-
Search
Real Estate Trends
-
Join Newsletter
Join our mailing list and receive the latest news in your Inbox 
Archives
By Paulo Winterstein and William Freebairn
Sept. 17 (Bloomberg) — Brazilian and Mexican homebuilders tumbled on Latin American stock exchanges on concern that the global financial crisis will raise the cost of capital while slowing growth and accelerating inflation slow demand for homes.
Klabin Segall SA led declines among Brazilian homebuilders, dropping 16 percent to 5.30 reais at 12:15 p.m. New York time in Sao Paulo trading. Klabin declined the most in two years. Corporacion Geo SAB paced the retreat in Mexican builders, falling the most in almost eight years. The Habita index of six Mexican homebuilders slid to the lowest since November 2005.
Homebuilders in Latin America fell on concern credit market declines will curb mortgage lending as economic growth slows and inflation cuts into consumers’ buying power. The credit crunch spawned by the subprime mortgage crisis forced Lehman Brothers Holdings Inc. this week to file for bankruptcy, a week after the government took over Fannie Mae and Freddie Mac, the two biggest buyers of mortgages.
“These companies depend on credit and the clear sign this week is that credit is going to be restricted in the U.S.,” said Carlos A. Gonzalez, a homebuilding analyst at IXE Grupo Financiero in Mexico City.
Banks may tighten credit standards, and mortgage-backed bonds may be more expensive to sell as demand slows, he said. Mexico’s economy would have expanded 4 percent this year without the financial crisis in the U.S., Finance Minister Agustin Carstens said today. The ministry now forecasts 2.4 percent growth.
More Risk
Banco Fator analyst Eduardo Silveira sees increased risk for Brazilian real estate developers due to increased capital needs, “capital and credit markets becoming more expensive and selective” and “the greater pressure from inflation and interest rates on demand for homes.”
Camargo Correa Desenvolvimento Imobiliario SA was cut to “hold” from “outperform,” and MRV Engenharia e Participacoes SA was cut to “underperform” from “hold,” Silveira wrote in a note. Camargo Correa may trade at 9.31 reais in 12 months, he said, a 41 percent cut from the previous estimate of 15.67 reais.
Camargo Correa’s risk has increased because of the large value of projects it plans to begin work on in the fourth quarter, Silveira wrote.
MRV’s contracted sales in 2009 may reach 2.9 billion reais, or about 300 million reais less than his previous estimate as “the continuing deterioration of the macroeconomic outlook could start having a greater effect on demand for homes in the low-end segment,” Silveira wrote.
PDG Upgrade
PDG Realty SA Empreendimentos e Participacoes was raised to “outperform” from “hold.” The pace of the company’s sales is above the industry average and the company’s “solid cash position” make it a potential consolidator, Silveira wrote.
Silveira maintained his “hold” rating on Klabin Segall and his “outperform” rating on Rodobens Negocios Imobiliarios SA and Tecnisa SA.
Policy makers are expected to raise Brazil’s benchmark Selic rate to 14.75 percent by yearend, according to a Sept 12 central bank survey of leading economists. The rate dropped to a record 11.25 percent last year.
Cyrela Brazil Realty SA Empreendimentos e Participacoes, Brazil’s biggest developer, slid 6.9 percent to 16.67 reais. Gafisa SA, the second-biggest, fell 6.8 percent to 19.76 reais. Rossi Residencial SA, the third-largest, tumbled 12 percent to 6.89 reais.
Geo, the second-largest Mexican builder, fell 14 percent to 21.15 pesos in Mexico City trading. Ara, the fourth-largest builder, dropped 10 percent to 6.90 pesos. Urbi Desarrollos Urbanos SAB, the third-largest homebuilder by sales, slipped 8.9 percent to 21.90 pesos.
In the U.S., builders broke ground on fewer houses than forecast in August, signaling the worst housing recession in a generation will continue to weigh on growth in coming months.
To contact the reporter on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net; William Freebairn in Mexico City wfreebairn@bloomberg.net
Foreign investment in Mexican real estate is on the rise and many favorable factors conspire to keep this trend moving forward.
Investors and developers are increasingly looking to Mexico as a land of opportunity. While Mexico’s economy is closely tied to that of the United States and is expected to be impacted in some measure by the current slowdown, the financial crisis in the U.S. has not yet had any significant repercussions on Mexico’s economic activity or international trade.
Over the past 15 years, as Mexico has increasingly drawn foreign investment, the appeal of real estate as an asset class has continuously grown.
Secure prospects and government incentives
Developers and investors have a tendency to take a longer-term perspective with regard to their activities in Mexico. This is due in part to several key trend lines that support investment in Mexico’s real estate sector and, more specifically, in lodging and tourism.
Mexico is host to the development of numerous master-planned projects offering legal certainty, quality infrastructure, ample amenities, and development platforms for hotel and residential developers.
Like those in the U.S., urban and resort markets in Mexico have witnessed a marked increase in projects combining hotel and residential components. In addition, the Pacific and Caribbean coastlines of Mexico are increasingly viewed as prime destinations for upscale developments.
Tourism and resort residential development are a national priority for Mexico. The country’s regulatory framework fully backs foreign ownership in the majority of ventures, including real estate, allowing 100% participation in shared capital. Mexican laws governing foreign investment provide legal guarantees and offer investment security.
The legal mechanism also simplifies the paperwork involved in registering foreign investments, as well as the unrestricted repatriation of profits, bonuses, dividends, and interest payments. In addition, title insurance similar to that offered in the U.S. is now widely available for purchasers of large sites and individual housing units alike.
More industry, more demand
According to the Secretaría de Turismo, Mexico received approximately $3.5 billion USD in private tourism investment in 2007, an increase of 11.12% over 2006. Foreign investment, particularly from Spain and the U.S., accounted for 43.76% of the total. Mexico has consistently been one of the largest recipients of foreign direct investment in all economic sectors among emerging markets.
As industry expands in several cities in northern and central Mexico, so does the demand for lodging, particularly in the limited- and focused-service segments that cater to business travelers. Relatively few hotels outside of the resort destinations are branded, offering an excellent opportunity for both domestic and international brands to obtain growing market share.
In urban areas, the development of mixed-use projects that combine hotel and residential uses with office and/or retail components present another opportunity for growth.
For the second consecutive year, condominium construction has outpaced that of hotels. According to the housing consulting firm Softec Mexico, sales of tourist housing in 2007 totaled 18,000 units, an increase of 52.5% as compared to the previous year.
Puerto Vallarta occupied the lead position in sales; other areas that demonstrated dynamic activity included Los Cabos, Puerto Peñasco, Acapulco, Cancún, Riviera Nayarit, and Playa del Carmen. Approximately 80% of the beachfront housing was purchased by foreigners, principally from the U.S. and Canada.
Mixed-use developments including hotel and residential components are expected to multiply with Mexico’s flourishing status as a second-home and retirement market for U.S. and Canadian baby boomers.
In fact, Mexico ranked at the pinnacle of the 2007 Global Retirement Index, published by International Living. Consumer confidence in buying residential property in Mexico is bolstered by the increasing availability of title insurance policies issued by U.S.-based companies.
Outlook
Some challenges do impose on Mexico’s attractive investment climate. The biggest obstacle to ongoing activity will likely be the tightening of credit markets in the U.S. and Mexico.
Loan-to-value ratios are expected to be reduced, and loans will be made on a more selective basis, factors that are bound to stifle development to some extent. However, investment and development platforms take a longer-term view, and in this light are somewhat less focused on and less vulnerable to the possible impact of a slowdown in the very short term.
The outlook for real estate development and investment in Mexico is, therefore, relatively sunny and streaked with the colors of a variety of prospects, from hotels to residences in urban to resort locales. Moreover, based on current trends and the government’s inviting stance, foreign investments stand on solid ground.
What to do when you have a network of real-estate brokers selling new condominiums, but few new condos to sell? Edgardo Defortuna, who has made millions selling South Florida condos, hopes one answer is found on the Pacific shores of Mexico. Defortuna, who heads Fortune International, last year agreed to start selling condo units built by Miami’s Related Group in Puerto Vallarta. It’s part of a plan that he and Related CEO Jorge Perez hope will ultimately include more than a half dozen projects across Latin America and the Caribbean — and provide a fruitful market until South Florida’s formerly hot housing industry recovers from its cold snap.
At a time when starts for residential projects are slowing to a trickle from West Palm Beach to Homestead, those who sell new housing like DeFortuna’s Brickell Avenue company are having to strike out for new markets. They are following different trails. International Sales Group in Aventura started marketing a project in New Orleans last year, attempting to take advantage of a lack of housing after Katrina. Prodigy Network in Miami moved its headquarters to New York City to better focus on its projects there, while also pushing units in places like Mexico and Panama.
Latin America has emerged as a place of opportunity during the U.S. downturn. A recent report by consultancy Ernst & Young cited the region for its steady economic growth yet relative affordability when compared to the United States and Europe.
”The overall fundamentals are positive,” said Rogerio Basso, an E&Y analyst covering real estate and hospitality in Latin America. “Those investors who have the appetite to take moderate risks and identify joint venture partnerships with local players should be able to observe higher yields than in the U.S. today.” For Defortuna and Perez, both of whom spent their childhoods in Latin America, the push into the region is being done with a distinctly Miami flavor.
THE MIAMI CONNECTION
Take the Vallarta project. Its name, Icon Vallarta, echoes the Icon South Beach condo and the Icon Brickell hotel and condo project under construction. Its architect is Bernardo Fort-Brescia of Miami’s Arquitectonica. Not only are the developer and the brokerage company from Miami, but so are many of the salespeople in Mexico.
Already, Defortuna said, he has sent eight Miami real estate brokers south of the border. He expects that number could eventually be between 40 and 50, depending on the number of projects launched by Related Group. ”I expect the brokers will eventually be back here in Miami,” said Defortuna, whose company at one point during the boom was selling units at 28 South Florida condo projects.
“But the reality is that some brokers got used to an income level that would be hard to maintain in this sort of market. There won’t be much for them to do in the next couple years.” Michelle Minagorri, who has a home in Coconut Grove, picked up and moved to Puerto Vallarta to start selling condos last fall. During the South Florida housing boom she sold units at Jade Ocean and Jade Beach in Sunny Isles Beach, and Mint and Ivy along the Miami River. But then things went quiet, and Mexico came calling.
”The market in Miami the past couple years has been unbelievable, an unsurpassed market,” said Minagorri, who grew up in South Florida. “But Miami’s market is taking a breather and I thought this was a good opportunity.” The transition has been smooth, she said. ”Someone from the Midwest moving to Mexico might feel a little more culture shock, but not coming from Miami,” she said.
SELLING OUT
The market, too, has proved good so far. The first 133-unit tower at Icon Vallarta is sold out and nearly all of the units are sold in the second 133-unit tower, she said. Sales are underway for the 75-unit third tower. Half the buyers are coming from Mexico. The biggest U.S. feeder state is California. Canadians, particularly from western cities like Vancouver, and Europeans are also drawn to lower prices for beachfront property than in the United States, she said. A large one-bedroom beachfront condo — say, 1,300 square feet — can be had from the high $200,000s to low $300,000s.
Mexico also hasn’t experienced a giant dose of new construction like South Florida or Southern California. It’s that pent-up demand coupled with competitive pricing that Defortuna and Perez hope to capitalize on. Defortuna said direct access by airplane to the Latin American and Caribbean destinations is a key factor as well.
In Mexico alone, projects are also planned in Zihuatanejo, Acapulco and Cabo Riviera. Other sites include Cartagena, Colombia; Buenos Aires; Punta del Este, Uruguay; the Bahamas; and Panama City, Panama. To be sure, some places like Panama City have seen vast new development in recent years - and already been inundated with South Florida builders and brokers. Defortuna acknowledged a discomfort with that Central American city, questioning the depths of its market. But he said Related Group’s Perez has secured a well-located site to build on there and thinks it can work.
Yet such questions are not stopping brokers thirsting for new product to sell as South Florida’s latest housing boom winds down. Indeed, Defortuna also operates as a developer and is himself finishing several South Florida projects and two in Argentina where he grew up. ”I have someone coming into my office daily saying, don’t forget me for the next project [in Latin America and Caribbean],” he said. “For the young and aggressive, it’s a great opportunity. It’s a good place to be for the moment.”
Buyers, Sellers, and Brokers Benefit from Internet Technology
The rapid growth in use of a new Internet technology over the past two years by Mexico real estate brokers has resulted in a de facto Mexican multiple listing service (MLS). The new system better serves buyers and sellers of real estate throughout coastal and other regions of interest to foreign buyers. This progress helps solve the key challenge of sharing and marketing listings between agents, a historical challenge in Mexico as it was in the early days of US real estate. Buyers and sellers would do well to make sure that their agent is part of this growing MLS in order to ensure that they are receiving the proper real estate service, particularly in regions of interest to foreign buyers.
A common misconception amongst real estate buyers and sellers is that there is such a thing as the “one and only” multiple listing service. This is erroneous because there are literally hundreds of multiple listing services in the US and Canada, and the term is morphing to become a descriptor of any quasi-public repository of real estate listings (except in Canada where the term is a registered trademark for real estate). Anyone may create a multiple listing service with the value of the system being a function of how widely and how responsibly the system is used. Each market determines the MLS system that best meets the need – with the occasional disruption such as the lawsuit by the US Department of Justice with the National Association of Realtors®.
Mexican real estate has a history of agents withholding listings from each other with the intent to get the commission from both the selling and buying sides of the transaction (i.e. “pocket listings”), similar to the situation in the US and Canada before the various regional MLSs were created. This made it difficult for a potential buyer to know if they were seeing the best properties or getting a fair deal, and for sellers to know if their agent would give proper exposure to their property. (The appearance of organized MLSs in the US in the early 1970s was a vast improvement over this inefficient system.)
The good news for consumers is that booming Mexico markets of interest to foreigners plus the ubiquity of the Internet have driven the demand for more open methods of sharing listings to the benefit of buyers and sellers. No longer does the market have to submit to anachronistic sales methods in the Internet age.
One particular multiple listing service has grown organically to gain a leading spot for Mexico’s real estate inventory: Point2 NLS by Point2 Technologies. Mexican agents from Tijuana to Rocky Point [Puerto Peñasco] to Puerto Vallarta to the Mayan Riviera have discovered that this commercial platform is an effective way of sharing and marketing nearly 7,000 Mexico property listings amongst over 1,000 fellow agents throughout Mexico. Quite simply, it is the largest database of Mexico real estate listings shared between agents in the world – and it is growing daily.
“Point2 is a vehicle to provide, in Mexico, the technology that a full-blown MLS provides,” commented Saul Klein, CEO of Point2 Technologies in an interview. “Organizations of real estate professionals can add value around the platform. The key function of sharing and marketing listings between agents is intrinsic to Point2. Individual agents control their business relationships in a way that best serves their clients.” Klein noted that Mexico real estate agents are Point2 Technologies’ third largest group of Point2 adopters in the 85 countries that the company services, preceded only by the USA and Canada.
Why should real estate buyers and sellers in Mexico care about an Internet technology?
The answer is that if their agent uses Point2, that client’s agent has access to the most prolific MLS throughout Mexican regions of interest to foreigners. Buyers and sellers would be wise to ensure that their agent is using Point2. Sellers will want to seek out listing agents that generously share the properties with other agents’ Web sites in order to maximize exposure of those listings. Buyers in turn will want to understand how their preferred agent filters listing results that appear on their agent’s website.
Until an improved sharing and marketing solution is offered nationally to Mexico, the Point2 system is leading the way towards addressing buyer and seller requirements for an MLS in the United Mexican States, one real estate listing and one real estate agent at a time.
Latin America is certainly piquing interest from investors, judging from the crowd of over 200 attendees at Jones Lang LaSalle Inc.’s Latin American Capital Markets Perspective conference, held this morning at the Jumeirah Essex House in Manhattan. “The proportion of (foreign) investment was 25 percent in 2002, was up to 45 percent last year and is increasing rapidly,” said Colin Dyer, the company’s president & CEO, at the start of the panel discussion.
Mexico has been a large part of the region’s growth, pointed out Pedro Azcue, president & CEO of Jones Lang LaSalle’s Latin America region, who noted that the country has been a pioneer in key modernization, shares elements with the Brazil-Russia-India-China model of emerging economies and is a unique space due to its geographical location, economy and political environment. The company has reported that total investment in Mexico last year rose a record 129 percent to $3.1 billion, up from $1.4 billion in 2006. Cross-border transactions in Mexico also vaulted year-over-year to $2.9 billion, a 161 percent increase over 2006’s $1.1 billion. And out of last year’s $43 billion in foreign direct investment into Mexico, $4 billion was directed to real estate.
Manual Zapata, chief investment strategist for LaSalle Investment Management in Mexico, discussed the country’s solid fundamentals, which include: a downward inflation trend since 1995, currently trending at 3.8 percent; a stable exchange rate with modest depreciation; downward country risk; compressing cap rates; a modest deficit of 1 percent of the country’s gross domestic product; stable GDP and employment growth; increasing retail sales; and a decent growth of business investment.
And this growth is accelerated in all sectors, due to its close proximity to the United States, its reinvestment in commodity imports and favorable economics and demographics, added Hector Klerian (pictured), executive vice president of Jones Lang LaSalle Mexico. “We’re right next to the world’s largest economy and taking advantage of it,” he said.
Industrial has been seeing steady growth, especially in the aerospace, automotive, electronics and logistics industries. “As conditions become more difficult in the U.S., it’s a competitive advantage (for an industrial company) to move to Mexico,” Klerian said. Cap rates have declined from 11.5 percent in 2004 to approximately 7.5 percent last year.
Overall, the office market now boasts 3.6 million square feet of product, roughly the sizes of Boston and Miami’s office market. Mexico has experienced a sharp decline in vacancy rates, and rent yields are approximately 8 percent, which is above such yields in the U.S. and Europe. A lack in quality office space also offers opportunities in some sub-markets, but there is also a dearth of development sites, as many are family-owned and few decide to sell. Cap rates have compressed from 12 percent in 2004 to 8 percent this year. Retail is also on the rise, with consumer spending rising 9.6 percent in 2007. Retailers are now embarking on aggressive expansion, and international retailers want to establish themselves in the country. Wal-Mart alone accounts for 25 percent of Mexican retail spending, Klerian noted. Cap rates have declined from 15 percent in 2002 to 8 percent in 2007. As the eighth most popular tourist destination, Mexico remains the center of hotel development in the Latin American region. Occupancy has stabilized, and 80 percent of investors are into the hospitality market for the long haul. “Very few look to sell,” Klerian noted. And investment is estimated to surpass $1.1 billion in 2009, already growing over 1,000 percent since 2000.
Residential is suffering a housing shortage, with between 4 and 6 million extra homes needed now and an additional 20 million over the next 20 year. “There’s acute demand with high employee migration,” Klerian said. And this would be an ideal sector for an investor, as the market is not crowded, he added.
Despite Mexico’s growth, there are still challenges to investment, Klerian was quick to point out. These include: a limited number of development sites, especially because of family ownership; the cultural gap between buyers and sellers; a new tax regime; and the increased amount of work it takes to get a deal done. He noted that it is important to have a local contact, as it is difficult for investor to do a deal out of New York, Germany and elsewhere. The conference also included discussion about Brazil and regional Latin American and Caribbean markets like Argentina, Panama, Costa Rica and Chile.
“It’s a time of hope,” claims Ana Laura Pulido, a real estate broker in Mexico. While its northern neighbor remains in the depths of a housing meltdown, the Mexican real estate market has been booming.
Mexico has long found its economy overly sensitive to the happenings in the United States, so to see the country’s real estate market thriving despite the turmoil in America is a very encouraging sign for our southern neighbor.
And don’t think that American investors haven’t started to notice this new trend.
According to Clark McKinley, the spokesman for the nation’s largest pension fund, the California Public Employees Retirement System, his fund sees greater returns for its money in Mexico and has already decided to pump over $300 million into Mexican real estate funds.
The main difference between the Mexican and American homeowner is the chances that his or her home is mortgaged. At this point in Mexico, only slightly over 25 percent of all homes are financed with mortgages. That is wildly different from the situation in America, where 67 percent of all homes are mortgaged.
The mortgage gap between the countries should begin to slow however, as the nation’s leader, President Felipe Calderon, has established a national goal of 1 million new mortgages a year by 2010.
Another factor that has helped insulate the nation from the mortgage crisis that is tearing through the American landscape is that lenders there have had the advantage of being more selective with who they give their loans to so far. Looking over the country as a whole, we see a shortage of about 6 million homes. Considering that we are talking about a country with a total population of 108 million, that is a pretty sizable shortage.
What the shortage has done is create serious pent-up demand and therefore allowed lenders a greater advantage in hand-picking the most trustworthy borrowers to give loans. As a result, in the third quarter 2007, mortgage delinquency in Mexico was under 4 percent, compared with 5.7 percent in America.
Calderon is expected to announce a new set of measures and goals today that will be aimed at continuing growth and combating urban sprawl.
Will the Mexican real estate market continue to show immunity to the problems facing America? That remains to be seen, but so far it looks like the country’s growth is going smoothly, and with so much room to grow it seems unlikely that things will turn around any time soon.