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How High Can Skyrocketing Land Values Go?

by Garland M Baker on January 24, 2005

Nation confronts a sizzling market

Tourists arriving in Costa Rica this year have another attraction besides the beautiful beaches: soaring property values.

Potential investors in property are finding themselves confronted with land prices that are skyrocketing. The phenomenon is everywhere. Even tourists notice the flurry about them. Buyers have to hold on tight to offers as prices float even higher.

A.M. Costa Rica forecasted the growth in Guanacaste last January at the completion and opening of the Río Tempisque Puente de Amistad or Friendship Bridge, built by Taiwan. The bridge, in concert with the Daniel Oduber International Airport in Liberia, has made an otherwise remote area quickly accessible.

Professional people, along with the common Joe, from the United States or Canada can wake up and be sick of the snow, hop on a plane and be surfing Playa Guiones near Nosara at sunset.

The question is: Will Costa Rica boom or bust?

Markets do burst and crash. Real estate is a market like any other. Remember the stock market fueled by the Internet? KaBOOM!

There are a number of theories to explain the growth cycle that tourism destinations go through over time. As a destination matures and attracts differing types of tourists, its growth process is likely to change.

This has happened since the time of the Romans. New-found paradises go through a defined cycle: The phases of the cycle are exploration, involvement, development, consolidation, stagnation and decline and/or rejuvenation.

Tourist attractions do not exist during the exploration phase. Nosara was just a dream, Manuel Antonio was desolate and no one had even heard of Dominical. There were no tourists around anywhere.

Little by little, the drifters and explorers, common to this phase involve locals into providing tourism services. Over time, visitors arrive and there is more and more development.

Tourism officials and business persons invest heavily in advertising and the development of tourist attractions catered specifically to the individual and mass-market traveler types. As a result, the destination benefits from increasing rates of arrivals growth.

Does this sound familiar? Just look around Costa Rica. Type the words “Costa Rica” into any Internet search engine. Advertising about this country is exploding. E-mails about fabulous real estate deals inundate the cyber highway every day.

Time passes and, at a point, the market begins to consolidate and visitor numbers slow. Aging infrastructure characterizes the destination. Around the time when peak arrival numbers are at their highest, the market becomes unfashionable and things start to turn around. Stagnation sets in and it becomes difficult to maintain arrivals. After the stagnation regime, the destination enters the decline stage, where it either dies or rejuvenates.

Where is Costa Rica in this cycle? What are the risks to investing in this country?

Costa Rica has already had one mini setback in its recent history. Old timers remember. In the 1970s Costa Rica was in a development phase. It was during this time the country gave incredible incentives to invest here. Tax-free status given to tourism companies, for up to 12 years, to make investments made projects flourish. Liberal tax exonerations enticed retired and independently wealthy people to make Costa Rica home.

Then came the war in Nicaragua in the 1980s. Tourism dropped off heavily. Real estate prices fell fast. The world forgot all about Costa Rica until Oscar Arias won the Nobel Peace Prize in 1987 and put the country back on the international map.

Over the past couple of years, Costa Rica has canceled almost all of its incentives. Immigration laws are so unwelcoming it is embarrassing. This picture is not one of encouraging more growth from the outside.

The point to this essay is, do not invest blindly into anything just because it has a pretty package. If Costa Rica is of interest as an investment, understand it is in a cycle.

It could be on the up side or the down side. Consider the external factors to any investment. Right now, there are grumblings again in Nicaragua.

When investing, do a sensitivity analysis. This means study the possible effects adverse changes may have on a project. Determine a risk reward ratio. In other words, know how much you have to gain vs. how much you have to lose.

Good vision is what makes the world, and money, go ’round.

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