Beach boomers: U.S. retirees looking for new places to invest drive a land boom in tropical Nicaragua.

In the tremendously speculative world of Nicaraguan real estate, where the cowboys of high-risk investing ride high, Larry Banchero stands apart from the crowd. Unlike his predecessors, who bought beachfront lots looking to flip them as get-rich-quick schemes, the latest wave is betting instead on the construction of rental properties along the country's coasts. The trend toward long-term investments includes projects of all sizes, often condos and apartments that are sold in a variety of formats to foreign retirees or as time-share units. "My customers will be foreigners who want that I hand them the keys when everything is ready, and who want a source of potentially immediate income," says the 52-year-old Seattle native. His 26-unit apartment building, in the port town of San Juan del Sur near the Costa Rican border, will cost US$3 million to develop. His partners in the project are mostly family and friends.

The first time Banchero visited the area, in 2001, it was still a sleepy Central American fishing village and the port itself was falling apart. "It was clear to me then that Nicaragua was the next Costa Rica, the best business to be in was real-estate development," he says. San Juan del Sur since has transformed itself into the country's tourism and investment hotspot, a bustling mix of surfers, backpackers, students and wealthy Nicaraguans, mixed in with foreign retirees, as well as real-estate speculators and investors who have not only bought all of the land around the bay but also south and north of the area.

What's driving change in part is a change in Nicaragua's image, once that of a country plagued with revolutions and political instability. In 2004, foreign tourism climbed 13% compared to the year before to 734,971; North American and European tourism spiked harder, up 33% over five years. During 2004, the country was featured in at least 20 international publications, including GQ, Travel + Leisure and Outside Traveler. Conde Nast Traveler called it "Central America's action mecca." Despite these achievements, Nicaragua Tourism Promotion Institute Director Regina Hurtado is worried that the country is overselling itself, and risking disappointing visitors with high expectations. Decades of turmoil and underdevelopment cannot easily make up for a lack of basic investment, no matter how lovely the beaches are or how friendly the government is with incentives to invest. "What we want is to project an image that reflects reality," she says. "We don't have the enormous tourism development like that of Costa Rica or the Dominican Republic, and we lack the level of service and conditions to host a certain type of tourist:'

Although real estate and tourism are not synonymous, such building projects are taking advantage of the tourism boom happening in Nicaragua at the moment and are Filling the gap left by the lack of good hotels and first-rate tourism offerings in the country. "The development of real-estate projects is creating the tourism infrastructure that doesn't exist here," says Chale Espinosa, a tourism industry consultant in Managua. "And that's the way it's going to be for a while since there's a perception of risk in terms of hotel investments, which are heading to Yucatan or the Dominican Republic instead."

In fact, some real-estate offerings advertise themselves simply as tourism projects. One $5 million project in San Juan del Sur, known as Villas de Palermo, took advantage of the country's generous incentives on tourism investments. As such, and as the project's investors make clear in their brochures, the project's income, as well as potential income generated for potential buyers, is tax-free for 10 years. Built on 405 hectares of forests and pastures, with facilities for horseback riding and recreation, the project developers say they have pre-sold at least 13 units 50 total without having even broken ground for construction.

Another project, perhaps the most ambitious of its kind to date, is a series of developments in an area known as the Riviera del Pacifico Tola on the southeastern coast, home to nearly untouched beaches. The $200 million mega-project will cover 5,600 hectares of land and 51 kilometers of beach and will grow during the next seven years to include residential homes, hotels, marinas, golf courses and shopping centers.

The results on some of the short-term rental apartments seem to confirm that, at least for now, the investments are working out. In its first nine months of operation, the Villa Isabella condominiums, also in San Juan del Sur, are 70% occupied. Unit owners are happily charging $1,000 a month rent, according to one of the building's owners, Jane Mirondette. "The level of demand has been surprising," she says. "There have even been offers to buy at double the original price."

Nevertheless, some worry about the speculating that's been going on: The value of the land continues to shoot up, and more traditional tourism businesses are being squeezed out. "The hotel owners and restaurateurs of the future will not be able to buy land facing the beaches because they've been bought or what is available will be too expensive," says tourism development consultant Arnoldo Martinez. Besides lacking experience running a business, qualified workers and capital for tourism and regular infrastrucure, potential investors also no longer have a key mechanism that once drove the latest generation of tourism operators.

In 2003 the government removed a tax provision that allowed investors to put money into any tourism business and deduct up to 70% of the investment on their business taxes, a case of a small number of abusers of the system ruining what had been a sound incentive for the majority of investors. Industry experts note that this type of incentive was in large part responsible for the development of Costa Rica's tourism sector, and an unqualified success there. And, although banks are awash with money to lend now, getting approved for a loan is such a tortuous process that many business owners are scared away. Nor do banks have enough experience nor desire to get into high-risk investments.

Premium prices. It's hard to say how big the building boom is nationwide, but in San Juan del Sur alone there will be 400 new units built in the next 24 months. Despite land prices doubling and even almost tripling in the last two years, the good news is that there is still room to rise. "Even when people are paying premium prices" says Kathleen Peddicord, executive director of International Living, a newsletter that provides investment advice on emerging-market countries. The company that owns the newsletter is also developing Rancho Santana, a 688-hectare coastal development, so it's no surprise it is also promoting Nicaragua as this decade's Costa Rica. With prices in neighboring countries like Costa Rica, Belize and Honduras up 500% during the 1990s, many of its readers--mostly U.S. retirees--are following the advice they are getting word for word. They are heading south and taking their nest eggs with them, for now.

RICARDO CASTILLO, SAN JUAN DEL SUR, NICARAGUA