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Colombia 2015 | CONSTRUCTION & REAL ESTATE | REVIEW: REAL ESTATE

The Santos administration is continuing to stimulate the real estate market, especially for lower income participants.

Growth in Colombia's real estate market is continuing apace, shaking off the potential affects that lower commodity prices may be having on the broader economy. With the IMF expecting real GDP growth to slow to 3.4% over 2015, down from the 4.6% recorded in 2014, the government is using the construction of mass social housing schemes to help the local economy overcome some of the negative aspects of sharply lower oil revenues. Outside of the residential segment, consistent growth is being recorded in more commercial purpose properties, with Roberto Cáceres, General Manager of Colliers International in Colombia, seeing a 2007 law allowing pension funds to invest in real estate projects as being a major driver, “The subsequent entry of such investment funds has changed this business completely." In terms of the office market, an ongoing pipeline of work in Colombia's main economic centers will see a significant rise in gross leasable area (GLA) and may see a temporary cooling of rent prices. While the retail sector is slowly heating up, hotel development may see a slight dropping off as a tax concession for the industry ending in 2017 begins to recalibrate the investment pipeline.

RESIDENTIAL

The residential segment continues to rule the roost in Colombia's real estate industry, with estimates pointing to COP26 trillion ($10.91 billion) in residential sales over 2014. According to figures released by BBVA and La Galería Inmobiliaria, residential sales grew some 4.5% in Colombian peso terms over 2014, with Bogota and its surrounding areas representing some 33.85% of the national market. Overall, the residential sector is divided into three broad categories: Priority Interest Housing (VIP), Social Interest Housing (VIS), and non-VIS, representing the free market for housing in the country devoid of open state support or subsidy. With the Colombian constitution guaranteeing housing for its population, the government has in recent years sought to tackle to ongoing housing deficit in the country, caused in part by the rapid urbanization of the population as well as displacement due to internal conflict. The VIP program, which was launched in 2012, has sought to provide some 100,000 new housing units for free to those displaced by conflict or on marginal incomes.
The social housing segment is continuing its rise, especially under the Santos administration's vivienda de interés prioritario para ahorradores (VIPA) program, which encourages voluntary saving by those on lower incomes looking to enter the housing market; when excluding this segment, a fall of 9.2% in sales for unsupported housing was recorded. The VIPA program has allowed many of middle and lower income earners to gain access to house financing by setting some relatively soft conditions for those looking to own their first home. With a minimum down payment of 5% for a property and one or two sufficient wage earners, or one who is signed up in the formal sector to the Family Compensation Fund, new homeowners can get access to financing for social housing projects. This program provided a much needed boost to the local construction industry, which recorded growth of 11.4% in 2013, and some 7.8% annualized at end-3Q2014, according to BBVA estimates. Attempts to address the housing shortage in the country, whether measured quantitatively or qualitatively, was estimated at 1.6 million units, or some 27% of households, demonstrating the need by the Santos administration to continue its commitment to social housing spending.

The government has now sought to extend the support it gave to middle income earners to those with lower incomes, and less formal employment patterns. Through the Mi Casa Ya (My House Now) program announced in 2014, the government has committed itself to raise spending on public housing initiatives worth some COP8 trillion ($3.36 billion) over the 2015-18 period, although with the national currency falling by more than 30% in YoY terms versus the US dollar this figure is likely to be revised upwards. The policy aims to see the construction of some 100,000 new homes annually for those in the low to middle income bracket, and alleviate some of the housing stress seen in Colombia's intermediate-sized urban areas. The COP2.4 trillion in initial funding allocated is hoped to generate some COP9 trillion ($3.78 billion) in private sector activity over the period, helping to boost construction in the formal sector. Over the course of the Mi Casa Ya initiative, another 400,000 homes are expected to be built with government assistance. Essentially, the program is targeting families who have not previously benefitted from government housing initiatives who have global earnings of between two and four times the national minimum wage to enter the housing market. The maximum value of the home is some COP86 million (roughly $36,000), and the government can offer up to a 14% subsidy for the down payment, as well as take on up to four percentage points of the cost of financing. While the scheme is hardly likely to make a major dent in the more expensive major urban centers, it may go a long way to boosting housing demand, and thus construction, in intermediate cities and lower income areas.

House prices are also beginning to cool off, with BBVA estimating real price growth to be a more limited 6.2% in YoY terms when measured at end-3Q2015, down from the 8.5% recorded over 2013 as a whole. At the end of 2013, some 43% of households owned their own home, with 34.8% participating in the rental market. In addition, some 4.1% were paying off loans for a residence, while 16.3% of households lived in a housing unit with the permission of an owner, though not in a rental state. The structure of the housing market is also beginning to slowly shift toward apartments from single homes. In 2011 some 64.4% of households lived in an individual housing unit, though this had fallen to 57.2% by 2013, according to BBVA. Those living in apartments saw a 7.8 percentage point rise to 38.4% over the same period, demonstrating not only the success of the government's plans to improve housing for lower income earners, but also more intensive land use in urban areas. While the construction of some 230,000 housing units a year is keeping the residential real estate industry firmly in the Santos administration's sights, the success of the Mi Casa Ya program and the improved access of middle income earners to the mortgage market may help in further bolstering the construction market, especially if the government is looking to boost the local economy in a time of falling oil rents. Mortgage lending rose from 5.9% of GDP at end-2013 to 6.3% by end-2014, a notable rise and an effective demonstration of the VIPA program running at the time. While the intent of Colombia's housing initiatives may be welcome by many in the market, the still yawning gap that the country needs to bridge in both qualitative and quantitative metrics should see real estate remain the focus of government spending efforts for some time to come.

OFFICE

Across Colombia's main commerce centers, a wave of new office supply is set to arrive on the market, likely cooling off rents and seeing a potential drop off in new supply activity until a sufficient level of absorption is achieved. In the main market of Bogota, by 2017 its 1.8 million sqm of office space in the Grade A and AB markets is set to grow by a further 780,000 sqm, or some 43%, according to JLL. Rents are beginning to cool, much a reflection of the rising USD, to more the $25-$40/sqm per month region for Grade A listings, depending on location, demonstrating 6.1% YoY growth

In the second largest market, a similar picture is emerging in Medellin, with the end-2014 total of 570,000sqm of Grade A and AB space set to be joined by another 205,000 sqm by 2017, showing growth of some 36%. Rental prices in this large market remain in the $15-25 per sqm per month zone for Grade A listings, though with higher demand and still limited supply these price levels may see significant upward pressure, according to JLL forward estimates.

Cali is the third largest market by office stock, with some 175,000sqm of Grade A and AB space as of end-2014. Supply going forward to 2017 was estimated by JLL at some 50,000sqm in the premium categories, showing growth of a more modest 29%. With increasing trade flows emanating from the Pacific coast provinces, the demand for better office space may see the $16-19/sqm per month currently seen in the Cali Grade A market put under significant pressure, and may create the potential for further construction opportunities.
The Caribbean market, encompassing the cities of Baranquilla, Santa Marta, and Cartagena, is set to undergo a significant amount of supply growth, though whether the demand will be out there is a big question mark. JLL calculated that the triple cities had a joint Grade A and AB office reserve of 136,000sqm at end-2014, with another 130,000sqm set to be constructed over the time period till 2017, nearly doubling the present office market. Rents have seen limited growth, with JLL seeing 4% growth in recent years, and they remain in the $19-25/sqm per month zone for Grade A properties.

RETAIL

With just 183 main shopping centers as of end-2014, Colombia is in third place for the Latin and South American region, with only Mexico (630 centers) and Brazil (429 centers) leaving it well behind. Retail market development in the mall category is beginning to pick up the pace, with 54 of the new centers coming onto the market over 2014 alone. The Colombian Association of Shopping Centers (ACECOLOMBIA) estimated in May 2015 that a further 30 new centers would be completed by the end of the year in 18 cities across the country. Of the projects, the largest will be the Costanera in the city of Chia, north of the capital Bogota. At 350,000 sqm and 200 shops, it will far outsize other new malls including the 133,000sqm Viva Envigado, as well as the 132,000sqm Marcas Mall in Cali. However, Chia remains a popular place for retail development, with the 132,000sqm Fontana Mall set for completion over 2014, in direct competition with the Costanera.