April 21, 2010
Last night I ate at one of the fanciest restaurants in Cuenca. Everything except for the Chilean wine was locally grown and absolutely delicious, right down to the banana flan for dessert.
The total bill for my beautiful companion and I rang in at $40.02, including 3 courses with wine.
For lunch, I ate at a local cafe– another 3-course meal with a chicken soup to start with, beef loin on a bed of rice, small dessert, and fresh squeezed juice right out of the fruit. That meal set me back a whopping $1.75.
I gave the waiter $2 and he literally followed me out of the cafe trying to give me my $0.25 in change back because apparently the $1.75 already included a 10% gratuity.
I’m telling you this because I’m trying to impress upon you how cheap Ecuador truly is, and how much value is in the price.
I think of countries like publicly traded shares on a stock exchange. Sometimes the market gets out of hand, and companies trade for an unjustifiably high multiple of their earnings and assets (think Amazon.com during the tech bubble).
In some instances, though, companies trade at a discount to their net asset value– we saw this in the first quarter of 2009 when many of the junior mining companies were trading at less than the value of the cash they had in the bank.
It doesn’t really matter how high or how low the price of a stock is, or what the market capitalization is… what makes a company attractive to buy is when it is significantly undervalued relative to its earnings, assets, and potential.
I value countries in the same way.
Brazil, for example, is like a company with a very large market capitalization that is trading at roughly net asset value, neither significantly overvalued nor undervalued.
Morocco, on the other hand, is a small cap company that is trading at a premium to its net asset value and earnings– sure, it’s cheap, but it’s a total disaster.
Ecuador, in my assessment, is like a deeply undervalued mid cap company. It is not without its own problems and challenges, but price level here is substantially lower than the level of its well-developed infrastructure and amenities.
I’ll give you a few real estate examples to help paint the picture:
Here in Cuenca, I’m looking at a particular property near town that’s on about 10 acres with a 3,400 square foot main house (roughly 300 square meters) of quality construction. The asking price is about $150,000.
If you calculate the construction costs at $500 per square meter (which is extraordinarily cheap, roughly the same cost to build a no-frills garage in North America), then the construction cost of just the home is $150,000. You get 10 acres of land for free.
Another place I’m looking at is in the mountains on 20-acres of prime property. The main house has over 350 square meters of quality construction that’s almost brand new, and the owners are asking $375,000. You can do the same math and see that they’re basically giving away the house at cost, and giving away the land for nothing.
You see my point.
As for taxes, local property taxes are a joke… most of the owners around here complain if their taxes go up from $52/year to $55/year.
The biggest issue with taxation is on rental income– if you buy a property and rent it out, a tenant must withhold a flat 25% on rental income, which means that yields are not as high as in neighboring Colombia or Panama.
Overall, I really think Ecuador has substantial value. Using my “10-year rule” and looking out into the future, I’m not convinced that the country is on a very steep upward trajectory like Peru or Cambodia… but even if it stays exactly the same, it will still be a great place to spend some time and even retire.
Like any real estate market, from Vancouver to Vanuatu, there are traps to watch out for in Ecuadoran property; there will always be sharks waiting to take advantage of the uninitiated, which is why I recommend for people who are seriously considering expatriation to rent first, or deal with an absolutely trusted advisor.
A trusted advisor can be difficult to find– foreigners tend to rely too heavily on Google and Wikipedia (which I regard as the black hole of accurate information). It takes a lot of time on the ground– I’ve spent years running all over the world building quality contacts while burning through crooks and incompetents.
Ecuador has been no exception. More to follow.