Latin America’s largest economic powerhouses, Mexico and Brazil, are enjoying a real estate revival that neither country has seen in years. Big-picture economic fundamentals, politics and recent laws welcoming foreign investment are helping to trigger building sprees in residential and commercial properties, observers say. As Rogerio Basso, a Miami-based Latin America specialist for Ernst & Young’s hospitality and real estate advisory service, puts it: “There are good expectations for growth in both countries.”
The region’s boomlet follows lows of 2001, when regional real estate prices dropped 25%, with office space reporting the sharpest falls. Reasons for the slide varied. In Mexico, there was considerable fallout from the terrorist attacks in the U.S. In Brazil and Chile, markets suffered the effects of Argentina’s lingering recession.
My Casa, Your Casa
But markets and prices have since picked up, with Mexico being perhaps the region’s biggest winner. “Everybody’s focus is Mexico,” says Chuck Bedsole, a Latin America real estate specialist with PricewaterhouseCoopers. Given the fact that Mexico’s economy is so interwoven with the U.S.’s and that the country has investment grade status, “there’s a comfort level there.”
Mexico’s housing boom has mostly targeted the working and middle classes who are beneficiaries of President Vicente Fox’s push for affordable housing. Mexico’s lower interest rates – they are now around 13%, well below 1990s post-devaluation highs when they shot past 100% – have led to cheaper mortgage financing.
This means that while Mexico’s economy in general has puttered along, real estate, especially in the residential arena, may be among the nation’s hottest sectors. Indeed, amid a sluggish IPO market in Mexico, the last three Mexican firms to go public since 2002 have been homebuilders. Mexico homebuilder Desarrolladora Homex S.A., partly owned by Sam Zell’s Chicago-based Equity International Properties and Mexico investment fund ZN Mexico Funds, listed at the top of its proposed range of $15.80 per share on the New York Stock Exchange and in Mexico, raising $155 million. Homex plans to use IPO proceeds to pay off a $30 million bridge loan and to cover future construction.
Meanwhile, competing homebuilder Urbi Desarrollos Urbanos SA launched on Mexico’s bolsa in May. The company raised $182 million, according to New York-based consultancy Dealogic.
At 2.5%, Homex’s market share in Mexico’s splintered homebuilding market is slight. But given Fox’s push for affordable housing and the country’s increasingly liquid mortgage market due to mortgage-backed securities, “there’s room for everyone,” insists Carlos Moctezuma, Homex’s optimistic spokesman. Fox’s administration intends to build 750,000 new homes by 2006. Homes built by Homex and its competitors cost between $20,000 and $45,000, and Mexicans pay a down payment of about $400. Mortgages range between 10 and 20 years.
As a result, swathes of land from Tijuana to Mexico’s southern states of Oaxaca and Chiapas have been cleared to make way for new homes for the working poor. With a population of 100 million, nearly half of whom fall below the poverty line, homebuilding for this population “is an endless business,” says Wharton real estate professor Peter Linneman, who has consulted for Equity International Properties. “Homebuilding is largely manufacturing, not real estate, to the extent that you can churn out homes.”
But some observers fear a housing glut is on the way in this market – something which could have enormous consequences for players such as Homex. According to recent reports in Mexico’s daily newspaper Reforma, lots are undeveloped and homes are unoccupied in Mexico’s northern states, areas key to Homex.
“We’re all looking to see how Homex does,” says Ricardo Zuniga, Wharton alumnus and a principal of O’Connor Capital Partners, which holds a stake in mass homebuilder Demet, a Homex competitor, and other real estate interests. Others expect some consolidation in the medium-term in a sector whose health depends on government largesse.
Prosperous and tony neighborhoods across Mexico City are also seeing a building jag, with condos fetching two million and five million pesos ($175,000 to $430,000) for those located in gated communities. In addition, revival of Mexico City’s 500-year-old colonial-styled centro has come into fashion. Carlos Slim, Latin America’s wealthiest man and the region’s telecom titan, has made significant investments in rehabilitating commercial and residential buildings.
Along the Baja California peninsula and the so-called Maya Rivera, housing of opulent mansions for deep-pocketed non-Mexicans and Mexicans has shot off at a blistering pace, according to Basso.
South of the (U.S.) Border
After thousands of jobs began shifting to China from Mexico in 2000 and 2001, amid a tighter U.S. economy, the country’s maquiladora sector seemed likely to wither. (Maquiladoras are manufacturing factories located in free trade zones where parts are imported tax-free to be assembled under the understanding that, once assembled, these goods will be exported. They are a way of keeping exports competitive for manufacturers). But Linneman and others think Mexico’s maquiladora sector will revive and that major components of that assembly sector will remain in Mexico. “The manufacturing belt of the U.S. is now in Mexico,” Linneman says “As durable goods pick up and as the U.S. booms, the demand for durable goods in Mexico will pick up.” And that, presumably, means a pick-up in the building of maquiladoras.
Indeed, after several years of shrinking, maquiladora production is increasing once again. The sector saw a 6% productivity increase in June compared to the same period one year ago, says Basso, whose firm analyzes labor and logistics costs in Mexico and China. Mexico proved more cost-efficient than China in the manufacture of bulky items such as cars and household goods, he adds.
Although Argentina’s economy is still feeble from the 2002 peso devaluation, the country’s residential real estate market has seen a quick rebound. Home prices in gated communities built by developers such as U.S. based Pulte quickly returned to about 85% of pre-devaluation prices within 18 months after Argentina’s devaluation. Unlike Mexico and Brazil, where prices are usually based in the domestic currency, real estate in Argentina has historically been dollar-based. The country’s history of defaults and hyper-inflation – Argentina saw five-figure inflation in the 1970s and 1980s – probably shaped that, Linneman suggests.
Even after the devaluation, with the Argentine peso hitting lows of four to the dollar (it had traded one-to-one with the dollar for nearly 10 years), Argentines were scouting for deals on homes to park dollars, instead of putting them under mattresses or in safety boxes.
Argentina’s market is something of a reversal from the U.S. In Argentina, real estate is viewed as the safest asset, whereas in the U.S., U.S. government bonds have traditionally been viewed as prudent places to stash money, Linneman says. “In Argentina it’s historically safer to own real estate than government bonds. The flight to safety is a flight to real estate.” That helps cushion the residential real estate market even during economic troughs, although commercial real estate is still soft and well below pre-devaluation levels.
Brazil: Calmer Waters, Calmer Markets
Observers say three areas in Brazil’s real estate market – middle-income housing, tourism and “build-to-suit” industrial warehousing – are poised for impressive growth within a three to five-year horizon.
Although the ascent of President Luiz Inacio Lula da Silva, Brazil’s charismatic and center-left leader, initially scared off foreign investors and temporarily put a kibosh on projects there, macroeconomic fundamentals have since calmed down. The real, Brazil’s currency, has stabilized to around 3 reais to the dollar (it hit a low of 3.8 reais after the election) but more crucially, interest rates are now around 16% after hitting 25% in 2003. “We are seeing [the market] re-ignite now,” Bedsole says.
The sprawling state of Sao Paulo is experiencing an uptick in light industrial and warehouse offerings as it succeeds in luring companies from the U.S., Bedsole adds. And with Wal-Mart’s arrival in Brazil amid a rash of shopping center construction, Basso predicts a burst of build-to-suit properties in Brazil’s larger cities and along the southern agricultural belt where strong soybean prices have stimulated local investments. Custom-designed real estate could produce Wal-Mart-like distribution centers or grains-friendly storage centers.
The nation’s homebuilders are preparing for increases in home buyers as new laws give Brazilians greater access to cheaper financing. In addition, bankruptcy legislation offering developers greater foreclosure powers is expected to encourage more investment geared toward the working class sector, Basso notes.
Recent laws more welcoming to foreign investors have led to a boomlet of foreign-owned hotels in tourist-friendly zones. Laws, passed about five years ago, have brought in such investors as U.S.-owned chains Holiday Inn and Fairfield Inn, the French-owned Accor, Spain’s Iberostar and Portugal’s Pestana.
But in their zealousness for profits, certain projects have over-reached. Basso points to Costa do Sauipe in northeastern Brazil where some multinational hotels – betting that foreign tourists would want to stay in luxury facilities such as theirs – now face high vacancy rates. “They have lost money,” Basso says. Prudent investors, he suggests, should always pay close attention to local and international tastes.
