Why It's Time To Invest In Cuba

By Carl Delfeld

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 were 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.

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Comments

[abala1]

You guys! I'm Cuban and I've been living abroad for 13 years if one thing you should learn by now- is not to trust any of Castro's laws, he creates them and remove them as his own pair of socks, (if he ever does, that filthy big-mouth-punk!) any way he will make this law so some foreign money is coming in and when the time is right he will change the law and you will have not access to your investment, and/or property. He will keep your money frozen in a Cuban bank account, if not ask all these companies that now have been accused of corruption in Cuba after have been providing the country for the last 20 years, of course that's the only way to get rid of the debt in the unproductive Cuban state! Throwing them out putting some of their directors in jail, expropriating their products and holding their money! Good old communist Cuban style!

[edexter]

They are getting older so maybe it is time to relax it a little bit to give them the opportunity to go back to suger cane/ethonal if they want a boom. We can alway crack down again and get rid of their market if they cause misceff. It would make more sence for them to follow brazil as a model instead of the U.S. because that is how they will get the growth.. oil and ethonal and then related stuff like synthetic plastic and agg exports with maybe some manufacturing. They may not want to have things relaxed on thier side because of the economic issues.. I will disclose that I am involved with the beef industry

[Ray Lopez]

I had a swell time in Cuba but did not contribute much to the western tourist oriented companies since I illegally used black market pesos not dollars. I also saw, for the first and last time in my life, what clearly appeared to be counterfeit US dollars in circulation. Cuba is a great place to visit but I doubt it's ready for investments quite yet.

[K L Beck]

Not sure your focus is valid. Top 10 holding show me little to do with Cuba:

http://bit.ly/t6z5U1

This CEF only has $27 million in assets and for not having leverage, an enormous expense ratio (2.66%). It's been around since '94 (seems they've been waiting a long time to wait for change in Cuba). Worst news is that it's not had a distribution since '08 and since inception has underperformed the S&P by 175%. Gimme the upside again? If you are looking for newer markets to invest in you might look at FEO.

[MexCom]

So are they going to pay off the Batista bonds?

Let the Cubans invest in their own country. Else, buy real estate in Miami.

[Thomas Smicklas]

No. You are dead wrong.

Until the rule of law, property rights, settlement of outstanding claims from exiles, etc. are addressed, it is Cuba, No...not Cuba, Si.

Where on earth did you get the idea that because of a pronouncement or two from the Castro brothers that Cuba was now on the radar screen?

I will grant you that many ex-US companies are working within Cuba in areas such as deep water drilling off the coast, but the participation is but a small fraction of their business portfolio.

My son, who is a member of the US Interest Section in Havana, would concur.

[kwm3]

also dead wrong in comparing capitalism to communism. this dumb ass doesn't even know that communism is a system of government, not commerce.

[financemc]

You need to be very careful even thinking about investing in Cuba. First: it is a federal felony, Trading With the Enemy Act, secondly, only Cuban citizens can own realestate- not even transplants- under the new law, thirdly, when Cuba falls your title may not be worth squat. Every piece of realestate used to be owned by someone else before the revolution before it was stolen, the title lawsuits are going to be legendary.

It's illegal to even travel to Cuba and Bush prosecuted Americans that did, enthusiastically. Not sure about the Obama admin. Would not try it myself- Trading with the Enemy is a major felony.