Key real estate segments grow in Colombia

Structural precaution against risk, along with an influx of investment coming from government housing programmes as well as private investors, continue to fuel Colombia’s housing market. Although government support has primarily focused on the lower-income segments of the population, the expansion of the middle class has helped move housing programme financing up the income echelon. At the same time, development of high-end real estate has continued in some of the main cities.

Additionally, development in the office and retail segments continues to be driven by real estate investment trusts (REITs), although slower economic growth and increasing supply in some segments of the market underline the need for some adjustment.

Industrial real estate, although not yet seeing the dynamism shown by the office and retail segments in previous years, continues to benefit from the development of logistics and investment flowing into multi-modal transport. Annual investment in real estate construction, including residential, commercial, office space and industrial buildings, totals around COP60trn ($18bn), of which COP33trn ($9.9bn) goes towards investment in residential construction. Government housing programmes, which comprise free housing as well as subsidies to allow families access to the banking system, have had a major effect in reducing the housing deficit, as well as improving living conditions.

Recent Developments

After a record year in 2015, the residential real estate segment was impacted by slower economic performance in 2016. It posted a positive first semester, but in the second part of the year the environment for housing acquisition and construction development deteriorated.

The Colombian Chamber for Construction (Cámara Colombiana de la Construcción, CAMACOL), which measures housing activity in the 17 most active market areas in the country, estimated that 178,300 new homes were sold during 2016 at a total investment of COP32.5trn ($9.8bn). Of these, some 67% were bought during the planning stage and 27% during construction. The number of new homes sold decreased from 183,622 in 2015.

For the market overall, the impact of the rising dollar on the peso led to increases in the input costs of several housing projects, which ended up being reflected through higher final prices. “Some inputs, such as elevators and heating equipment, grew at 16% a year because of the higher dollar. In a lot of cases the worst input price hikes were linked to the higher segments of housing construction,” said Edwin Chirivi Bonilla, director for economic studies at CAMACOL. “In some cases developers restructured projects to require more local inputs as opposed to imported ones.”

Residential real estate prices rose by around 8.5% in 2016, according to CAMACOL. The sector was also impacted in the second half of 2016 by rises in interest rates, which led to a loss of buying capacity.

Overseas Colombians

Although the economic slowdown affected the Colombian market negatively, the improved dollar-to-peso exchange rate continued to fuel real estate development in some of the regional markets through remittances.

The state-owned National Savings Fund, which develops savings products, has established home credit offers for Colombians abroad since 2015, focusing on 12 countries with large communities of Colombian emigrants, including Spain, the US, Canada, the UK, Mexico and Germany.

According to CAMACOL’s Antioquia department, which organises housing fairs for Colombians abroad, migrants in Spain were searching for homes ranging between $20,000 and $40,000 in value, while demand from Colombians in the US ranged from $40,000 to $100,000, local media reported. Input from overseas Colombians into regional housing markets is set to continue while the peso exchange rate remains low.

Risk Aversion

The new tax reform, which included a 3-percentage-point increase in value-added tax to 19% (see Economy chapter), is expected to have a visible impact on the market in 2017 by increasing construction costs and affecting Colombian households’ buying power. However, the sector’s cautious approach to risk has allowed it to stave off any large-scale problems by adapting to fluctuations in demand, with pre-construction sales still accounting for a large part of the market.

As sales cooled during 2016, builders adjusted by delaying their construction projects. Homebuyers have so far been sustaining delays to the start of construction of their new homes because inflation has been leading to price increases, meaning that buyers have been preferring to stick with their new home despite receiving the keys five or six months later than initially planned because they were able to secure a lower price. It is, however, unclear how long the situation will hold for.

According to Alberto Isaza, general manager of real estate firm Galería Inmobiliaria, second-hand housing has been increasingly competing with the new home market, especially in middle-to-high-income segments in cities such as Bogotá, Barranquilla and Bucaramanga. “This is starting to take some market share away from new housing development, making builders focus even more on selling new homes before they are completed,” Isaza told OBG.

Financing

The banking sector remains an important element of the housing market for homebuyers using government subsidies to access credit and buyers in the middle-to-high-income segments.

Buying capacity was affected in 2016 by interest rates of 11-12%, compared to 10% a decade earlier, which did not play into the market’s favour. As of early 2017 Colombia’s central bank began reducing interest rates, although the transfer of that towards mortgage rates is expected to take time.

“Banks are still interested in loaning for housing acquisition, but they are doing it from a more conservative position,” Chirivi Bonilla told OBG.

In the fourth quarter of 2016 Colombia’s total home loan portfolio reached COP51.5trn ($15.5bn), up 12% from COP46.1trn ($13.8bn) in the same period in 2015, according to the National Administrative Department of Statistics.

Land Availability

Land access for real estate development has increasingly become a local government factor, and changes in local authorities after municipal elections often determine urban expansion patterns across the country. After municipal elections at the end of 2015, reactions were diverse. Some local governments preferred to wait before increasing licensed construction. “Promoting real estate development in their cities and regions means they also have to invest in services. Several local governments wanted to assess how their finances were. But that process ended up blocking development in some areas,” Chirivi Bonilla told OBG. After a few years of legislative instability, which ended up discouraging real estate expansion in some areas of Bogotá, the Colombian capital is now witnessing a surge in real estate development. Recent municipal government measures are set to improve land availability in the north and west of the city. Furthermore, early 2017 saw the confirmation by capital city authorities of several decrees that will allow urban densification in some of the main thoroughfares. This has opened the door for the construction of buildings with an average of 20 floors in the Calle 80 and Carrera 30 areas, which had been left with a number of unused land plots after the construction of the Transmilenio bus system. Municipal authorities have announced that the increase of urban density in these corridors of the city will allow the addition of 54,000 homes, according to local media reports.

“Increasing vertical construction in some areas of the city is a requirement, because otherwise it is hard to generate the necessary number of new homes,” Chirivi Bonilla told OBG.

Prices for land in Bogotá have been rising faster than the remaining construction inputs, increasing the pressure on developers to secure land for future developments, according to Isaza.

Office Space Aplenty

Most of the vertical construction in the country over recent years has taken place in other segments. Colombia’s real estate sector has shown an increasing level of maturity with the strong impact of REITs, which are allowing for the development of new projects.

Traditionally, Colombian builders would also be the ones selling and managing the buildings. However, development companies have joined forces with banks and other institutions and established the necessary financial structure to create significant quantities of real estate projects through the REITs.

Despite having the financial power, existing buildings in the market can be owned by a large number of people. To counter this, REITs started to develop their own projects, hiring construction companies to create buildings, which are owned and managed by trusts. This has led to an influx of stock, which has hit the Bogotá market the hardest, especially in the office segment, but it is also visible in different degrees of intensity across the country. It has also led to more customisation. “You find more built-tosuit projects, where the developers have the land and look for firms wanting to move in. Once they sign a big company into the new office space, they begin construction,” Aurora Turriago, marketing and research director at Colliers International, a real estate consultancy, told OBG.

REITs have become a notable power in real estate development, and due to their financial capacity are influencing all levels of the market.

Office Space

Although the office market has been witnessing a strong influx of capital investment across most of Colombia’s major cities, Bogotá has remained the central focus of investment. New projects, coupled with vacancies caused by the fall in oil prices, which led to large tenants linked to oil, gas and mining companies vacating some of the city’s most sought-after office real estate areas, have increased the available offer. However, the city’s market still absorbed up to 153,000 sq metres of office space, despite Colombia’s lacklustre overall economic performance in 2016.

Bogotá, in particular, has seen notable investment in its office segment, with 20 new office buildings completed in 2016 in the capital. According to fourth-quarter 2016 figures from Colliers International, office space supply in the city rose by 8% compared with the same period in 2015, to reach 2.27m sq metres. The majority of existing space in Bogotá is classified as class-A space, which accounted for 43% of the offer at the end of 2016, followed by class-B space with 32% and class-A+ with 25%.

New additions include Colombia’s tallest building, the 67-storey, 240-metre-high Bogotá Downtown Bacatá, which was completed in 2016 and includes residential apartments, retail units, a hotel and 8500 sq metres of class-A+ office space.

In the first half of 2017 the market is expected to increase by an additional 100,000 sq metres, and by as much as 848,000 sq metres by 2019, pointing to the large volume of investment that has fed into the city’s office real estate offer.

“The most sought-after areas in Bogotá still have a lack of available space and the prices have stayed relatively high,” Turriago told OBG. However, the rise in the amount available has continued to increase the difference between asking prices and closing prices. Popular areas for office real estate such as Santa Bárbara, Salitre, Andino and Córdoba continue to command some of the highest prices. The Salitre area in particular attracted a large amount of investment due to its available land, which has allowed for the development of organised and large-scale office projects. “Salitre has good areas to reunite operations, because for a long time large office spaces were not available in Colombia. Now some of the big companies are taking the opportunity to unify their corporate offices,” said Turriago.

Despite the addition of a significant amount of new office space in recent years, developers have been able to adapt to the market. This has kept vacancy rates at acceptable levels, rising by just 0.9% in 2016 to 10.5%. “The good thing is that builders are conservative, they change or delay the project completion, and that [has kept] vacancy rates in the city at 8-10% over the last couple of years, which is not alarming,” said Turriago. “But of course, if all the projects on the books were to be completed at the same time, there would be oversupply.”

The additional supply has helped push average rental prices in the city downwards. According to Colliers International, rental prices at the end of 2016 decreased by 4% year-on-year (y-o-y), settling at COP63,950 ($19.19) per sq metre per month.

The new space, coupled with the increasing number of ongoing projects in the market, has continued to be beneficial for tenants, who can request improved finishings and other amenities offered by building owners to secure deals.

In line with other markets, prices vary depending on location and quality of real estate, with class-A+ office space costing up to COP95,000 ($28.50) per sq metre per month. Sales prices in the city ranged from COP6.9m ($2070) per sq metre for class-B space to COP10.2m ($3060) for A+ space, according to Colliers International figures for the fourth quarter of 2016. During the same period, a total of 237,868 sq metres of office space was available in the A+, A and B categories across the city.

Commercial Segment

Similar levels of dynamism are leading the expansion of commercial space. Rising incomes and the arrival of new retail brands have supported the construction of new shopping malls. According to Colliers International, Bogotá had 45 modern retail shopping malls as of the second half of 2016. These amounted to 1.29m sq metres of leasable retail space, a 6% y-o-y increase. Colliers International anticipated total inventory to surpass 1.5m sq metres by the end of 2018.

Average rental prices in retail areas in the capital decreased by 3% y-o-y in the second half of 2016, standing at COP84,000 ($25.20) per sq metre per month. The type of shopping mall and its location both affect prices, with the most expensive locations commanding an average of COP164,000 ($49.20) per sq metre in the same period.

Industrial Space

Reducing logistics costs in Colombia remains imperative for business operations, and successive governments have been making efforts to improve transport infrastructure. In addition, industrial real estate has become an increasingly dynamic part of the real estate sector, and as the new 4G highways open up for traffic, further options for warehousing and production will likely be required across the country.

According to fourth-quarter 2016 figures from Colliers International, Bogotá’s industrial real estate space reached 3.78m sq metres, a y-o-y increase of 7%. However, with new industrial areas set to hit the market, the total supply of space in and around Bogotá is likely to increase to more than 5m sq metres by the end of 2017. As the amount of available industrial space has grown, owners have reduced prices to secure tenants. As of December 2016 industrial space in and around Bogotá cost an average of COP13,500 ($4.05) per sq metre to rent, a 4% decrease compared with the end of 2015. Prices for industrial space within the city itself, however, could reach an average of COP20,300 ($6.09) per sq metre per month, according to Colliers International.

The industrial real estate offer will need to expand nationally over the coming decades, as a series of investments in multi-modal transport will make operations more dynamic, combining river, road, rail and air cargo transport. Under Colombia’s long-term Master Plan for Intermodal Transport, COP208trn ($62.4bn) in investment will go towards transport infrastructure between 2015 and 2035. This is in addition to the Fourth Generation Toll Road Programme, which is set to build 40 new highway links across Colombia (see Transport chapter).

Industrial areas in and around the northern coastal cities have seen a rise in activity, prompted by port operations and increased international trade. The supply of industrial real estate in Barranquilla, for example, increased by 9% y-o-y in the second half of 2016, reaching 1.22m sq metres. The continued opening of new industrial areas and free trade zones is likely to continue to expand supply in the near future, with Colliers International anticipating an additional 2.17m sq metres of industrial space being added to the city’s offer by the end of 2019.

Outlook

The focus on pre-construction sales by the real estate market has allowed the sector to avoid significant risk, while expanding to support the housing needs of the population. This has galvanised social housing programmes and property acquisition by middle-income Colombians. Although real estate remains profitable due to genuine demand, companies will have to manage a number of variables that remain out of their control, such as construction licences and access to water and electricity connections. These factors will add a degree of risk and depend on local regulatory requirements. Managing these and finding the areas with a combination of favourable conditions will be critical.

The real estate sector is set to continue expanding, although some areas, such as the office segment, may face a degree of oversupply in the coming years if absorption rates do not match the considerable amount of projects expected to be finalised.