As Cuba once again becomes accessible to U.S. investors and business, many are preparing to dip their toes into uncharted waters of its long forbidden marketplace.
Relaxed trade relations between the two former foes have been met with great fanfare and while there are opportunities to explore, a careful look at the conditions suggests limited potential in the short-term, says Marc Miller, JLL’s Research Manager in Florida.
Here’s what Miller says business- and investment-seeking Americans need to know before heading 90 miles south of Florida’s panhandle.
Uncertainty with current laws in Cuba
Conducting business, particularly in a real estate capacity, within Cuba is truly unknown territory for U.S.-based companies. Given the political structure on the island, and the lack of checks and balances among branches of government, there is little in the way of protections for investors. Considering the largest landowner in the country also controls the legal process, there is a certain level of risky involved in doing business with Cuba as the situation is currently constituted.
Understanding bureaucracy and development process
As JLL’s Denny St. Romain has previously discussed, Cuba has been open for business for corporations from across the globe for the previous 50 years, providing them a distinct advantage when dealing with the Cuban government. The U.S. is essentially playing catch up, and the eagerness of U.S. companies to get involved with the Cuban marketplace, particularly on the real estate side, could lead to poor decisions and costly mistakes due to lack of know how when conducting business on the island.
Limited marketplace for American goods
The opportunity for US-based companies to trade with the Cuban population is still limited in terms of the types of goods that can be exported/imported, and who the recipients of those goods can be. Currently, the new U.S. regulations allow for goods to be shipped to private-sector entities and small farms. Cuentapropistas, as these private sector entities are known, have increasingly popped up, but they still represent a relatively small portion of the Cuban economy.
Over the long-term, telecommunications and consumer goods have the brightest prospects; however, significant infrastructure improvements still need to be made. Tourism related industries are also on the up: Airbnb has expanded operations to serve visitors to the island, airlines are announcing new flights to the country, and four ferry services have been approved by the U.S. to embark from Florida ports. However, regardless of the current restrictions, analysis of the Cuban marketplace suggests limited opportunities for new entrants.
There is also still the risk that the Cuban Thaw and improved relations could be repealed depending on the upcoming presidential and congressional elections in 2016. U.S.-based business eager to increasing business ties with the island would be prudent to implement a “wait-and-see” approach, as the loosed regulations have the potential to be repealed.
Navigating geopolitical tensions
Outside of the tourism and hospitality sector, limited foreign investment in the country has occurred beyond the involvement of Venezuela and Brazil. The Cuban economy is closely tied to Venezuela, and is particularly reliant of Venezuela for energy. Given the current economic and political situation in Venezuela, any shift in that atmosphere can have a significant impact on the Cuban marketplace.
In addition, outside of Brazilian-based Oderbrecht completing massive renovations at Port of Mariel, no major foreign investment has occurred in response to the Portfolio of Opportunities for Foreign Investment according to the Brookings Institute. One hindrance is the need to hire local labor which can be cost prohibitive, but if the opportunities available were viewed as a lucrative investment, there certainly would have been some involvement. This presents a red flag for US-based companies: if firms from other countries can operate within Cuba, why haven’t they been more involved?