Obama and Castro’s detente opens opportunity for US real estate investors, reports Justin Slaughter
On Wednesday 31 August, a JetBlue Airways flight left Fort Lauderdale, Florida, and landed at an airport east of Havana, Cuba, marking the first US commercial passenger flight to the Caribbean island nation in over five decades.
The flight is the latest step in an easing of tensions between the US and Cuba stemming from Barack Obama and Raul Castro’s announcement in December 2014 that the former rivals would restore economic and diplomatic relations.
Following the flight, the US government said it had finalised plans to grant eight airlines permission to operate a total of 90 daily round trips to Cuba’s nine international airports.
Along with the Carnival Cruise Line ships that started sailing from the US to Cuba this year as well, these flights present a new boon to tourism along with new opportunities that US real estate investors have begun to jump on.
Checking into hotels
In March, Starwood Hotels & Resorts became the first American company to seize on the opportunity after the US Treasury granted the firm permission to operate three Cuban hotels: the Four Points Havana, the Gran Caribe Inglaterra and Hotel Santa Isabel.
The Treasury, which will only allow US entities to purchase property or conduct business in Cuba with a special license, also approved Marriott International’s application to develop multiple hotels on the island that same month.
That approval was announced the same week Arne Sorenson, Marriott’s CEO, flew to Cuba with a delegation led by President Obama, the first sitting US President to visit the island in 80 years.
“We have long been convinced that with the right frameworks in place, new economic opportunities, including dramatically expanded travel, abound in Cuba,” says Sorenson.
The Treasury declined to comment on the historic Starwood and Marriott licenses, while the content of the applications are unavailable to the public.
But with Starwood and Marriott paving the way, interest among other US real estate investors has spiked, and many expect US investment there to rank among the highest in Latin America this year.
A July report from Akerman, the law firm that worked with JetBlue to coordinate regularly scheduled flights to Cuba, found that 32 percent of industry executives anticipated that the island nation would see the greatest increase in US investment among Latin American countries this year. The results showed that “market forces and interests” were already “ahead of the law”.
“US businesses are starting to see the island as an opportunity,” attorney Augusto Maxwell, chair of Cuba Practice at Akerman, says. “I’ve spent many years in efforts to prod US businesses to look at the island, and now folks are considering long-term opportunities.”
Akerman is working with several hospitality and marina companies to build infrastructure – flights, money transfers, communication channels, energy and water infrastructure – that will lead to more real estate development.
But while Cuba, still a centralised command economy, allows foreign companies like Starwood and Marriott to operate or develop properties owned by Cuban nationals, it only allows foreigners to buy property there on a case-by-case basis.
Though the process and rules have not been formalised, foreigners have been able to raise significant capital on renovation or construction projects, he says.
In September 2013, the Cuban government designated a specific economic zone in the town of Mariel, a port city west of Havana, where foreigners can invest in real estate and development.
Last year the Los Angeles Times reported that Cuba had received roughly 100 proposals for industrial projects from Brazil, Singapore, and China and other countries to build manufacturing, office, and energy projects in the port zone.
“The logic of the zone anticipated the loosening of the embargo,” Maxwell says. “Cubans hope that the port will be a hub for foreign investment and are promoting the idea that foreigners are able to do business there.”
Maxwell adds that the zone may not be immediately interesting to US hospitality investors, who are predominantly looking at Havana, Santiago, and other beach resort-type locations. But the zone itself signifies that things are changing in Cuba.
Expanding the Mariel ‘zone’ to the wider Cuban real estate market is not going to happen immediately. Cubans still have to figure out a transition from the current regime to the next generation of leadership and from a command economy to one that employs more free market principles, Maxwell says.
US real estate investors are still restricted by a US embargo that President Eisenhower instituted in 1960 that effectively barred US investment into the island. (He then cut all diplomatic relations with the island in January 1961, a rift that has endured decades beyond the downfall of Cuba’s ally the Soviet Union).
The embargo can only disappear by an act of Congress, but for now the licenses are the best option to work around it. Maxwell is optimistic that the US will continue to loosen its antiquated trade and diplomatic restrictions.
He sees growing political support in the US to embrace a restoration of US-Cuba relations, especially from commercial and Republican interests that were formerly opposed to lifting the embargo.
“We are coming to a bipartisan agreement that the embargo has outlived its usefulness,” he says.
Beyond the legal and political barriers, Cuba as a tourist destination will continue to lure American tourists with its globally renowned architecture, Afro-Latin infused music, beaches, and cigars.
With flights to Cuba underway and major US hotel chains now operating there, real estate opportunities will begin to expand – particularly those that cater to an inevitable tourism spike – as the two nations and its regulators continue to cut through the red tape.
In the meantime, it may be worth it for US real estate investors to hop on board a flight to Havana to get a lay of this new land of opportunity.