The sector continues to grow steadily, despite a lack of available land

Driven by demand for housing and a mounting construction sector, real estate in Colombia has been experiencing healthy growth. Fears of an impending bubble have so far been exaggerated, as the housing stock is being absorbed by high demand and a well structured mortgage system. The real estate sector accounted for 8% of GDP in 2013, according to figures by the Colombian Federation of Real Estate (Federación Colombiana de Lonjas de Propiedad Raíz de Colombia, FEDELONJAS).

Real estate services generated a value of $9.8bn, a 3.2% increase on 2012 figures. Employment creation has also been consistent with the expansion of activity. On average, between January 2012 and December 2013, employment grew at an annual rate of 7.3%, much higher than the national average of 2.3%, according to FEDELONJAS.

Trending Upwards

Besides a strong performance of the social housing segment, driven mainly by government measures to make housing more accessible, prospects are also good for higher-income housing. According to figures by BBVA Bank, the number of people with middle to high income in Colombia is expected to rise by 621,000 during 2012-14. Over the same period, the size of the population earning high incomes will increase by 512,000. This is set to put demand of middle- to high-end housing on a stable upwards trend for years.

Equally important has been the sector’s geographic dispersion over recent years. Activity is no longer solely centred in the main urban centres such as Bogotá, Cali or Medellín, but is also moving into medium-sized cities, where broader macro-economic expansion is fuelling demand for new residential and commercial real estate. This has helped to compensate for some of the difficulties faced by real estate developers in the capital city, where institutional issues have challenged longstanding development plans and are now forcing a re-think of the way the capital will develop through the coming decades.

Capital Woes

The real estate and construction sector is waiting to see how the current institutional wrangle will be resolved. Bogotá, like many Latin American cities, has grown considerably segregated between the northern neighbourhoods, where luxury apartments and office buildings have been established, and the southern areas, dotted by shantytowns with insufficient infrastructure. Successive local governments have tried to reduce the differences. A system based on income stratification has divided the city in six different zones, allowing for municipal contributions to be higher on the wealthier neighbourhoods, thus channelling subsidies to utilities for families living in poorer areas. Coupled with this, increased policing has helped to reduce crime rates in the less developed areas of the city, where the government has also increased investment in social infrastructure such as hospitals, schools and transport. However, this has not prevented a continuous move of the city’s more affluent inhabitants to the northern neighbourhoods.

To counter this, in October 2013 Mayor Gustavo Petro tried to implement a new Territorial Organisation Plan (Plan de Ordenamiento Territorial, POT) by decree, circumventing approval by the City Council, and engulfing the capital city in an institutional battle that has already impacted real estate expansion projects. The plan aims to integrate the city’s development through a handful of zoning restrictions. It establishes limits to urbanisation on the outskirts of the city, a measure geared to moving construction of new homes to central neighbourhoods, thus revitalising these areas of the city. Furthermore, major emphasis was placed on preventing the continued expansion of high-end commercial spaces towards the north of the city, as well as limiting multi-storey commercial and residential developments. Forceful implementation of the new POT generated uneasiness among private investors, prompting a rush for building licences before the end of 2013, before the new rules were passed. In early 2014, after Petro ended the private tax collection system, in what was viewed as an unconstitutional gesture by Colombia’s judicial authorities, the mayor was stripped of his post in March 2014. A higher court then overturned this decision, however, and in the following month Petro was reinstated as mayor.

“The POT remains suspended. But between its approval by decree and the subsequent suspension, certain construction licences were generated, so this has created a legal limbo,” Sandra Forero Ramírez, executive president at the Colombian Chamber of Construction (Cámara Colombiana de la Construcción, CAMACOL), told OBG. “It has also restricted a lot of planned expectations that had been created in previous years. While we agree that the new design for a density model is correct, it is not being done in the right way.” It is still unclear what will happen to the new POT. Instability for several months in mid-2014 took its toll on the city’s real estate market. In a statement published in April 2014 FEDELONJAS said conditions for real estate development in Bogotá have been affected “due to the constitutional problems that have resulted in price inflation and a discouragement to real estate activities”.

The possibility of the POT being re-implemented might certainly have an impact on the return of housing development projects. By forcing construction of new housing away from the outskirts of the city, and towards central neighbourhoods, higher land prices will make development more costly, which will reduce the attractiveness of low-income housing for private developers. The POT will also have consequences on the development of areas such as Chapinero, Chicó and Santa Barbara, which increasingly concentrate the capital’s wealthier echelons and have been a source of high-end real estate.

Financing

Nonetheless, public policy remains focused on resolving the housing gap. Government-backed financing programmes for lower-income house buyers, coupled with the rising penetration of mortgage financing schemes for middle- and higher-income earners, have increased access to new homes. The Vivienda para Ahorradores (Homes for Savers) programme was launched in late 2013, combining government benefits with banking financing. In contrast to the Vivienda Gratuita (Free Homes) programme, which aims to construct 100,000 free units to be distributed among the country’s poorest citizens, the Homes for Savers scheme targets those Colombians who, despite earning between one and two times the monthly minimum salary, are not able to get a mortgage. The goal is to build 86,000 homes and help buyers access them through a subsidy on the down payment and on the interest rate on a bank mortgage. To encourage the participation of the banking sector, the government will also give credit guarantees to the mortgage providers.

Despite the positive aspect of involving the banking sector, these benefits can be used only on government-selected housing developments. The money is paid through two vehicles: the majority of it is dispensed by the Ministry of Housing, but 30% will come from the Cajas de Compensación Familiar, which receives 8% of workers’ monthly salaries to be used in health, education and housing.

Furthermore, regular mortgages are becoming an important vehicle to access housing. Colombia’s mortgage portfolio as a percentage of GDP increased from 4.3% in mid-2012 to 4.7% in mid-2013, according to figures from BBVA Bank. More importantly, mortgages are increasingly being used to buy high-value homes, and not merely as an instrument to access social housing. Figures from BBVA Bank show that the percentage of high-value homes bought with mortgages increased from 63% in 2007 to 70% in 2013. This shows that household incomes in the country have been improving and impacting the housing market positively.

Matching The Demand

A December 2013 report titled “Real Estate Outlook Colombia”, published by BBVA Bank, predicts that annual investment in the residential sector will average 7.1% between 2013 and 2015. These are high numbers, but they are also justified by a continuous absorption of new housing by the market. The housing market has been able to self-correct, and despite the number of sold homes not being fully backed by the number launched in projects, the Colombian housing market has so far been able to avoid scarcity, which would have a direct impact on prices. Government subsidies to reduce the burden of interest rates have helped to strengthen sales. “People were really motivated to buy, but the industry had trouble replacing homes at the same rate. The reason for this is the scarcity of land in the big cities,” Ramírez told OBG. Figures by CAMACOL show that the difference between sold homes and launched homes was 10% as of April 2014. Housing supply in Colombia has also been sustained by a focus on regional markets. A BUBBLE?: In 2013 the Central Bank of Colombia published a report suggesting that rising prices, linked to expansion of home-financing schemes, might potentially lead to a property bubble. Despite the rising prices of homes, which, according to the National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadística, DANE), increased 11.5% in the first quarter of 2014, other signs show a healthy disposition in the sector. “Prices are stabilising, because the market understands that if the prices became too high, sales do not materialise,” said Ramírez. “So far, we do not see a bubble. Households are not in debt; the credit to house-value ratio is not bigger than 50%,” he added. Also positive is the fact that there is not a large amount of vacant stock in the market.

“Finished inventory is only 4% of the offer, which is about 3000 units in a market that sells 150,000 homes a year,” Ramírez said. Lack of excessive housing stock results from off-plan sales, which account for 70% of all homes sold yearly. This has allowed a healthy level of successful project completion for residential building, which avoids burdening developers with unsold housing and locked-up capital.

Meanwhile, the ability to pay for mortgage financing remained at stable levels between 2008 and 2012, and has receded only slightly in 2013, according to BBVA Bank. This is important, because it shows that despite all the pressure that demand and land availability can have on home prices, this is still not pricing families out of the housing market.

Government regulations limit the percentage of income that can be directed towards a mortgage at 30%, and research shows that Colombians are well below what can be considered excessive debt for housing finance. BBVA Bank found that the Index of Effort, which measures the percentage of a home buyer’s income directed at the first payment of a mortgage scheme, is currently at 24.7%, according to the Real Estate Outlook Colombia.

Average mortgage interest rates have come down from between 14% and 16% in 2006 to a range of around 9% to 12% in 2013. Amortisation periods currently range from five to 20 years, and the buyer is expected to pay 20-30% of the total value upfront. Affordability of housing is also helped by the fact that wages in Colombia are pegged to the inflation rate, which helps to keep household incomes LAND: Low availability of land for construction is certainly affecting residential as well as commercial real estate. A study conducted by CAMACOL has found that land costs are becoming increasingly burdensome in the final cost of construction projects, increasing from 17% in 2010 to 25% in 2013. The problem is prevalent in the major cities, and it is negatively impacting the real estate sector’s ability to expand despite demand. Furthermore, rising land costs are eating away at developers’ profits. “When you compare this, you see that the rise in land prices is higher than the transfer of that augmentation to the final price of homes,” CAMACOL’s Ramírez told OBG. “Developers are absorbing the brunt of the land price increases because the market would not Successive governments have made efforts to increase the amount of available land in order to keep the real estate sector growing at sustainable rates, as well as to reduce the housing gap. A World Bankassisted project has aimed to create housing macro-projects, involving large swathes of urbanised land plots. Several national social housing macro projects (macroproyectos de interés social nacional, MISN) were designed under private-public partnership agreements to facilitate cooperation between municipal authorities and housing developers and accel- Of these, 12 MISN were developed across Colombia, adding a total of 1700 ha of available land to the sector. However, an additional 13 MISN projects have yet to take off, having been stalled by environmental issues and procedures. “The conditions are there: the market is working well, there are strong economic fundamentals and there is a government will for the social housing policy. We just need to make land available, which partially depends on the local administrations,” Ramírez told OBG. Macro projects are also more challenging because they require a larger amount of government investment in social services. In the capital specifically, they might be further restricted by the application of the new POT.

CAMACOL is currently working on a proposal to restart the MISN projects as well as rehabilitate new areas in certain cities. The focus of the effort will be on combining residential and non-residential building in order to offset the lower valued-added from housing development. In some areas, mixed-used projects, involving residential, commercial and office space, might be the best viable option to counter the rising land prices.

Commercial

Rising purchasing power of Colombian households is also impacting the development of retail outlets and large shopping malls. Although this had been a visible trend in the main cities for some time, it is now expanding significantly in the rest of the country. “Commercial real estate is the most dynamic segment and there are a lot of shopping malls being developed in medium-sized cities,” Juan Felipe Hoyos Mejía, president of Coninsa Ramón H, a real estate developer, told OBG. According to Colombia’s Association of Shopping Centres, in 2013 a record of 382,000 sq metres of retail space in shopping malls was built, surpassing the previous record of 317,755 sq metres in 2006.

The fast growth is linked to the still largely unexplored potential, especially in medium-sized urban centres. On top of growing incomes, density of retail space remains low when compared to neighbouring markets in the Americas.

In Colombia, the current gross leasable area (GLA) is 62.7 sq metres per 1000 people, compared with Chile’s 167.5 sq metres, Mexico’s 91.8 and 79.2 in Peru, according to real estate consultancy Cushman & Wakefield. This makes it an attractive market for large regional commercial developers.

Regional Offices

With an increasing number of companies setting up operations in Colombia, development of office space has become a dynamic component of the sector. Understandably, this is being felt more acutely in the capital Bogotá, where some international firms have chosen to establish their regional base for Latin America. Rising demand and a limited supply of new office space have pushed up rents over recent years. But as more office space joins the market, the increase in supply is affecting prices, at least marginally. In its annual review of office space prices, titled “Office Space Around the World 2014”, Cushman & Wakefield ranked Bogotá the 35th most expensive location for office space in the world, a considerable decrease compared to 2013, when it was ranked 20th in the report.

Average rents per sq metre per month reached $39.36 in 2014 in some of the most sought-after locations, a 6% decrease compared to $41.97 in 2013. New office space rental offering is expected to hit the market in the next few years, easing pressure on the current limited supply. The number of construction permits for new office space changed from a 7.4% reduction in 2012 to a 20% increase by September 2013, according to figures by BBVA Bank.

Another positive development comes from the reduction in rotation rates for office space over recent years. In 2009 office stock in Bogotá and Medellín needed an average of 2.5 years to be sold at that year’s selling rates, however by December 2013, that period was reduced to 1.3 years. This means that despite the increased offer, the market remains ready to absorb new office space supply, which in August 2013 had grown by 42% over August 2012, according to BBVA Bank.

According to figures by Jones Lang La Salle, more than 550,000 sq metres will become available in Bogotá between 2014 and 2016, 70% of which is expected to be in the Chicó and El Salitre neighbourhoods, as well other areas in the northern districts of the city, where a lot of firms have chosen to locate their offices. Another area where office space supply is developing is close to the city’s central district, along 26th street, where prices can be lower compared to the newer neighbourhoods to the north. “The advantage of these areas is the lower prices, which ranges between COP60,000 ($30) and COP65,000 ($32.50) per sq metre per month, compared to other office areas where prices can reach COP80,000 ($40) per sq metre per month,” Andres Alvaro Ortiz, managing partner of Abacus, a financial services firm focusing on real estate, told OBG.

Size of office space can sometimes be an issue, as a large majority of available office space is made up of 30-sq-metre offices, although there is demand for bigger offices at 500 sq metres. This is pushing some companies to move to less central areas, where office space is less divided into parcels and where prices can be lower than in the northern neighbourhoods. Another area of the city with potential for further development is Boyacá, where prices per sq metre average between COP52,000 ($26) and COP60,000 ($30). “One of the problems of Bogotá is the high price for land, which can affect the city’s competitiveness,” Ortiz told OBG. “The capital is still a regional business centre, which forces companies to establish themselves here, but this could change in the coming years,” he added.

Other areas have also been gaining traction. The northern cities of Baranquilla and Cartagena are attracting office space development, as the enhancement of port infrastructure on the country’s Caribbean coast creates new business needs.

According to Roberto Cáceres, director-general of Colliers International Colombia, office space has grown in line with the economy. “The significant increase in office space construction has been due to the country’s economic growth and the signings of various free trade agreements, but the estimations may have been overoptimistic, especially for secondary cities such as Barranquilla and Medellín.”

Industrial Segment 

The development of industrial real estate has been less dynamic. Despite the good fundamentals, 2013 was not a good year for the industrial sector, as value of output fell 1.9%, according to figures from DANE. This will have an impact on the amount of industrial land procured by manufacturers. Furthermore, oversupply of some types of industrial space seen in earlier years seems to persist. Between August 2012 and August 2013 the amount of available warehousing space increased by 80% in Bogotá and Medellín, according to figures by BBVA Bank. This points to excess supply that is not fully utilised by the market.

The imbalance might also come from a lack of coordination between central government strategy and regional authorities. A positive development in this regard is connected with the heavy investments in transport infrastructure by the Ministry of Transport, which is determining where the country’s strategic logistics corridors will be established. This will allow central government to override local authorities’ decisions, making the utilisation of existing industrial real estate more efficient.

Outlook

On the back of promising forecasts for the economy, the real estate sector is bound to continue on an upward trend. Despite its growing dispersion across the country, much confidence in the sector will depend on a successful resolution to the institutional challenges blocking development plans in the capital Bogotá. Developers have thus far been able to compensate for the slower market in the capital with ventures in other cities, but the institutional battle over the POT can have a serious impact on the way the residential, retail and office segments of real estate develop in the near future.

The housing sector seems able to stave off any dangers of overheating through a careful balancing of existing demand and supply. But the future of this balance will depend on more land for construction becoming available. With economic growth bringing more people into the housing market, the country will need to plan where the necessary housing supply for the coming five to 10 years will be built.