REVIEW

Space for More

As the real estate sector undergoes a steady revival, the government and private institutions are focusing on narrowing the housing gap and increasing residential and commercial space.

Over the past 20 years, real estate in Mexico has enjoyed rapid growth propelled by structural changes and a surge in government and private institutions designed to regulate, finance, and develop the sector. Triggered by a large housing deficit in the early 1990s, Mexico has seen an evolutionary trend beginning with an increase in the quantity of property available and shifting to high quality and sustainable offerings that meet national and international standards. Since then, the country’s most important achievement has been the large number of mortgage credits provided to the population.

With unemployment rates falling and housing demand increasing, opportunities for investment in residential spaces are widely available. Riding a wave of a 1.8% boost in consumer confidence recorded in late 2011, the number of mortgage loans granted increased by 8% in year-on-year terms, and the housing sector overall registered 10% growth.

As businesses expand their operations in the country and more and more enterprises choose Mexico as a regional hub, commercial space is also on the rise, with many projects in the pipeline in the medium term and steadily rising demand. By the end of 2012, analysts expect a surge of public investments in relation to this year’s elections, which is likely to kick-start a series of construction projects continuing into the following year.

RESIDENTIAL

For a decade leading to the global financial crisis in 2009, the residential housing sector in Mexico benefitted from an average of 17% growth annually. This rapid development, coupled with
better quality products and sustainable solutions, is what has led Mexico to its stable recovery in the aftermath of the economic downturn. In 2011, the housing sector rebounded by 10%, witnessing 1 million transactions, 250,000 of which were microloans for home improvements. House prices increased by 5.5% in 2011, compared to the previous year.

Currently, the average family home is approximately 40 sqm, built with quality materials. Many houses are constructed with cement, and are rented or purchased complete with electricity, drainage, and plumbing. The total cost of the average home was around $18,000 in 2011, and could be constructed in three months. Average rent prices in urban areas range from $300 for a 1-bedroom apartment to $1,200 for a 3-bedroom house.

With 29 million households serving a population of over 110 million, residential real estate has further developed its strengths and addressed many of the issues that have historically affected the industry. However, according to the National Population Council, a federal entity that analyzes demographics, the country will need 9 million new houses by 2020, or more than 1 million per year. To meet this demand, the government has drafted a series of plans that incentivize construction and target those left behind.

GOVERNMENT SUPPORT

Following an overhaul of the sector that took place from 2005 to 2006, the government has consolidated real estate institutions and encouraged collaboration under the current administration in order to better address the needs of the population.

After taking office five years ago, President Calderón’s administration has delivered 5.9 million credits for housing, 4.2 million loans, and 1.7 million grants, meeting 98% of its goal to finance the construction of 6 million homes as part of the National Housing Program 2007-2012. In line with the government’s target to support and promote environmentally friendly projects, 1 million homes under the program are designed to utilize green technology and be sustainable. “The government elevated the program to legal stature and developed a multi-pronged execution strategy targeting several issues, such as access to financing, options for low-income residents, and the availability of ‘green’ housing,” Ariel Cano Cuevas, Director of the National Housing Commission (CONAVI), told TBY.

Established shortly after a series of reforms in 2005, CONAVI aims to offer subsidies up-front that complement government-supported credits and loans. In collaboration with other entities in the government, CONAVI has issued approximately 900,000 subsidies through the National Housing Program, with financial support totaling $2 billion. CONAVI has also launched projects to expand financing coverage for low-income families and marginalized segments of the population, such as indigenous groups, single mothers, and senior citizens. One such project is Esta es tu Casa, or “This Is Your Home,” a program that provides subsidies of up to 25% of the acquisition cost of a family home, provided that the working members earn less than four times the minimum wage, which currently hovers around $6,000 annually. To accelerate the success of the initiative, the government grants contracts, credits, and favorable financing terms to private developers constructing green or low-income homes. However, with a potential political turnover in the wake of this year’s election, the director of the institution and its respective programs for low-income or sustainable housing projects may face challenges as a new government takes office.

In addition to CONAVI, government-led Infonavit as well as the Housing Fund of the State Social Security Institute for State Workers (FOVISSSTE) are two organizations dedicated to financing potential homeowners working for both private companies and state enterprises. Established in the 1970s, these entities have undergone thorough transformations that repositioned them as mortgage banks. Together, the two issue 60% of the annual mortgages granted to the population. “At present, we have 14 million affiliates and 5 million active credits; we approve 500,000 financed credits per year—approximately 10,000 credits per week—through a highly automated process. Today, 22% of Mexicans live in a dwelling financed by Infonavit,” Victor Manuel Borrás Setién, Director General of Infonavit, told TBY. The remainder of mortgages are issued by banks (20%), private entities (2.5%), and Sofoles (0.2%).

COMMERCIAL

Demand for space in Mexico City, Guadalajara, and Monterrey dominates the country’s commercial real estate sector, with large corporations, retailers, and manufacturers seeking to expand operations or purchase property in the country.

Currently, Mexico boasts 6 million sqm of Grade A office space, with more than 1 million sqm currently being built and another 1 million sqm projected to be available within three to five years. Office space tops the list in terms of demand, with companies both well established and new to the country seeking an average of 500,000 sqm per year. “What is on offer is state of the art and comparable to similar offerings in New York, London, or anywhere else in the world, at very competitive prices. Very high-quality buildings in excellent locations can be found for as little as $5,000 per square meter,” Luis Méndez Trillo, President of Coldwell Banker Commercial, told TBY.

In addition to office space, analysts and experts in the field of commercial real estate see an increased demand for sports complexes and corporate business centers. As Mexico enters the spotlight as an international player, the hosting of world-class organizations, conferences, and exhibitions is expected to fuel demand for commercial space.

Additionally, when sectors such as energy become private and open up to possibilities across the globe, Mexico can expect to receive many international businesses entering the country and the market for both property purchases and project investments.

FOREIGN INTEREST

Under the current system of fideicomiso (trust law), foreign investors may only indirectly own real estate by setting up bank trusts. Although a relatively safe system, the process rests on the credibility of Mexico’s banks and property registry administration, and has historically discouraged foreigners who are seeking to buy property in the country. This constitutional ban on the foreign ownership of land has been in place since the early 20th century.

For this reason, real estate companies find that the majority of their clients are Mexican consumers. However, the international market remains fairly strong as many international buyers who work in Mexico City spend their weekends at summer homes or in the Cuernavaca area. International demand is largely driven by US customers, but an increasing number of Canadian buyers have entered the market as a result of a steady economy in that country. More recently, French, Russian, and Italian homeowners have been flocking to Mexico as a retirement destination, and the number of buyers from Asia has also increased. As Mexico becomes more and more globalized and the domestic demand for residential and commercial space stabilizes, the future holds huge prospects for the development of more efficient buildings and the real estate sector in general.