A Brief history of Cuban Real Estate
Anyone who walks around Havana is bound to notice the stately homes and tremendous amount of wealth that was invested in construction in the years between Cuba’s founding as a republic in 1902 and Fidel Castro’s takeover in 1959.
Housing was one of the first public policy issues addressed by Cuba’s socialist government. In revolutionary lore it is held that grievances over housing helped the rebel movement to gather political support and win its victory in 1959. Shortly after, the government nationalized billions of dollars worth of property (homes, farmland, businesses) owned by private Cuban citizens, as well as foreign-owned property (talks between the U.S. and Cuba to settle disputes over American-owned properties that were seized are still ongoing.)
When Castro took power his government suspended evictions of tenants who were behind on their rent and ordered rent payments to be cut in half. In 1960, the Urban Reform Law established the principle that housing is for people to live in, not to live from – and based on that, private rental of housing came to an end. Those who owned homes before the revolution and stayed were allowed to keep their homes. No Cuban could possess more than one urban dwelling while converting hundreds of thousands of renters into owners — that is to say owners who couldn’t sell. The Law also changed rent payments into mortgage payments on a five to 20-year basis. Thus, made owners out of renters.
Renters were given control of their apartments. They paid half their previous rent payment to the state, and eventually gained full ownership. Landlords were offered a choice between a lump sum payment or a monthly payment for life to compensate for their loss.
Cubans were allowed to “swap” (called permutas) which was overly bureaucratic and often a corrupt state-run process. It involved finding two properties of roughly equal value and then getting state approval to transfer the title. Homes swaps often involved under-the-table cash and the lack of a formal market and government restrictions on private home construction worsened the housing shortage.
The market for sales of residences disappeared as the state gave itself the derecho de tanteo, or right of first refusal, whenever a homeowner wanted to sell. A 1984 law explicitly permitted the sale of housing between private parties, but only with the state’s authorization, which were rare. Cubans worked their way around this restriction and created a real estate market of sorts based on their ability under the law to swap residential housing units among themselves. This market was visible and sometimes involved chains of transactions to satisfy multiple parties. In the eyes of the law, homes were simply exchanged and no cash changed hands.
In reality, side payments were routinely and discreetly made to compensate the person giving up the higher-value property. Multiple swaps were illegal but done anyway and involved many transactions, with one party compensating, with money, another party giving up better property.
Legal papers were often executed to make these ostensibly money-free transactions official. In other cases, homes were sold illegally for cash but the property titles were not updated to reflect the new owner. As a result, the seller retained title and legal ownership of the home, and the buyer, now occupying the home, incurred this legal risk.
How a Home Swaps Work
As reported in the Herald Tribune Americas reported on how home swapping worked. Here is how: "Imagine a married Cuban couple with two children and a baby on the way who find their two-room apartment in the historic Old Havana neighborhood too cramped. What are they to do?" "Well, with the help of an agent known as a runner they might start by locating a bachelor from the countryside looking to come to the capital. They could arrange for the newcomer to move into a tiny apartment in Chinatown and move its residents - who also have a house in Miramar where their elderly grandmother lives - to a first-floor unit they sought in Central Havana. The Central Havana flat is available because the residents have divorced; so the former wife would go to the bachelor's country house, near where her parents live, while her former husband would go to Old Havana. The Old Havana family that started the whole process would then head to their dream house in spacious and quiet Miramar."
"Sound complicated? It is. And the government added even more hurdles by trying to regulate the swaps with a variety of forms and fees as well as inspections of the properties involved to ensure that they are of roughly equal value All trades had to be endorsed by the government, but Cubans said slipping money to bureaucrats increased the chances that deals of unequal properties - as in those that involved money and carried the taint of capitalist yearning – would be approved. Under the table, there were all sorts of things going on."
"Controlling this practice was difficult for Cuban authorities. "It's something people shouldn't have done, but they did. It was like saying you have to stop at the red light, and you can't go until it's green. You ought to do it, but not everybody did.”
“The type trading occurred in plain sight. Under the watchful eye of a police officer, hundreds of people gathered every Saturday El Prado, one of Havana's bigger avenues. Some carried cardboard signs describing their units: the neighborhoods, number of bedrooms and whether there were patios, garages, hot water, private bathrooms and gas supplies. Less desirable dwellings used tanks of gas for cooking and required residents to share toilets with others down the hall.”
Although it was not clear how many thousands of swaps take place annually, some of them involved the same people again and again, as in the case of a woman around sixty, who said she had moved 42 times over the last two decades. Now all of this has changed.
Regulations issued in 1996 legalized private land ownership for Cubans making it possible to invest in real estate and own property. Property rights were recognized and protected from state expropriation. This opened the door for real estate investment and development in the future. Consequently, an interesting phenomenon arose in Cuba — an underground market in homes and apartments, which gave birth to illegal real estate agents and illegal speculators. The latter tired to get their hands on historic homes in anticipation of a time when private property may return to Cuba.
In 2003, a new law prohibited such sales altogether. In this legal framework, to hold a property title to a home meant that one could live in it, improve it (with government permission), pass it to heirs, or swap it for another.
For decades there has been a tremendous housing shortage in Havana with some houses and apartments housing several families. However, it is estimated that today between 80 to 90 percent of Cubans own their own homes and a large number of them who own their own homes, pay no property taxes.
A New Housing Market is Born in 2011
One of the biggest economic reforms that Raul Castro initiated after taking over from ailing brother Fidel in early 2008 was in real estate.
On November 2, 2011 when Decree-Law 288 was published in the Gaceta Oficial and went into effect, permitting Cubans to buy and sell homes legally at prices they set between themselves. The new law permitted the sale of homes that can now be sold and did not exist prior to this date. This measure was taken to breath a little capitalistic life into a depressed socialist economy. Now it is common to see Se Vende (for sale) signs.
Now after a half a century after Fidel Castro’s government expropriated all private property, part of the socialist state are up for sale. Billions of dollars in property assets that have been frozen in place and time, unvalued or undervalued, are now up for grabs.
Castro’s limited real estate liberalization has brought with it a major change. Homes were transformed from state control into a tangible asset whose value needs to be preserved, if not improved. However, significant restrictions remain. Cubans are limited to one property in the city and one vacation home. Titleholders must be Cuban citizens or permanent residents, NOT foreigners. The deals are almost always done in cash, and the transactions must pass through Cuban banks, though buyers and sellers often agree to exchange additional sums outside the country to minimize tax payments.
As usual, Cubans have found ways to skirt their government’s attempts to control the market, as have Cuban Americans (and U.S. residents) blocked by the U.S. trade embargo. Some buyers acquire additional properties in the names of their children, while foreigners find Cubans to put on the deed, despite the risk that they would have no legal claim to the property.
The main provisions of Decree-Law 288 are as follows:
- Cubans residing in Cuba and foreign nationals legally residing (resdients) in Cuba may buy and sell homes at prices they set between themselves. Ownership of one residence and one vacation home is permitted.
- Properties may also be transferred by donation or through swaps. The side payments that have long accompanied housing swaps are now legal if properly declared.
- Buyers and sellers, or the parties to a donation or swap, register their transactions before a notario (noteary), a government official. Unlike before, the parties to the transaction do not need to obtain prior approval from the local office of the National Housing Institute. The notario changes the title to reflect the new owner, who registers the new title at the municipal property registry.
- Transactions have to occur through bank accounts; buyers pay with a cashier’s check.
- Buyers state under oath that they own no other main residence and that the money for the purchase was obtained legally.
- Buyers pay an asset transfer tax equal to four percent of the home’s value. Sellers make a lump sum income tax payment in the same amount. For tax purposes, the home’s value is the purchase price or the legally declared value, whichever is higher.
- A process is established for property titles to be updated and made accurate, and entered in the municipal property registry.
The legalization of residential real estate sales in November 2011 is one of the most significant actions taken in Cuba’s economic reform program. It has impact on the vast majority of Cuban households, transforming the nature of residential property.
Before, a home was an asset to use and to pass on to heirs. Now it can be made liquid. At the family level, the result is instant capital formation, the creation of wealth through the granting of a new legal use for assets to which Cuban families hold clear title.
Finally, the absence of mortgage finance stands out as a major impediment to expansion of this young real estate market. Demand in this market, and consequently the expansion of the housing stock, is constrained by the lack of credit.
As one expert says,”In a market where full payment must be made at the time of purchase, the universe of Cuban buyers consists mainly of those who have sold a home or those who receive capital from a relative abroad. A monthly payment of approximately $200 would amortize a $25,000 loan at a five percent interest rate over 15 years. While many Cubans cannot afford such a monthly expense, $200 per month is affordable to many who work as entrepreneurs or for foreign businesses or elsewhere in the hard-currency sector, and it would put modestly priced housing within their reach. Assistance to low-income buyers could further expand affordability. “
See more about investing in Cuban real estate here:
https://www.brookings.edu/wp-content/uploads/2016/06/Phil-Peters-Cubas-New-Real-Estate-Market.pdf
