Puerto Rico's deepening economic troubles have punished investors and made life hard for many locals. But one group has been encouraged by the opportunities it sees: real-estate investors.
A rising number of private-equity firms and property managers have been buying or developing high-end hotels and luxury residences. There have been about $1 billion in upscale-property deals on the island over the past couple of years, local investors say, even as the island's economy has fallen into a tailspin and analysts raise the specter of default.
Some see their investments as longer-term bets on Puerto Rico's eventual turnaround, and on tourists' willingness to overlook the island's credit concerns. Others are betting that changes to Puerto Rico's tax code, which eliminates most taxes on investments, will lure thousands of wealthy U.S. citizens to buy homes on the island and establish residence.
"No one ever checks the balance sheet of the place where they are going on vacation," says Mark Lipschutz, chief executive of CPG Real Estate LLC, one of the biggest property owners in Puerto Rico. At the end of 2012, CPG opened the ultraluxe Ritz Carlton Reserve in Dorado, on the north coast just west of the capital San Juan, and it expects to break ground by year-end on Dorado's beachfront with a 350-room J.W. Marriott, plus 40 timeshare units.
The hotel business on the island is booming, with valuations nearly back to levels last seen before the global recession, investors say. About 4.2 million people visited Puerto Rico for the fiscal year ending in June 2013. That is nearly 1 million below the 2008 peak, but the numbers have been rising.
CPG Real Estate, one of the biggest property owners in Puerto Rico, opened the ultraluxe Ritz Carlton Reserve in Dorado, located on the north coast, at the end of 2012. Ritz-Carlton Reserve Dorado Beach
Average daily room rates on the island hit a record high in February—the middle of peak season—at $256.29, up 13% from the previous year, according to Smith Travel Research. That increase was roughly double what other Caribbean destinations experienced during that month.
Puerto Rico's revenue per available room, a popular performance metric for the industry, was $99.82 in 2013, the highest level in the 15 years that the government has tracked these figures.
Hotel analysts point to the high number of flights to Puerto Rico from the continental U.S., the ease of traveling without a passport or customs for U.S. citizens, and the island's more developed infrastructure compared with some of the hot-spots in the region.
Still, the island's high unemployment, shrinking population and credit woes may yet undercut demand for property. The government-owned electric utility, which is plagued with problems, charges customers more than double the U.S. average. Rates have climbed as the authority scrambled to cover rising costs, and complaints about power bills are widespread.
At the beginning of this month, Moody's Investors Service downgraded the Commonwealth of Puerto Rico to B2 from Ba2, affecting $14.4 billion of outstanding general-obligation bonds. The island's housing market remains dour, with condo prices down about 25% to 40% from six years ago, according to José Villamil, chairman of Estudios Técnicos, a Puerto Rico-based economic consulting firm.
But some investors are making long-term bets on residential real estate, finding distressed properties they can acquire cheaply.
One of those investors is Putnam Bridge Funding LLC, a private-equity firm that purchased the island's largest marina last year and a residential complex in 2012. Both were bought out of bankruptcy.
Nicholas Prouty, the firm's CEO, said after Putnam invested $74 million to finish and improve the residential property, the 312 units are nearly all sold out. Putnam recently acquired a neighboring property to expand the residences further, and expects to spend $96 million on the land acquisition and building of 250 units, parking and retail.
Mr. Prouty moved last year to San Juan from Greenwich, Conn., and relocated his firm to the island. While his new residence lowers his personal tax bill, he said he also made the move "to be closer to his two his major Puerto Rican investments."
The most prominent investor is John Paulson, a hedge-fund billionaire who made his fortune betting against the housing market before the global financial crisis. He spoke in April at a Puerto Rico investment summit in San Juan, where he urged fellow investors to buy property on the island to take advantage of tax laws enacted in 2012.
These laws sharply reduced federal taxes on capital gains and income from interest or dividends for U.S. citizens who spend at least 183 days a year in the territory. The Puerto Rican government says so far 280 individuals have relocated to the island for tax reasons, while another 250 businesses have moved to the island. The government forecasts thousands more individuals and businesses will arrive over the next few years.
Last year, Paulson & Co. took stakes in the Bahia Beach Resort & Golf Club and St. Regis Bahia Beach Resort, which offers private cabanas, butler service and access to zip lining in the rain forest. Mr. Paulson also is building a waterfront residence as a vacation home.
In March, his firm said it was investing $260 million to buy two adjacent beachfront hotels and a residential tower in San Juan. The cost includes completing the luxury Vanderbilt hotel. It is slated to open year-end, which will give Paulson & Co. nearly 1,000 hotel rooms on the island, with plans to build hundreds of residential units on newly acquired land.
—Aaron Kuriloff contributed to this article.
Write to Craig Karmin at craig.karmin@wsj.com
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