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A Trap on the Island of Freedom

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Articles / Rubric: Companies and Markets

 

A Trap on the Island of Freedom

June-July 2014 | Companies and Markets

 

 

In November 2011, the Cuban government legalized the real estate business in addition to passing other economic reforms. From this point in time, residential property ceased to be a “dead asset” – which previously could only be legally passed on to heirs – and turned into a very liquid commodity. The primary reason to overturn the ban on real estate transactions was a desire to overcome the housing shortage and to reduce the illegal housing market in Cuba. Two and a half years later, we see that the main objective of the reform has not been achieved, and the Cuban real estate market is on the verge of collapse.

 

In 1959, Fidel Castro imposed a ban on the sale of residential property in Cuba. For more than fifty years after this decision was made, the only way that Cubans could move was to exchange properties on the basis of similarity. A new property should not be different from the old one in terms of square footage or style. And even if a family had the need to expand their living space and, more importantly, the means to do so, it would not have been legally possible. At the same time, other families could have housing that was too large for their needs. For example, childless families or older couples might prefer to live in a modestly sized apartment, but the paradox was that this exchange was impossible. In addition, according to one unofficial estimate, by 2011 there were about 200,000 units of vacant housing on the island, despite the fact that about a third of Cubans had to squeeze into a few square meters of living space each. According to the 2012 census, the Cuban population (11.2 million) lives in 3.9 million housing units, meaning that there is an average of 2.8 inhabitants per unit.

Raúl Castro, who took office in 2008, has proved himself to be a more pragmatic leader than his brother. Already in 2011 he published the plan for the reform after it received preliminary approval at the Sixth Congress of the Cuban Communist Party. This document emphasized measures to reduce the size of the public sector and increase the size of the private sector, as well as to introduce agricultural reforms, among others. Raúl Castro proposed reforming the real estate market by lifting the ban on housing transactions, as a way to address the housing shortage and eliminate the black market for real estate. The law was enacted on November 2, 2011.

At the same time, the sale of real estate under the new law is permitted only to Cuban citizens residing on the island and to foreigners who intend to take up residence (meaning persons who come to the island under a long-term labor contract or foreign nationals who intend to marry Cuban citizens). It is permitted to own up to two units of real estate: one permanent residence and one vacation home. Real estate purchasers also must officially confirm that the money they are using to purchase the property was obtained legally. As for the Cubans who fled the country in the early years of the socialist government, under local law they are considered as subjects who have renounced their rights, including the right to own property. As was true under the old version of the law, foreigners are forbidden to complete transactions involving residential property. However, according to experts, in the near future there are likely to be some concessions. Already in 2010, a law was enacted that entitles foreign investors to lease land in Cuba for up to 99 years. Experts note that the opportunity to buy property on the island may be granted to foreigners participating in the construction and development of new resorts, along with all necessary supporting infrastructure, which is planned to be built together with foreign corporate partners.

It is noteworthy that real estate deals in Cuba are taxed on both sides of the transaction. Buyers pay a tax on the transfer of assets that is equal to 4% of the value of the home, whereas sellers in turn have to pay a one-time income tax at the same rate. The purchase price or the legally declared value is used to assess the value of the home for tax purposes. Buyers, sellers and brokers have meanwhile found a way to minimize their losses from taxation. They all unanimously declare that in practice they pay 4% of the legally established valuation of the home, as assessed by the municipal government. Typically, this is only a small part of the actual market value of the property. For example, an apartment in Havana may be listed at CUC 30,000, but under the property law it is only assessed at CUC 149. And more often than not, the real purchase price does not appear in the agreement papers, giving both sides the opportunity to save on taxes.

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Two types of buyers have fueled demand for property on the relatively new Cuban real estate market. The first type consists of Cubans who rely on their own means and savings, and the second represents remittances from abroad (from family members who have emigrated, foreign friends, or foreign spouses). Due to the low wages that the majority of Cubans earn, residential real estate is now largely dominated by representatives of the second category of buyers. If you do not receive a salary from a foreign company or do not have ties abroad, then it is virtually impossible to buy property, because the average Cuban earns a monthly wage of about $20, and the cost of a one-bedroom apartment in Havana starts at $7,000.

According to Cuban media, during the first 20 days of the new law 364 residential properties were sold, 1,579 units of real estate were given as gifts, and 409 transactions were completed involving simultaneous buying and selling. Since then, data on residential real estate transactions have not been published on a regular basis. However, on December 3, 2013, Cuba′s Ministry of Justice reported that in the first eleven months of 2013, there were 200,000 property transactions, 80,000 of which were direct acts of purchase and sale.

Thus, the main objective of the reform – to address housing shortages – has not been achieved. According to the pre-reform figure for 2010, the country would need at least 500,000 units of real estate in order to adequately address the needs of citizens on the island. According to information published by the National Housing Institute in September 2013, 60,000-70,000 units of new housing need to be built each year in order to partially address the housing shortage. Real growth today is significantly lower than what is required: 16,000 units are under construction today by the state and 8,000-10,000 units are being built by the homeowners themselves. In fact, there has been a negative trend: If 32,540 housing units were built in 2011, then 32,103 were built in 2012, and in 2013 the figure was even less.

Raúl Castro′s reform has unquestionably expanded the economic freedoms for the 84% of Cubans, who now own their own homes. It is also a positive step forward for human rights. The just emerging Cuban real estate market has a number of characteristic features. The demand for housing is hampered by a lack of cash needed to buy, and the option of mortgage lending is not yet available to Cubans. Another interesting fact is that until 2011, it was illegal to be a broker or realtor. Thus, the expansion of the real estate market (and this was the main objective of the reform) is constrained by several factors. These include, as noted above, the lack of a mortgage system, the inability of buyers to use their own homes as collateral to obtain a loan, the decline in new construction, and the tendency for secondary housing to become run down and dilapidated.

Text: Olga Irisova

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