BREAKING GROUND

Mexico 2018 | CONSTRUCTION & REAL ESTATE | REVIEW

The construction and real estate sectors have seen stagnated growth in recent years, but new government initiatives are starting to accelerate growth, and fast.

While Mexico was forced to change its focus and spending in recent years due to relatively sluggish GDP growth, the market for real estate and construction has not suffered, and the sector as a whole is on track for strong long-term growth. Austerity measures are likely to create a few short-term roadblocks, and in some cases the value of certain construction and real estate projects has fallen, but both the government and private sector are preparing for a sector that will one day see the majority of its funding coming from private players.

Nearly all forecasts for the construction sector are positive. From 2013 to 2017, the residential construction industry saw a compound annual growth rate of approximately 3.3%, while the commercial building sector saw its compound annual growth rate at 2% for the same period. Infrastructure construction for 2017 was forecasted to exceed USD45.5 billion in value, with an annual growth rate at 2.4%. Overall, the construction sector is forecasted to rise to a value of just under USD190 billion by 2022, following a compound annual growth rate of 2.1%.

At the core of many recent projects in the country has been the National Infrastructure Program (NIP). The government plan envisaged nearly 750 projects throughout the country, primarily focused on energy, water, urban development and housing, communications and transport, health, and tourism. According to a report by PricewaterhouseCoopers, NIP was projected to cost a total of just under USD600 billion, with total investments amounting to 8.3% of GDP. Energy, urban housing and development, and communications and transport together made up over 90% of total funding, with just over 50% of spending allocated to the energy sector, 24% for urban development and housing, and communications taking up 17%. The energy sector alone accounted for 262 of the 743 projects.

Aside from NIP, overall public-sector financing of infrastructure projects has reduced as a result of declining oil revenues and the resulting austerity measures the country needs. The measures can easily be seen in the 2017 infrastructure budget; the government projected to spend some USD32.5 billion in 2017, a decline of more than 27% from the previous year. The shortcoming on the side of the government for infrastructure projects has created an environment conductive to public-private partnerships. Though they allow for a wider financing base and more security on both sides, they have been relatively slow to catch on.

In 2012, the government enacted new legislation regarding PPPs, but two years later there was just one PPP project operational, a hospital in the capital. Though momentum was slow in the beginning, the model is now starting to take off, with more than 15 PPPs planned for 2017, an increase from two in 2015 and 10 in 2016.

TBY met with Nicolás Madrigal, the CEO of Marhnos, a Mexico-based general contractor, to get a better understanding of the private sector's outlook on PPPs in the country. “A PPP office was partly started with the Ministry of Finance in 2017," Madrigal said. “That office needs to start centralizing some of the norms and identifying the main features and characteristics of PPPs. This would generate some focus and allow priorities to be set in terms of what infrastructure the country needs at a strategic level, for example, in communications, infrastructure, and connectivity in ports and airports. In terms of enforcement, we have sufficient regulations and are where we should be. It is not an issue about the regulatory environment, but about defining projects and setting priorities."

The largest infrastructure project in Mexico in more than a century, and one of the largest throughout all of Latin America, is Mexico City's new international airport. The project was announced by President Enrique Peña Nieto in September 2014, and is scheduled to open in October 2020, easing pressure on Mexico City's current airport, which is the busiest in Latin America. The new project carries with it an estimated price tag of USD13.3 billion, 60% of which will be financed by the government through public finds, and the remaining 40% of which will be funded through bank loans and debt securities.

The government has been working toward the project since the 2000-2006 administration of President Vicente Fox, slowly and incrementally purchasing land that will now constitute the airport. For several years, intense protest from farmers and locals at the site had delayed and even canceled plans at times. With the promise of jobs and the development that will come with the airport, much of the opposition has reduced. Some issues still remain for the project, however; the fact that much of the city is built on a lakebed and some of the land of the airport is on a former landfill mean engineers will have a particularly difficult time combating subsidence and ensuring the runways remain level.

When the first phase comes online, expected on October 20, 2020, the airport will contain three runways and a capacity of 68 million passengers annually. When the final phase is complete, estimated to be in 2065, the airport will have six runways, two main terminals and two satellite terminals, and have an annual capacity of 125 million passengers, making it one of the largest in the world by 2018 standards.

The government has made a concerted effort to revive the country's real estate market since the housing crisis in 2013, and thus far, there have been several signs of improvement. The Urban Development and Housing Policy that followed the crisis sought to give all Mexicans dignified and affordable housing. The plan created a national registry of land reserves, which the government hoped would offer higher degrees of certainty for land developers, and also created a more open dialog between the government and industry to create the ideal products and to ensure guidelines are followed.

With the demand for mixed-use developments rapidly growing, TBY sat down with Vicente Naves Ramos, the CEO of real estate company Grupo Frel, to gain insights into the reason for their popularity as well as what the company is up to. “Mixed-use projects, especially in urban areas, are appealing for people because it is convenient to have different offerings close to their homes," Ramos said. “In dense cities, such as Mexico City, it is convenient for people to be able to walk to obtain the goods and services they need on a daily basis. Grupo Frel has three projects in the area known as Uptown Polanco, a nice district already being developed with residential apartments, offices, shopping malls, restaurants, theaters, and many cultural things to see and do."

The country's housing crisis was stemmed not exactly by a shortage of homes, but rather by a shortage of rooms. Cultural customs of the country are increasingly favoring intergenerational cohabitation. Developers have began to catch on, and increasingly, homes are being built with more rooms to accommodate households of increasing size. Part of the government strategy includes mixed-use facilities with a special emphasis on vertical construction.

There is some speculation that housing prices are set to rise, as not only are the prices of gas and electricity predicted to rise, building materials are rising in cost as well. Some estimates suggest within the short term, construction costs could increase by 30% or more.