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Mexico's Housing Market - Demand continues to grow

Editor's Note: This story is the first in a two-part series about investment opportunities in Mexico. This story covers Mexico's booming economy and its underserved housing market. The second story, covering Mexico's retail sector, will be in GREM's December issue.

With its young, growing population, strong economic growth and expanding mortgage and consumer credit markets, Mexico is becoming one of the top locales for real estate investment - both residential and commercial.

Although Mexican real estate has historically been owned by local occupiers, investors and entrepreneurs, more and more foreign investors are entering the country, which boasts the world's 13th largest stock of commercial real estate valued at $200 billion, according to Jones Lang LaSalle.


"Today there are about 30 institutional investors actively looking to place capital," says Pedro Azcue, president & CEO of Jones Lang LaSalle Latin America. "Compared to five years ago, we probably had just 10 investors, and we didn't have any 10 years ago."

Azcue estimates that investors would like to invest as much as $7 billion per year in Mexican real estate, but end up investing about $3 billion because of the difficulty of finding the right deals. Investors like LaSalle Investment Management, which recently invested $20 million with a Mexican company to develop residential projects throughout the country, are searching for opportunities.

Mexico's housing market is particularly attractive to investors, according to Luis Sada, managing director of equity for GE Real Estate Mexico, which entered the housing market two years ago and has since partnered with Opus to develop residential product across Mexico. GE Real Estate Mexico has plans of investing as much as $250 million in equity in the sector.

"We've always seen residential as the real estate space with the most growth potential given the demographics of Mexico," Sada says.

Stable economy

With 107 million people, Mexico is the world's 11th largest country in terms of population. It has a young demographic profile - the average Mexican is 27 years old and more than one-third of the population is 15 years old or younger. This compares to the median age in the United States of 36 and 20.4 percent under 15.

Mexico's labor force is 34.5 million strong, and given the country's demographics, the labor force is young. The country, which is currently the world's 13th largest economy, is set to become the world's 5th largest economy by 2040.

Although Mexico has historically suffered from a volatile growth pattern - in the 1980s and early 1990s the country experienced an oil-related boom and bust and excessive external indebtedness - economic reforms have brought greater stability. For example, Mexico's central bank has maintained a free-floating Peso since 2001, increasing transparency and stabilizing the currency. Meanwhile, consumer price inflation has fallen from 35 percent in the mid-1990s to under 5 percent currently and interest rates have fallen from 19 percent in 1997 to 7.2 percent today. And, in July 2007, international credit rating agency Standard & Poor's raised the country's credit rating outlook from stable to positive.

"The most important thing is that Mexico is stable," says Peter Oxman, a partner in the real estate finance group at King & Spalding LLP's Houston office. Roughly 50 percent of his practice is tied to Latin America and Mexico, and he's doing work for a number of clients who are investing in Mexico including two California-based private equity funds and an industrial REIT also based in California. "General economic prosperity on a global basis, as well as more prudent financial management in Mexico, has stabilized the Mexican economy," he says.

In fact, the Mexican economy has transformed since the 1980s, primarily because of the North American Free-Trade Agreement (NAFTA). Foreign trade has doubled since the 1980s and is now almost 60 percent of gross domestic product. However, Mexico also is the world's 5th largest oil producer and a major source of commodities, and the country has benefited from record energy and commodity prices.

In 2006, for example, the Mexican government had been budgeting for an average oil price of $36.50 a barrel and exports of 1.6 million barrels per day (BPD). In fact, the average price for Mexican oil was around $53 a barrel and, for the first half of 2006, oil exports were up 46 percent or roughly $18.5 billion, according to LatinReport, a research firm that specializes in Latin American economies.

Mexico's GDP growth is forecast to fall to 3.3 percent in 2007, down from 4.8 percent in 2006. However, it's expected to rebound to 3.8 percent in 2008 and reach 4 percent by 2009. Unemployment is expected to stay below 3.5 percent.

Mexico boasts a GDP per capita of $8,442 per person - the highest in Latin America. The GDP per capita in Mexico City and prosperous northern cities is much higher. For example, in San Pedro Garza Garcia the GDP per capita is more than $25,000 per person - comparable with Spain's per capital GDP.

"More and more Mexican women are working outside the home, which means that household incomes have grown," Sada notes. "Additionally, salaries are increasing, creating greater disposable income for Mexican families."

Expanding mortgage market

With growing incomes, more Mexicans can afford to buy their own homes. But, expanding incomes are not the only reason why Mexico's residential sector is booming. Without question, Mexico has a chronic housing shortage due not only to the rapid rate of new household formation and population growth, but also because of a lack of residential construction over the past several years and limited mortgage financing availability.

During the mid-1990s when Mexico was going through a severe financial crisis, many global banks pulled out of the mortgage market, creating a huge void, says Pierre Arriz, general manager of Hines Mexico, a Houston-based developer with several luxury residential condo projects under development in Mexico. "The lack of financing was not properly addressed until about five years ago," he notes, adding that Mexicans were forced to pay cash for their homes or take on very expensive financing.

However, the regulatory environment for mortgage institutions became more favorable under Vicente Fox's administration (2000 to 2006) and new sources of funding emerged. The mortgage market is expected to a least triple in size over the next 15 years.

Today, Mexico's mortgage financing primarily comes from three entities: Fovisste, INFONAVIT (Instituto del Fondo Nacional de la Vivienda para los Trabajadores) and SHF. Funding for Fovisste, the public body that finances the construction of housing for public workers, has been increased, allowing it to provide 100,000 extra mortgages, while INFONAVIT, a public body that receives contributions for housing from all private-sector workers, has also increased its provision of mortgages. SHF was established in 2002 to perform a role similar to Fannie Mae in the U.S. - facilitating mortgage finance for low to moderate income buyers.

Additionally, residential mortgage backed securities (RMBS) are also growing in Mexico. The first Mexican RMBS issues were in 2003, bringing $53 million into the market. This year, RMBS issuance is expected to eclipse $1.7 billion with Su Casita, Mexico's largest mortgage financier, planning to securitize $1.2 billion in 2007, an increase of more than 100 percent over 2006.

Overall, the amount of mortgage financing issued in 2006 was up 167 percent over 2005. INFONAVIT alone issued $381 million in 2006 and plans to increase its annual issuance by at least $180 million over four years, reaching $1.3 billion by 2010. Potentially, this amount could go as high as $3.6 billion, according to experts.

Mexico's current president Felipe Calderon has proposed aggressive housing policy, targeting 6 million mortgages during his six-year tenure, 30 percent more than the number achieved under Fox.

Meanwhile, CONAFOVI, Mexico's housing development commission, says the country has a shortfall of 3 million homes; others estimate the shortfall to be as high as 7 million even though the construction sector is building 750,000 homes a year. At the current speed of construction, it is estimated that the deficit could be met somewhere between 2015 and 2020, but ongoing demographic trends indicate that another 800,000 homes per year are needed to satisfy new household formation.

While there are around 38 million people between 25 and 49 - the age that is typically associated with household formation - this number will grow by 21 percent to 46 million by 2030. Moreover, Mexicans are moving away from multi-generational living where two or three generations live under the same roof. In 1990, the national average was 5.2 people per household; today, the average is below 4 people per household. Over the next 15 years, as these occupancy rates drop further, Mexico is likely to need in the region of 20 million new houses.

Housing demand is particularly acute in Mexico City, Guadalajara, Monterrey and the border cities of Juarez and Tijuana. Both Opus and Hines are developing residential projects in Mexico City.

Opus' project, developed in partnership with GE, targets Mexico's growing middle class, according to Humberto Chavez, CEO of Opus Mexico. The project, Vista Coyoacan, offers 260 residential units in a 19-story building. Units are selling for $150,000 to $200,000. Across Mexico, Opus has a development pipeline worth $800 million, with most of the projects concentrated in Mexico City.

Similarly, Hines has about $700 million worth of residential projects either under construction or in its pipeline in Mexico City, Guadalajara, Monterrey and Queretaro. In Monterrey, for example, the company is developing Punto Central, a mixed-use project geared toward wealthy Mexicans. Of the 92 high-end condos, which range from $300,000 to $800,000, 90 units have already been sold, Arriz says.

"Mexico and its residents are in a much stronger financial position than they've ever been," Chavez says. "We expect Mexico to do very well over the next couple of years."

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