Bogotá expansion limited by land and legislative uncertainty

Despite the growing importance of medium-sized cities for property development, Colombia’s real estate sector has been highly affected by expansion in Bogotá. The capital city has seen a wave of economic growth turn into real estate investment, whether for high-end housing options or as an investment opportunity. Despite the fast-growing market, the city’s real estate sector remains pressured by institutional issues regarding the urban development plans and a consistent lack of available land to build.

High-End Building

According to a report by BBVA Bank, out of a total of 54m sq metres of urban housing constructed in the seven largest cities in the country between August 2007 and July 2013 some 38% was built in Bogotá. There remains a considerable amount of housing construction targeted for the higher-end market. Between 2008 and 2013 an average of 40.5% of all housing construction projects launched in Colombia targeted the middle-high and high-income segments of the market.

Although construction of luxury property does not contribute to solving the housing deficit, the fact that developers have been focusing on these higher segments reflects its attractiveness, with an increasing number of Colombians looking for higher-quality property to live in. “Over recent years, there has been a tendency to focus more on vertical construction to better use the space, and even though initially this had focused mainly on the higher-end market, nowadays the middle income and social housing have got this building model,” said Sandra Forero Ramírez, executive president at the Colombian Chamber of Construction (CAMACOL). “This is a trend, especially in the north of the city, to increase density, so you see an increase in the number of taller buildings. But this is far from providing enough homes for the middle and lower market. It is still focused on the higher-end segment of the population.”

According to figures by BBVA Bank, the number of people in Colombia with a high income is set to increase by 512,000 during the 2012-14 period. The high-end market is therefore moving fast, and with a quick rotation of its inventory.

Better Economy, Less Crime

Much of this growth is driven by generally better living conditions in the city. Improved security over recent years has made some previously undesirable neighbourhoods in Bogotá more accessible.

According to government figures, the homicide rate in the capital has dropped to 16.36 per 100,000 residents, compared with 80 homicides per 100,000 residents in 1993. Combined with safety, a revamping of some of the central areas, such as the Candelaria district, a historic neighbourhood in downtown Bogotá, has resulted in a surge in the flow of tourists. This in turn has fed new real estate opportunities in recent years, which have driven prices upwards.

In addition to the growing appeal for foreigners, attracted to the country by new business opportunities, the capital’s real estate market has also seen an increasing number of local buyers, as macro-economic stability has lead to a rise in available cash. The country’s per capita income has risen from $4400 in 2000 to $6990 in 2012, according to figures by the World Bank. Beyond the rising number of people that can afford a home, Colombia’s real estate sector is also gaining traction due to the increase in the number of wealthy people.

In a report published in November 2013, Wealth Insight, a consultancy, said that in the past five years, Colombia has created more millionaires than Mexico or Brazil. The number of millionaires in the country grew by 39% over those five years, compared to a 0.3% decrease worldwide over the same period. According to Wealth Insight, there were a total of 35,000 millionaires at the end of 2013, which means that there is a growing high-income class with liquidity to buy real estate.

Prices

Rising residential property prices, especially in the capital, have led some analysts, and even the central bank, to speculate if the market is creating a real estate bubble. Fears have so far proved unfounded. Rather than speculation, rises have been driven by a tight supply and low availability of land to build.

Furthermore, there amount of built stock that remains unsold is not high, and buyers are not excessively indebted. Additionally, in the case of higherend real estate, buyers generally fund the purchase with their own savings as opposed to bank loans.

Despite the prevailing signs of a healthy balance, there are neighbourhoods in the city where housing prices are reaching record highs, as investors look for opportunities in real estate.

“The high-end housing market in the capital is concentrated on a very specific part of the city,” Blanca Elena Reyes, country manager for Coldwell Banker, told OBG. “Here, a square metre can cost upwards of $8000,” Reyes added.

Northern areas of the city, such as Santa Barbara, La Cabrera or Rosales, are sought-after, and new developments in those areas can range between $5000 and $9200 per square metre, according to media reports. The price for a three-bedroom apartment in the Chicó neighbourhood can reach $1.6m.

Over the past few years change in some of the northern neighbourhoods has also come through urban renovation. In areas such as Chicó or El Nogal, which have become increasingly desirable, older, four to five-storey buildings are being demolished to make way for towers of apartment blocks.

As of the first quarter of 2013 some 20 of these projects were planned or already under way, especially around 92nd street, according to local media reports. However, many of these have either stopped or have an unclear future, due to the ongoing issues regarding the implementation of Bogotá’s new urban development plan which might limit construction in some of the northern areas of the city.

Zoning Out

Despite consistency in attracting new developers and buyers, the Bogotá real estate market remains vulnerable due to the ongoing dispute over where and how the capital should expand.

The issue arose in 2013 when Gustavo Petro, the city’s mayor, tried to implement an urban development plan by decree despite opposition from municipal assembly members. The mayor’s zoning plan, called Territorial Organisation Plan (Plan de Ordenamiento Territorial, POT), established new rules for construction in the city. Building of high-level construction in the northern neighbourhoods would be banned and the opening of new commercial outlets in luxury neighbourhoods restricted. The goal of the POT was to better integrate the city’s different areas, which have been growing increasingly segmented by income, and encourage more development into some of the city’s less affluent areas. However, according to builders the POT would severely limit housing development in some of the city’s most promising real estate markets at a time when increased economic growth has been injecting dynamism into the capital’s real estate sector.

After implementing the POT by decree, the mayor of Bogotá was stripped of his title during the first quarter of 2014 due to an unrelated judicial ruling, although he was later reinstated. His controversial POT was frozen by the State Council, and the city is now awaiting a final decision over the plan, which should come over the course 2014.

However, the situation has caused some confusion in the market, as some construction projects were licensed according to the zoning limitations of the new plan, with no information so far about whether the POT will ultimately be scrapped or re-introduced. The lack of definition has slowed the expansion of the residential market. Meanwhile, construction companies and promoters have moved to compensate the lack of certainty with developments in other parts of the country, mainly in medium-sized cities with a growing demand for housing. Furthermore, it pressured land prices in the city to rise by 15.8% in 2013, according to figures by Lonja de Propiedad Raíz de Bogotá, the city’s real estate association.

Room To Build

Pressure is set to continue. Land availability will be the real estate sector’s biggest obstacle for the foreseeable future, and an important driver of price. Although the price of land accounts for only 10% of the total price of a home in the social housing segment, it represents 25%- 30% in the case of high-end housing.

Despite the importance of the capital Bogotá for the real estate market, and as the country’s business hub, future development will intrinsically be linked to the government’s ability to generate more land for residential building. As developers move into other areas of the country, and projects in the capital await regulatory clarity, the city’s expansion will still need solutions. Taller construction that uses land more efficiently might help. However, for this strategy to be followed on a representative scale, the political issues relating to urban development in the northern neighbourhoods will have to be addressed.