RISING HIGH

Mexico 2014 | REAL ESTATE & CONSTRUCTION | REVIEW: CONSTRUCTION

With hundreds of billions of dollars committed to infrastructure spending, the government is spreading the largesse around to revive the sector.

Mexico's construction industry resumed growth in mid-2014 and is set to expand strongly on a surge in government infrastructure spending and a pick-up in the residential housing market. According to the National Institute for Statistics and Figures (INEGI), the construction sector posted growth in June for the first time in 19 consecutive months, increasing 2.2% from the previous year.

The sector contracted in 2013 by 1.8% to an estimated total value of $86 billion, or 7.35% of total GDP, as the new government of President Peña Nieto focused on opening up the energy sector and reforming education—and also because his change of national housing policy to favor construction closer to city centers led to a 17% drop in residential construction and the debt default of the country's three largest homebuilders: Desarrolladora Homex, Urbi Desarrollos Urbanos, and Corp. Geo SAB.

GOVERNMENT SPENDING KEY

Now, President Peña Nieto is making up for lost time. In the summer of 2014, the government announced or awarded three large infrastructure projects in quick succession, all part of the $315 billion National Infrastructure Plan for 2014 to 2018. In June, the Secretariat of Communications and Transportation awarded a Mexican consortium the Ps10.15 billion ($775 million) contract to build a 35-kilometer section of the Toluca railway, including a costly tunnel.

In July, the government announced an estimated $3.5 billion tender to build a 210-kilometer high-speed rail line, Latin America's first, between the capital and Queretaro, capital of the Bajio region in central Mexico. The government expects the railway to begin operating by the end of 2017 and to create 20,000 direct jobs—Mexico has 52 million people in the workforce as of 2Q2014, according to INEGI.

One of Peña Nieto's main promises as a presidential candidate in 2012 was to revive Mexico's dormant passenger rail system. Canada's Bombardier, the world's largest manufacturer of trains, and Siemens Mexico have both expressed interest in the Queretaro project.

And in September, President Peña Nieto announced in his state of the nation address a $9.2 billion project to build a new airport for Mexico City, expected to be the largest such project in his term, which ends in 2018. The new airport and its six runways would have capacity to handle 120 million passengers a year, clearly needed as the existing Benito Juárez Airport is operating at near full capacity handling 31 million passengers a year. Bloomberg reported that a Mexican consortium of nine companies, including Empresas ICA and Grupo Carso, the latter controlled by billionaire Carlos Slim, would bid on the tender to build the terminal, possibly bidding against international firms drawn to such a megaproject.

PRIVATE EQUITY & ENTERPRISE

With hundreds of billions of dollars committed to infrastructure spending, the government is spreading the largess around, including such places as Veracruz, the country's main port on the Gulf side. Consorcio Constructor E Inmobiliario Pegaso S.A de C.V. (CCIPSA), established in 2006 and employing 1,500 people, is a private company based in Veracruz dedicated to general civil engineering and construction projects.

Mexico's largest investment bank, GBM, in 2012 launched GBM Infraestructura, a $400 million infrastructure fund listed on the Mexican Stock Exchange. The management chose to list as a private equity fund because Mexico has defined contribution pension funds, Administradores de Fondos para el Retiro (AFOREs), which can only invest in publicly traded securities.

Manuel Rodríguez, Managing Director of, GBM Infraestructura, told TBY that, “The fund is for infrastructure and energy, including highways, airports, ports, trains, water systems, electricity and midstream and upstream oil & gas... As an example, we won the bidding process for the first toll road project of this administration. At the same time, we invested in the water system of Cancun, which has been operated by the private sector for more than 20 years, and it's a mature brownfield project."

RESIDENTIAL CONSTRUCTION

The administration of President Peña Nieto has promised increased transparency and efficiency in government operations, and success can be seen in the Registro Único de Vivienda (RUV, or Single Housing Register), which has begun compiling real-time statistics on the number of homes being built around the country, the stages of construction, and sale status.

According to a 2014 real estate research report by Bancomer, BBVA, the number of new homes available declined by over 55% between 2012 and 2013, the same seven states still account for more than half of all supply. The report said homebuyers were buying up excessive supply, but that imbalances persisted in Jalisco and Nuevo León, which still had the highest amount of new homes on the market even after the market correction. Bloomberg in August reported CEMEX SAB, the largest cement maker in the Americas, projecting growth in Mexico's residential real estate market would likely speed up in the second half.

According to the latest statistics from INEGI, 13.7% of houses in Mexico are built of mud brick and 6.2% have dirt floors. Whether an adobe house qualifies as substandard is open to debate, but floors of soil are clearly so. The government this year increased housing subsidies by 50%, especially for low-income homebuyers.

The National Workers' Housing Fund Institute, Infonavit, a government-backed entity that originates 70% of home loans in Mexico, forecasts demand for its mortgage financing will result in a near doubling of issuances in the next few years, from 200,000 in 2013 to an estimated 390,000 in 2018. Infonavit is also working with the country's first real-estate investment trust, REIT, dealing in residential mortgages, Concentradora Hipotecaria SAPI, or FHipo. Bloomberg reported in August 2014 that the company's planned IPO represented a signal for a rally in Mexico's housing market.

INDUSTRY BAROMETER

As infrastructure spending gives a boost to many other industries, so the construction sector as a whole relies heavily on two inputs, cement and steel. Antonio Taracena Sosa, CEO of Cementos Fortaleza, which with a million tons of installed capacity holds a 4%-5% share of the 36-million-ton Mexican cement market, told TBY that, “An important measure of the potential of Mexico's cement market is the per-capita consumption figure, which in 2013 was 300 kilograms. In Spain it was 1,100 kilograms… Dubai posted a staggering 8,000 kilograms per capita. Consumption per capita in Mexico is therefore very low. We have 118 million habitants, so the potential is huge."

In its 2Q2014 financial statement, CEMEX reported sales down 4% in Mexico and Latin America, but up 10% in the US and up 5% in Europe. Sales in Asia were down 2% from the previous year but the company's overall sales for the quarter stood at $4.2 billion, up 4% from 2012. Mexico is a net exporter of cement, but not in steel.

While every Latin American and Caribbean country has a deficit in finished steel trade, Mexico posted the greatest imbalance with a decline of 2.3 million tons, according to the Latin American Steel Association, Alacero.

Steel Times International reported in September 2014 that Mexico was among only three countries in Latin America showing growth in finished steel production, up 11% year-on-year, the others being Ecuador and Colombia, posting 1% and 15% growth, respectively, in the first half of the year. Mexico's 8.5 million tons ranked it second in regional production behind Brazil, with 31% of total output, up 9% YoY.

Mexico also was among the regional countries recording the highest growth in crude steel production, 6% YoY. These figures seem set to rise as the construction industry rebounds from its slump, but the sector's growth faces other challenges. Prices for rebar may decline over 2014, following the imposition of a US ban on Mexican exports. In 2013, Mexico exported some 300,000 tons of rebar to the US market valued at $182 million. Along with Turkey, Mexican rebar producers were accused by US steelmakers of dumping activities, and this eventually won support on Capitol Hill.