Hot property: Opportunities exist for developers due to a significant deficit in housing and office units

If construction is flourishing, so are property sales. The real estate market offers opportunities for both local and foreign investors that just a decade ago did not exist. Many foreign players have embarked on joint ventures with Peruvian companies, a model proving to be an efficient way to cover the most ground. Housing is an important segment due to high demand and a large deficit in the low-income segment. However, other markets are proving worthy of attention as well, with offices being an area that merit special attention.

RESIDENTIAL: The housing market has traditionally focused on high-end homes as profitable ventures. While many companies have succeeded in basing their profitability in this segment, the market’s attention is now shifting towards low-income and middle-class housing projects. This is due mainly to the demands of consumers who have collectively gained significant buying power thanks to several government incentives and a more open financing system. Both factors may help close the country’s housing gap and are driving forces of the housing market.

FINANCIAL SUPPORT: Through state-run credit funds like Techo Propio and MiVivienda, low- and middle-income consumers can access subsidised vouchers that assist in buying a home. Techo Propio is a system that involves savings, a state-issued voucher and credit, which is given through a private financing entity such as a bank. For its acronym in Spanish (Ahorro, Bono y Crédito, which translated to Savings, Voucher and Credit), this system has come to be known as the “ABC method”, providing simplicity for consumers.

Some banks have not wanted to enter into this financing programme on the basis that dealing with people of lower economic status can be risky. This judgement is not necessarily true, according to Carlos Lock Sing, the chief of housing promotion at the Ministry of Housing, Construction and Sanitation ( Ministerio de Vivienda, Construcción y Saneamiento, MVCS). According to Lock, these sorts of programmes provide a guarantee of at least 50% if not more. Subsidised vouchers, which are currently around PEN17,000 ($6229), plus the savings required to enter the programme already amount to nearly 50% of the house’s value, meaning banks normally do not need to lend more than that and run few risks. The cost of houses usually go up to $12,000 for the Techo Propio programme and MiVivienda beneficiaries aim to buy houses ranging from $18,000 to $30,000.

MORTGAGES: Using around 30% of monthly salaries, most Peruvians, regardless of their economic status, can manage to buy a home. And with loan interest rates of 7-8%, consumers have options to pay off a home within 25 years if needed. According to Ricardo Cabrera, managing director of estate agent CBRE Peru, this is a key factor for the country’s attractive housing market. “This percentage of a low-income salary could not pay for anything some years ago,” Cabrera told OBG. “But the qualifications for credit have loosened now. It’s not a matter of people being paid more rather the possibilities for buying have opened up.”

People are taking advantage of a more open financial system, and figures from over the years display a sharp upward trend. According to data from the Superintendency of Banking and Insurance, between 2010 and 2011, money lent in mortgages grew by some 20% to reach PEN19.3m ($7.1m), which represents a 160% rise in activity when compared to total credit value distributed by the financial system in 2006. This may also be reflected in the fact that home values are increasing and are predicted to continue rising. José Luis Ayllón, technical director at the Peruvian Chamber of Construction (Cámara Peruana de la Construcción, CAPECO), forecasts that during 2012 housing prices will increase by about 10%.

MARKET PLAYERS: Several major players have entered the social housing field. Consorcio DH Mont currently has three ongoing projects aimed at the low-income segment. The consortium’s CEO, Ricardo Mont Ling, told OBG that these projects attempt to provide more green areas and emphasise value-added construction to offer people a wider selection to choose from. According to Mont, traditional low-cost housing construction companies have had to adapt and returns have become slightly smaller. However, he believes that since there is such a large demand for housing, the large scale on which companies build makes up for lower profits per unit. Arteco Inmobiliaria has a similar operation and in 2011 sold 350 housing units with prices ranging from $40,000 to $60,000. The company aspires to sell 1000 units per year by 2015.

Another major firm to watch is Shamrock since its presence has been made spanning all segments, from high-end to low-income housing projects. At the top end of the market, a current project involves a luxury marine condominium development slated for southern Peru’s Paracas, where houses will begin at $250,000 and extend to around $750,000. The development includes a total of 250 houses and apartments spread over 18 ha of land with a 3- to 4-ha lagoon in the middle. Another project, which involves some 2000 apartments in Lima’s Santa Clara district, is oriented towards MiVivienda clients in the lower-income market segment.

Shamrock’s CEO, Carlos José Chuman, believes the market still offers substantial opportunities for property developers and predicts a positive situation in the near future. “Within the next five years demand and relative supply will increase significantly, with growth rate estimates of around 8%,” he told OBG.

BUY-TO-LET: Although Peruvians are prone to buying property, Carlos Cornejo, CEO of CV Project, an engineering and construction consultancy, believes there is still a market for renting. “Since there is a shortage of apartments, renting yields are still quite high, even above 10%. Smaller apartments between 60 and 90 sq metres are mostly buy-to-let investments,” he told OBG. “Anything above 100 sq metres is harder to rent out for the longer run and yields often don’t pass the 7.5% mark.” Trade journal Global Property Guide rates Peru’s gross rental yields at 8.17%, fifth in the region where Panama leads with yields of 9.03%. However, the market is not infinite and yields over 10% require a distinguished level of income in the end customer, Cornejo added. This means the number of potential clients in this market segment is somewhat limited.

Chilean-Peruvian real estate company Paz Centenario receives a good handful of clients who undertake buy-to-let activities in Lima. According to Jaime Alegre, chief of the company’s development department, these sorts of investments tend to occur in more consolidated areas of the city, such as Miraflores and San Isidro, representing an attractive market niche for renters. San Isidro’s appeal comes from its proximity to businesses and financial activity – not to mention a golf course – while in Miraflores properties typically offer views of the ocean. “We have many ocean-view apartments with 60-80 sq metres and people invest in these properties because they see that values could rise from one year to the next by 15%,” Alegre told OBG.

APARTMENTS: Amidst increasing market growth, apartments are becoming smaller. Whereas just some years ago many apartments were around 70 sq metres, standards are shrinking that size to around 32 sq metres. This is in part due to the densification of Lima but also to the market needs, since a larger group of buyers can afford smaller apartments and the government credit programmes are stimulating real estate purchases. Consumers have also become a lot more knowledgeable and expectations for amenities are on the rise, pushing developers’ profit margins. This has been the situation in nearly all socioeconomic segments, which is generating competition among real estate companies and ultimately improving quality.

Paz Centenario develops high-rise apartment buildings of up to 15 floors in Lima. This market is relatively new for Peruvians, who have traditionally preferred not to live in apartments due to perpetual seismic activity in the country. However, housing demand has proven stronger than the forces of nature since many apartments do not remain empty much longer than four months after a building is completed.

“Since there is so much demand, we usually finish the construction of a project at the same time that we are wrapping up sales of the units,” Alegre told OBG. “This is why the pilot system is so helpful. It allows clients to experience the apartment before it’s built and generates lots of sales.”

HIGHER & DENSER: Supply is a key factor in Lima and, with land running low, the trend is headed towards densification and vertical growth. Signs of this are evident in the capital’s cityscape and indicators on the ground represent this activity. According to Ayllón, many developers scout older properties which can be demolished in order to construct new ones from predetermined plans. “Buildings are being designed without even seeing the land before,” he told OBG. While this practice entails somewhat blind growth, benefits are that projects will often cost up to 20-25% less than market price, Ayllón said. According to Luis Tagle, the national director of urbanism at MVCS, this is a positive move because it recycles space. “There have been many cases of retired people living in large older houses and they couldn’t even pay utilities or taxes with their meagre pensions,” he told OBG. “Selling their properties gives them extra money to live on and allows 30 to 40 more families to live in that same space when the new building is eventually constructed.” These projects also tend to have positive impacts outside of the building itself, in terms of providing parks, roads, sidewalks and overall increased value of the developed area.

OFFICE SEGMENT: Despite surging business in the last couple of years, Lima still ranks as the capital with the lowest rental prices for prime office space in South America. Demand is extremely high and many companies are already securing spaces in buildings that will be finished within the next few years (see analysis). One of the most important new buildings slated for San Isidro is the HSBC Tower, for example, 80% of which has already been rented to transnational companies, leaving only 2000 sq metres of space available before the building opens in March of 2013.

CAPECO’s Ayllón has a take on what is driving the demand for office space. One factor is the number of multinational companies that are locating their headquarters in Peru and require prime offices to conduct business. The other is spawned by the latter, since Ayllón views that the entry of these multinationals is raising the bar in terms of quality, with many local firms seeking to improve their status by setting up shop in the latest high-tech buildings in order to compete. However, not all companies require grade-A office space and Ayllón believes there is significant potential in the market for grade-B offices.

NEW DISTRICTS: Lima’s traditional financial district of San Isidro is coming to its development limit in terms of saturation. There are no longer many lots to construct office buildings and the municipality, supported by residents, is pushing to restrict the construction of high-rise buildings to maximum number of eight stories. Aside from this regulation, factors such as traffic, parking and increasingly high prices for office space are causing many to look elsewhere.

Enrique Cabrera Otero, the chairman of CBRE Peru, told OBG, “Traffic in San Isidro has become a big problem. For this reason Surco turned into an attractive new district for the construction of offices.” Southern Lima’s Santiago de Surco is indeed already becoming a new zone for prime office spaces. This alternative district already hosts 155,308 sq metres of office space, making up 16% of the market. Several factors have influenced this shift, including ample lands that have yet to be exploited, the safety of surrounding neighbourhoods and the area’s vehicle accessibility by way of the Panamericana Sur Highway and other major avenues.

Chilean-owned Grupo Algeciras has much experience in the high-end hotel segment, but has also kept its eye on the progress of office development, mainly on the lookout for ways to combine accommodation with business amidst Peru’s growing demand for such ventures. Rafael Villanueva Merino, executive chairman of the company, also sees future office development around the capital. “The Cono Norte area of Lima is showing huge financial growth, yet there are virtually no office buildings there so we expect investment in office space to take off,” he told OBG. The only factor holding northern Lima back from this development is the lack of infrastructure to connect the area with the rest of business and commerce.

A TELLING TRAGEDY: Property registration is still an unresolved issue, as highlighted by recent events. After a 8.0 Richter scale earthquake in 2007 destroyed 70,000 homes in southern Peru’s Pisco, Chincha and Ica, government authorities quickly developed a plan to financially assist those in need of finding a new place to live. Yet criteria for beneficiaries included legal home ownership, a status most of those affected lacked. “Around 70% of the people did not have their properties registered,” Tagle told OBG. “And many of the property titles were under names of people living in Lima who rented to tenants.” This situation created many difficulties for aid to reach those needing it.

The state-run Organisation for Informal Property Registration (Organismo de Formalización de la Propiedad Informal, COFOPRI) has been working since 2006 to improve plots of land and grant titles to the rightful owners. However, the 2007 earthquake proved a harsh lesson for authorities that a stronger property registering campaign was required, which COFOPRI has since then undertaken to avoid similar crises in the future. Attention has been placed on the provinces and in 2011 COFOPRI managed to grant 45,565 property titles. Still, property registration is not obligated under law, a precept that Tagle believes creates loopholes for people who do not want to be identified. “Both poor and rich who are involved in illicit activities benefit from not having to register property. This is a huge problem that needs to be fixed,” he said.

OUTLOOK: High housing demand combined with increased buying power and overall stable economic growth provide positive prospects for the real estate market. To meet the housing demand, much development is happening outside of Lima, where land prices remain relatively low. Many of these ventures have succeeded working alongside the government, which is eager to assist more proposals since its ultimate goal is to reduce the housing deficit. The low- and middle-income segments display many opportunities in this respect and can turn into profitable business. Within the capital dealings can be more costly since land is scarce and property near central areas with retail and other commerce hikes up prices. Regardless, with nearly half of Peru’s GDP production, Lima requires more property to house its growing population. There is nowhere to go but up, with high-rise buildings that house more people at higher densities expected to be a key trend going forward. Prices are expected to rise through the next five years and, if credit systems continue to function as well have they have been, home purchases should also increase in that period.

Lima is in itself expanding and many opportunities for office real estate lie on the city’s outskirts. Both the southern and northern districts are expected to grow into business hubs in the short term, drastically changing current urban dynamics and diversifying business ventures in many more economic sectors, as well as providing a boon to real estate. Success of such endeavours will rely on improved infrastructure, which is already high priority on the government’s agenda.