Mexico housing and business real estate on the up

Still reeling from the recent crisis that shook Mexico’s main homebuilders to the core, the country’s real estate sector continues to expand despite the challenges. A resolution of the failed housing development model, which aimed at expanding availability on the outskirts of the capital, is now pushing home development closer to central districts of Mexico City. New government measures and incentives to refocus the national housing strategy promise to inject energy into the sector.

Far from the timid expansion of housing construction, other segments of real estate activity, such as commercial, office space and industrial, are benefitting from foreign direct investment. The growth of Mexico’s real estate investment trusts (REITs) has established a solid vehicle to attract institutional investors into the market, bringing large investment sums and increasing the competition for both development and acquisition of the best real estate products in the country. Similarly, the continued growth of Mexico’s industrial base, combined with the government’s vigorous efforts to further develop transport and logistics infrastructure, are both helping to spur demand for industrial real estate, especially in major northern cities such as Tijuana, Ciudad Juaréz and Monterrey.

Sector Expansion

Real estate services accounted for 11.6% of GDP in 2014, according to the Mexican Chamber of the Construction Industry, making it the third-most-important economic activity after manufacturing and commerce. The fast growth in segments such as office space and commercial real estate, in particular, has gone against earlier predictions. In 2010 Colliers International predicted that occupancy rates for office space in 2015 would hover around 18% to 20%. However, current availability rates, especially in Mexico City, the country’s most important market for office real estate, are close to double those numbers. “The demand for corporate and industrial real estate has increased drastically. Even though some people thought that the market might be getting saturated, I believe there will still be enough room for growth over the next three to five years,” Lyman Daniels, president of commercial real estate services firm CBRE Mexico, told OBG. “With available liquidity from REITs increasing competition, and demand following the fast pace that sees new corporate real estate options emerge regularly, Mexico’s economic development is feeding a healthy expansion of the real estate sector,” Phillip Hendrix, CEO of Coldwell Banker Commercial, told OBG.

Housing Development

The housing deficit remains a challenge, and programmes focusing on raising the number of Mexican families with access to affordable mortgages have been a priority for the government. For years, the Mexican government focused on subsidising the construction of low-income housing, distributing support through the buyers’ side as well as through housing developers. As large-scale housing developments took shape in peripheral areas outside of Mexico City, where land was easier and cheaper to secure, many homebuyers were reluctant to move so far outside of the city. New home owners also complained about the low quality of public services, including essentials such as water and electricity, in some of the new housing developments. Many new homes ended up being abandoned, and governmental support for vertical construction as opposed to single-family home developments has further decreased the value of the new houses on the city outskirts.

Incentives

After the 2013 crisis led to the collapse of the country’s three biggest housing developers, an overhaul of the housing programme was necessary. To fix the problems, the government re-oriented construction subsidies to foster the growth of residential areas closer to the city centre, primarily to keep new home owners closer to work opportunities. This redefined the urban development limits and placed a new emphasis on apartment block construction. Between 2014 and 2018, the total figure for both public and private investment in housing and urban development is expected to reach MXN1.8trn ($121.1bn), according to recent projections compiled by BBVA Research.

New measures implemented in 2014 and 2015 should bring dynamism to the sector. The National Workers’ Housing Fund Institute (Instituto del Fondo Nacional de la Vivienda para los Trabajadores, INFONAVIT) is a key component of the housing strategy, and the country’s biggest mortgage lender. From its inception in 1972 to the end of 2014, INFONAVIT has granted over 8.2m home mortgage loans. The fund receives contributions from employers on behalf of their workers, allowing them to use those savings as an entry payment on a new home and support further loan payments. This system has reduced the risk of non-performing loans for INFONAVIT and associated banks, as the mortgage payments are directly taken out of workers’ pay. Mortgage allocations remain linked to the performance of the housing sector. In 2012, for example, INFONAVIT approved a record 578,000 home loans, due to a strong drive for home acquisition from low-income housing promoters.

Housing Support

The strategy switch had a slowing effect on the housing market. Shifting the federal subsidies to support building within the city has meant that land is less readily available, and that fewer builders are able to access those subsidies, because of strict criteria that mandate new housing be located in proximity to certain infrastructure and job options. The shift to inner-city building had also priced many workers out of the market, due to the higher cost of land which ultimately impacts the overall unit price.

To counter this, the government announced in July 2014 a doubling of INFONAVIT’s fixed-rate home loan maximum amount to MXN850,000 ($57,200). According to INFONAVIT, the institute accounted for 75% of all mortgages awarded in Mexico in 2014, reaching 389,627 mortgages, at a total of MXN107.2bn ($7.2bn). An additional 166,234 credit allocations were directed at building home improvements. With a specific focus on low-income buyers, 63% of all credits approved by the institute were directed at people who are earning less than four times the minimum wage. During 2015, INFONAVIT plans to approve 350,000 home mortgages and 155,000 home-improvement credits.

The Mexican Housing Commission (Comisión Nacional de Vivienda, CONAVI) runs a subsidy programme, which has been easing access to mortgages. The federal Esta és tu Casa (“This is your home”) scheme was established during President Felipe Calderón’s presidency, and allocates subsidies for homebuyers to afford initial loan payments. The subsidy can be used to access credit to build a home, buy a new home or repair an existing one. During 2014, CONAVI’s subsidy allocation reached MXN11.5bn ($774m), which subsidised 248,300 homes.

Despite its key role in supporting housing acquisition for low-income families, CONAVI has experienced budget cuts, due to a lower level of available federal funding. For 2015, total funding allocated for subsidies under the Esta és tu casa programme was reduced to MXN8.5bn ($572.1m). However, the Ministry of Agrarian, Territorial and Urban Development (Secretaría de Desarrollo Agrario, Teritorial y Urbano, SEDATU) said in October 2014 that the subsidy programme would continue despite lower funding levels, and that the additional funding would be requested from the federal government in case it was required to fulfil subsidy requirements. Overall, the country’s housing deficit amounts to approximately 15.3m homes. Up to 3m of these need to be rebuilt, and the remaining units are in need of maintenance work, according to the figures compiled by SEDATU. Home acquisition, especially in the lower segments of the market, remains directly linked to formal employment, which allows salaried workers access to government mortgage schemes.

Mexico’s macroeconomic stability over recent years has improved the general environment for financing home acquisition. “Though land costs have increased, an extended period of low interest rates and strong competition has allowed real estate prices to stay relatively stable over the past 10 years,” said Pedro Azcue, CEO of JLL Mexico and chairman of JLL Latin America.

Mortgages

Access to financing has become an indispensable component of Mexico’s housing market, with public institutions and private banks having a key role. Public mortgage providers include INFONAVIT and the Housing Fund for the Institute of Social Security and Services for State Workers (Fondo de la Vivienda del Instituto de la Seguridad y Servicios Sociales de los Trabajadores del Estado, FOVISSTE). INFONAVIT still accounts for most employed workers’ home mortgages, while FOVISSTE’s credit allocations are strictly directed to federal government employees. State workers aiming to get financing for their homes through FOVISSTE would have to wait for their turn, in a lottery-type attribution procedure. However, government measures implemented in early 2015 to revive the housing sector have eliminated this rule. INFONAVIT remains the largest provider of mortgage loans, accounting for 389,627of the total 573,727 mortgages awarded in Mexico in 2014. The private banking sector came second, with a total of 94,900, while FOVISSTE gave out 63,100 housing loans. An additional 26,100 home loans were made available through co-financing.

For the sections of the market not included in government financing schemes, the banking sector provides several options. Yet even for medium and upper income earners, Mexico’s traditionally high interest rates have sometimes proved difficult to overcome. The market seems to be tilting towards lower financing rates. In July 2014, for example, average interest rates for home loans reached a record low of 10.8%, considerably lower than the 12.1% registered over the same month in 2013, according to information from Banco de México (Banxico), the central bank, which has been cutting benchmark interest rates. Part of the situation was triggered by the financial troubles that affected the housing industry in 2013. Following the bankruptcy of Mexico’s three main homebuilders, which led to an overall slowdown in the construction and sales of homes, Banxico cut borrowing costs, leading to an increase in competition between private mortgage providers. This increased competition among banks has seen some institutions offering mortgage rates between 8.5% and 9.5%, which has encouraged a trend of home mortgage refinancing across all segments of the market. This development has been facilitated by the significant financial reforms of early 2015, which have made it substantially easier and cheaper for Mexican customers to refinance their mortgages.

The dynamism of Mexico’s mortgage market has attracted investors to the country’s first mortgage-based REIT. In early November 2014 Fideicomiso Hipotecario (FH ipo) raised MXN8.6bn ($578.8m) in its principal initial public offering (IPO) on the Mexican Stock Exchange. The trust projects that it will use the financing to acquire over 5500 INFONAVIT-issued mortgage loans. INFONAVIT itself has announced plans to launch its own REIT, based on the pre-owned home market, although details were still unavailable in late 2015.

Growth In FIBRAS

These REITs, or FIBRAs ( Fideicomiso de Infraestructura y Bienes Raíces), as they are locally known, have made a significant impact on the Mexican real estate sector, providing an injection of investment and competition for the acquisition and management of the country’s best real estate products. By issuing real estate certificates to investors, these financial vehicles for real estate portfolio management have been able to attract vast sums of money from local and foreign investors, and channel it to a string of acquisitions of real estate developments. Rents originating from property management finance the payment of dividends back to investors.

A clear example of their importance to the sector was the $1.8bn acquisition by Fibra Uno, the largest REIT in the Mexican market, of Mexico Retail Properties Group’s 49 commercial properties in Mexico in 2013, amounting to one of the largest real estate deals in Mexico to date. REITs are investing in several segments of the real estate sector, acquiring shopping malls, office space developments, industrial areas and even universities. A change in financial laws in 2009 helped launch REITs by allowing Mexican pension funds to invest in an array of financial instruments (see analysis).

Office Space

Steady growth in the number of multinational companies operating in the country, as well as the increasing number of domestic operators, has been driving the development of office space projects. This has become especially visible in the capital, where several high-rise buildings are currently under construction. Specific neighbourhoods, such as Polanco, Las Palmas and certain parts of Reforma Avenue are shaping up into the city’s main business district, commanding the most sought-after office developments. “As soon as an office building is finished or advanced, it is occupied, sometimes by a government agency,” Flavio Gómez, manager for market research at Colliers International, told OBG. A total of 940,000 sq metres are expected to hit the market over the coming three years, and this is backed by an extra 500,000 sq metres that are planned but have yet to begin construction. Despite the continued supply, demand keeps growing at a similar pace, leaving the Mexico City office market with relatively low levels of availability.

Office space in Mexico is mostly accessed through renting, with only about 10% of users buying space, according to Colliers International. Rent in the capital can vary between $18 per sq metre per month to about $42 sq metre per month for top quality office space in areas such as Reforma, Las Lomas, Polanco or Las Palmas, according to figures from Colliers International. The total inventory in the city currently amounts to about 7.6m sq metres, with about 3m sq metres of that being A+ office space. The availability of office space in the A and B segments was about 1.7m sq metres and 2.9m sq metres, respectively, according to May 2015 information released by Colliers International.

Yearly capitalisation rates for office space in Mexico City revolved around 10% in 2011, but have now moved closer to 7-8%. Average profitability in the market is likely to decline even further, although a continued acquisition movement of important assets by some of the main REITs will likely help to stem the loss of earnings for the larger players. “There is still room for development of office real estate. At the moment, we are expecting a development of 1.5m sq metres which will be absorbed within two to three years, due to the dynamism in the city, and this leaves more room for growth in the future,” Javier Lomelín, managing director for Latin America at Colliers International, told OBG.

Commercial

Retail development has also undergone considerable expansion in Mexico, driven by two main factors. On the demand side, rising disposable income has made Mexican consumers more receptive to modern retailing options. On the other hand, continuous investment by REITs over the past two years has given the market the necessary financial backing for the development of new commercial real estate ventures. According to Colliers International, in early 2015 there were a total of 582 shopping centres of over 10,000 sq metres across Mexico, representing a gross leaseable area (GLA) of 18.2m sq metres. With 818,000 new sq metres having entered the market in 2014, commercial real estate has been receiving a constant flow of supply for new projects. Competition has led to new shopping malls opening in sections or extensions, allowing them to adapt their offer to demand changes and implement phased investment over a longer period. Furthermore, most new large-scale commercial developments are included within mixed-use projects which can include both office and residential space. This has become the norm, particularly in larger cities, where land prices have been rising steadily.

Rent prices can vary greatly, depending on the specific shopping centre, location and expected traffic. In cities like Mexico City, Monterrey, Guadalajara, Puebla or Querétaro, prices can range between MXN450 ($30) and MXN1300 ($87) per sq metre per month. In addition to monthly rents, most commercial real estate developments require a 12- to 24-month non-refundable advance which acts as an entry fee, especially in more consolidated and desirable shopping centres.

Development plans for commercial real estate are a sign the market expects demand to keep rising. According to Flavio Gómez of Colliers International, there are about 1.7m sq metres of projects for new retail space under construction in the country at the moment, and these are expected to come online between 2015 and 2016. Some of these are new developments, while others represent second or third extensions of existing shopping malls. In addition to these, an extra 1m sq metres of retail space is being planned.

Industrial

Mexico’s economic development over recent years has largely depended upon commercial interactions with the US. This has led to the establishment of a large manufacturing base, which is increasing the need for added industrial areas around the country. In addition to Mexico City, this tendency has also become visible in other large cities in the centre and north of the country, with places like Querétaro, Guadalajara, Monterrey, Tijuana and Ciudad Juarez all showing an increase in both supply and demand.

According to Coldwell Banker Commercial, 502,000 sq metres of industrial space were on offer in the first half of 2015 in Mexico City at an average price of $4.95 per sq metre. Along with the 358,000 sq metres under construction, close to 2m sq metres have been planned but not yet begun construction. “Industrial space availability averages 6.2% in Mexico City,” Luis Méndez, president of Coldwell Banker Commercial, told OBG. “Most projects are built-to-suit developments.” With new manufacturing capacity being developed annually in Mexico, and a revamped environment for investment in logistics areas across the country’s main trade routes, the industrial real estate segment can expect to witness continued growth over the coming years.

Outlook

Mexico’s real estate sector has undergone a period of substantial transition. Shifting government support towards building residential units closer to the city centre will certainly keep lower-income home buyers closer to the larger pool of employment options available in the city. Meanwhile, in the commercial, office and industrial sectors, financing availability channelled through a growing and dynamic REIT market has translated into a host of new developments. Property demand is closely following supply, which allows for availability rates to be kept comparatively low, and this prevailing trend is expected to continue over the coming years.