The Cuban Transition (6 mins)

How the future of real estate in Cuba hinges on Cuba’s next elections.

Take a break and imagine feeling a warm breeze rush over you as you hear a horn of a cruise ship through a rustling of palm leaves.  You are handed a refreshing beverage and newspaper as you gaze onto the Caribbean.  Surrounded by beautiful and historic architecture, you see all sorts of hotels, restaurants, night clubs, and casinos.  The atmosphere is loosened, yet vibrant, on this island paradise only 90 miles away from Florida.  Your news paper headline reads “Cuban Reforms Fuel Island Nation Tourism and Real Estate Boom”.  Now imagine that this headline could be a possibility only several months from now, if Cuba’s next government wants it.

Over 140 commercial cruises are scheduled to visit Cuban ports this year from both large and mid-sized U.S. cruise companies, including major cruise lines such as Carnival, Royal Caribbean, Norwegian and Regent Seven Seas.  In the related hospitality industry, companies such as Marriot/Starwood and Airbnb were early out of the gates in working under the new rules to obtain special U.S. licenses to reach agreements with relevant Cuban ministries to manage hotels and bookings in private Cuban homes.  ¹  AirBnB opened up service to Cuba in 2015 and currently host over 70,000 visitors a month.  ²  In 2016, 284,937 U.S. visitors traveled to Cuba.  In 2017, this number increased by 216% to 614,433 visitors.  Boston Consulting estimates that the island could see close to two million American travelers in 2025.  American tourism would have great implications for real estate in Cuba, if only impediments to investment did not exist.  The country’s national elections held in the next few months will be pivotal in Cuba’s political and economic future, and will affect whether there will be a market for the global real estate industry.

There is much uncertainty about who will be the next president of Cuba and it is unknown what type of transition the Cuban government will experience.  The leadership of Cuba’s next government will have a profound opportunity to revitalize the country’s struggling economy and restore Cuba’s real estate potential.  The country is in need of innumerable reforms, from opening up telecoms, e.g. internet, to fixing its currency.  ³  Reluctant industries will weigh their decisions to do business in Cuba against any risk the country’s new leadership may pose.  But as normalization between Cuba and the rest of the world continues, demand for opening up Cuba’s real estate markets to foreigner investment will surge.

Only recently were Cuban citizens allowed to own property.  Today, land ownership is restricted, and foreigners are barred from owning real estate.  ⁴  This is a relic of the country’s Communist past and will hopefully be addressed in the upcoming elections.  Originally scheduled to transfer power via an election of the Council of Ministers in February 2018, Raúl Castro, current president of Cuba, delayed his departure date from the presidency until mid-April.  The decision was ostensibly made because of a delay caused by the category 5 Hurricane Irma which devastated parts of Cuba in September causing over $13 billion in damage.  It is possible that Mr. Castro’s decision to delay could be linked to Cuba’s disrupted relationship with Washington D.C. over Washington’s recent policy shifts, however, the political undercurrents are still unknown.

Several names have been mentioned to take over the presidency.  Presumably, the more liberal vice-president Miguel Díaz-Canel was next in line, but other names have also been floated such as Mariela Castro, the current president’s daughter.  But reforms won’t be easy for whoever takes over the presidency.  Economic reforms present political risks for Cuba’s new leaders and this is a problem.  The reforms will certainly be disruptive for both the country’s weak and powerful.  For instance, by making an appropriate adjustment to Cuba’s artificially high exchange rate, the country’s state-owned enterprises would become endangered threatening the loss of 2 million jobs and damaging the support of political loyalists who manage the enterprises.  Economic reforms are also sure to offend party hardliners whose support is needed to sustain power.

Still, the need for reforms cannot be ignored, especially when considering the increase in demand for trade and tourism that normalization has influenced.  Commercial flights and cruise ships have leaped to provide service to the country’s tourism industry since restrictions to the country from the U.S. were eased.  U.S. airlines now negotiate directly with the Cuban government to plan and maintain routes to the island. Establishing direct flights has brought thousands of daily visitors to Cuba and helped spur bilateral economic relations across a range of related sectors including private and public transportation, retail, food services, hospitality, travel services, and air traffic control. ¹  The Trump administration’s recent shifts in policy toward the island nation, barring Americans from staying at military run hotels for instance, have not damaged tourism but have only highlighted areas of needed reform.

Despite the demand normalization is creating, impediments to investment remain.  The travel and hospitality industry, the agriculture industry, telecommunications, and services and supply chains are all eager to do business in Cuba, but with limitations to investment, it will be difficult for the demand in tourism to be sustained.  ⁶  Allowing foreign ownership of real estate would have the greatest impact on Cuban society and would certainly transform the country’s struggling economy overnight while creating boundless opportunity.  Many opportunities have been taken since 2014 to open Cuba politically and economically.  Hopefully Cubans themselves will take the next opportunity in April.  Imagine the possibilities.

 

 

 

Image: http://www.kuoni.co.uk/cuba/havana/hotels/hotel-nacional-de-cuba