by Carl Delfeld, Investment U Senior Analyst
Thursday, November 10, 2011: Issue #1640
You didn’t read about this on the front page of The Wall Street Journal today.
But a kind of revolution is kicking off in Cuba this very morning.
And it could make some smart investors a lot of money.
This revolution has nothing to do with palace intrigue. It doesn’t involve politics, per se. And it’s not something Fidel Castro likely would have approved.
This revolution has to do with Cuba’s property laws.
Effective today, Cuban citizens can buy and sell real estate on the open market… for the first time in 50 years!
The New York Times calls it “the most significant market-oriented change yet approved by the government of Raúl Castro, and one that will probably reshape Cuba’s cities and conceptions of class.”
So why should you care about this new Cuban revolution? And how can you capitalize on it in 2012 and beyond?
Let’s get to the specifics…
Unleashing Millions in “Dead Capital”… Instantly
If you think about it, the major difference between communist and capitalist systems is ownership of property.
British historian Niall Ferguson’s new book, The West and the Rest, puts property rights at the top of six characteristics that propelled the West’s economic rise.
Ferguson believes that the rule of law that protects property rights and peaceably settles disputes also forms the basis for democracy.
The Peruvian economist Hernando de Soto, in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, makes a powerful case that property rights are the key to unlocking enormous amounts of dead capital in developing countries.
That’s why it’s so important that Cubans recently received the legal right to buy and sell used cars. It means that a beat-up 1960 Chrysler can now be turned into serious capital – enough to fund a new business such as a restaurant. In a country where the average monthly salary is about $20, this is a big deal.
(This was also why I alerted you in early September about investing in Cuba and why I’m preparing to visit the country in early 2012.)
But the biggest deal is the new law allowing Cubans to sell homes to each other.
There’ll still be a fair amount of red tape, and financing has to go through the Central Bank of Cuba. But the momentum unleashed by this new freedom will be significant and lasting.
Some Will Have Special Access
Since most of these new opportunities will be exclusively for Cuban citizens, how can foreigners profit from the melting of Cold War economics?
- First, Cuban-Americans have a clear edge to funnel capital back home through relatives. Especially since the Obama administration greatly relaxed travel and remittances restrictions for them in 2009. If I was a Cuban-American, I would be on the next flight to Havana.
- Second, your best bet is in the tourism sector, where restrictions on foreign investment are at best murky. Vacation homes in coastal areas are up for grabs and golf tourism is taking off. Cuba now has only one 18-hole course (owned by the government, of course). But joint ventures with private Canadian and European companies are moving forward with 16 new developments.
Douglas Clayton of Leopard Capital, a frontier markets private equity firm, points out that Florida has 20 times more tourists, one reason its economy is 12 times the size of Cuba’s.
A “Cuba Play” for the Rest of Us…
The easiest way to play this is with the Herzfeld Caribbean Basin Fund (Nasdaq: CUBA), a closed-ended fund that’s loaded with tourism-oriented firms.
It’s anything but a pure play, but its portfolio of travel, cruise, banking and telecom companies will benefit from any jump in Cuban tourism.
The CUBA fund also noted that it’s adding a small amount of “highly speculative companies that have a pure Cuba business plan.” The more of this focused aggressive investing, the better, from my point of few.
Meanwhile, I will continue my search for more direct ways for you to exploit the cracks in Cuba’s obsolete Soviet-style economy.