ADDRESSING THE NATION

Mexico 2016 | CONSTRUCTION & REAL ESTATE | REVIEW: REAL ESTATE

Despite global turbulence, Mexico's real estate market is feeding off a rising middle class, demanding a wider retail offering, as well as more available mortgages.

Real estate is an excellent barometer of social dynamics, fiscal policy, and the broader economy. Mexico's construction sector in 2015 indicated, as in the year before, a continued rise in activity, the share of which in GDP rose 2.5% YoY. Moreover, a Elias Steiner, a Director at Grupo Frondoso, told TBY, “Another great thing about Mexico currently is that you can plan for the long term. In the past, for example the 1980s or the 1990s, long term meant anywhere from two to three years, depending on the project, but now you can plan for five to 10 years, [which] gives confidence to investors as well." Today, in fact, over 60% of the construction sector's stake in GDP derives from buildings. Meanwhile, PwC anticipates Mexico City becoming the world's seventh-richest city by 2025 on a GDP of $745 billion behind Tokyo, New York, Los Angeles, London, Chicago, and São Paulo, a valuable catalyst for the property market,

Victor M. Lachica, President and CEO of Cushman & Wakefield México and Central América, identified the real estate market's ability to tap the liquidity of global capital markets, in itself confirmation of Mexico's internationalization, and not least since the NAFTA accord of 1994. As he explained in conversation with TBY, while “the cost of land and construction is not significantly cheaper than the US... manual labor is," enabling the nation to be “competitive in terms of total cost, even in comparison to China and other countries in Western Europe."

RESIDENTIAL

By 2010 roughly 78% of the population was urbanized, demanding affordable accommodation. In partial response, the government introduced a $1.2 billion program to add bedrooms to half a million homes to alleviate overcrowding. Indeed, today around 80% of Mexico's housing market in geared toward subsidized social housing. And tellingly, enhanced economic activity in certain regions of the country has galvanized worker mobility such that housing is no longer demanded in those regions of greatest population concentration. This said, certain regions of the country need more balanced integration for long-term sustainability. Examples are Oaxaca and Chiapas, which remain clustered with the lowest price levels in Mexico. Additionally, the government is concerned that key tourist regions feature a more comprehensive housing policy that looks beyond the holiday home market to generate long-term employment and retain residents.

CREDIT WHERE DUE

The volume of home loans in 2015 had risen to 599,000 from 545,000 YoY, of which the respective figures for the state affordable housing scheme of National Fund for Worker's Housing Institute (Infonavit) were at 387,000 and 393,000. Their total value in 2015 was MXN303 billion, up from 293 billion YoY, of which the Infonavit stake was 122 billion, up moderately YoY from MXN119 billion, by 2014 exchange rates. While in 2010 the average value of affordable housing was around MXN335,000, by 2015, the average value was at MXN363,000. A government drive to boost the registered housing and employment economy, too, has reflected in mortgage and other credit uptake since 2014. In 2015, the average amount per mortgage at commercial banks had risen 4.9% YoY in real terms. According to the Federal Mortgage Society (FMS) index of housing prices, in the 2Q2012 to 3Q2015 period, prices rose by 18% in 16 out of Mexico's 32 states. At YE2015 the mortgage portfolio exceeded MXN1.8 billion in real terms, where the Infonavit credit market (of smaller credits) was at just over MXN1 billion. As of YE2015 a 120sqm apartment in upscale Mexico City set the homebuyer back around $3,000/sqm, or $350,000, while the monthly rent for the same was $1,588, according to global property guide.

WATER COOLER GOSSIP

According to Colliers International research, in 4Q2015 Mexico City's office availability rate rose with the arrival of 30 new properties, predominantly in Class A+, although the general availability rate was 11.1%. For the year, 866,000 sqm of sale and rent transactions occurred spanning property categories in the city's 10 key corridors, marking a 4% YoY rise. The monthly rental prices per square meter range, on average, between $18 and $27 for Classes A+, A, and B within the 10 main corridors. The greatest availability rate was in Class A+, followed by Class B, and finally by Class A, where the North and Polanco corridors of the city boasted the largest available surface.

INDUSTRIAL

With 80% of its exports flowing to the US, Mexico offers a sophisticated industrial property sector with state-of-the art offering, and is home to US and multinational manufacturers and distributors. This sector has experienced major growth and development over the past decade, driven by FDI and a recovering US economy. The vacancy rate for modern industrial space in the country is in the mid-single digits. This surge of trade and investment is benefiting Mexico City, and in turn supporting the real estate market. Mexico City, with a population of more than 20 million inhabitants in its metropolitan area, is the country's main economic engine, generating more than half of its industrial output. And being the local home to leading multinational producers and distributors, the city is a dynamo for the local industrial property sector. Sustained foreign investment has meant that today the vacancy rate for prime industrial space does not exceed the mid-single digits.
Despite modest 2015 GDP growth of 2.5%, direct foreign investment and new jobs in economic zones beyond the capital have supported the property market. Mexico City's inventory as of 4Q2015 according to Colliers International was at 22.2 million sqm across nine industrial corridors and exceeding 1,900 industrial properties greater than 2,000sqm in area. These were broken down into 9 million sqm Class A and 13 million sqm of Class B. 4Q2015 saw an availability rate of 3.1% in the aforementioned nine main corridors comprising Mexico City's industrial market. In terms of demand, in 2015, over 1 million sqm worth of sale and rent transactions for properties exceeding 2,000sqm in area were registered. Meanwhile, monthly listed rental prices at YE2015 varied between $2 and $8.5/sqm for Class A and Class B properties, respectively.

RETAIL

Demographics make for a highly diversified spectrum of Mexican consumers. Frank Knight estimates put the investment flow into Mexico's retail property sector in excess of $3.5 billion by 2017, where 100 new shopping centers boasting 36 million sqft of space will materialize, again predominantly in Mexico City.
The retail property sector expects investment inflows to exceed $3.5 billion by 2017, featuring 100 new shopping centers with an additional 36 million sqft of space. About half of this development will occur in Mexico City and its environs. During 2015, the 866,000 sqm of sale and rent transactions spanning all property types of the 10 key corridors of Mexico City was 4% up on the 811,000 sqm of 2014.

Mexico still has over 2.3 million “mom and pop" stores, cheek by jowl with premium retail outlets and international brands. Close to 50% of existing retail stock takes the community center format, normally anchored to a supermarket and a cinema complex. Recently, Wal-Mart Stores Inc.'s Mexican division chose to sell its Suburbia clothing chain of 119 stores to Mexico's prime department store chain operator, El Puerto de Liverpool SAB, in a deal worth $1.03 billion.

Regional economic activity continues to promote the decentralization of Mexico's real estate market away from Mexico City and other major conurbations. A more formalized economy has fostered the growth of mortgage uptake, while the state lends a hand to the lower end of the residential market. Meanwhile, retail and industrial property continues to feed off a diversifying economy that attracts foreign investment and tenants.