such as REIT's.  
 
Thanks to appreciation, rates that more than likely will remain the same and a more than probable economic bonanza for Costa Rica and the region in the next decade because of CAFTA, the real estate sector will continue to experience strong growth and sophistication and will be expected to perform with very positive results.