For several months, Mexico has been enjoying a real estate boom. The resurgence of mortgage banking, along with the battle between traditional financial institutions and the new ‘sofoles’ (niche mortgage lenders), is driving the sector. The profitability of the real estate market — which takes in more than $16 billion each year and employs almost four million Mexicans — has compelled some real estate developers to align themselves with the ‘sofoles’ and even with manufacturers of household appliances.


Although the government of Vicente Fox inherited its overall economic policy and stability from the administration of Ernesto Zedillo, Fox has introduced one fundamental change — a new way to look at real estate. Real estate is no longer viewed as a social asset; it has become a source of economic wealth. This change has led to changes in public housing policy, and it has helped to modernize such public-sector institutions as the National Fund for Workers’ Housing (INFONAVIT), the Housing Fund for Public Sector Workers (FOVISSSTE) and the Federal Mortgage Society (SHF).


Ibraham Villaseñor, researcher and dean of the economics department at the Michoacan University of San Nicolas and Hidalgo (UMSNH) in the city of Morelia, attributes the Mexican real estate boom to three factors. “The first factor is the country’s macroeconomic stability. The second is the existence of a stronger governmental policy regarding real estate. Finally, there is the impact of the North American Free Trade Agreement (NAFTA), and the economic deregulation that it brings.”


Villaseñor says that the real estate sector has grown because multinational corporations in Mexico demand office complexes that look like office skyscrapers in the United States. Mexico is now the third most important market in Latin America for developing ‘AAA’ buildings and offices. “The country’s stability enables it to have more security about how high interest rates are going to rise, and what the medium- and long-term returns on [real estate] investments will be.”


Salvador Peniche, a researcher at the University of Guadalajara’s center for business management (CUCEA), says that “although these governmental measures could translate into an initiative to privatize public services, I trust in the maturity of investors and in the healthy economic environment for developing new business opportunities. These privatization moves on the part of the government do not relate to any new conditions but are part of the trend to open up markets that began during the 1980s and has continued since then.”


According to Villaseñor, “There used to be a lot of rigidity and corruption in the institutions and procedures in the real estate sector. In the case of FOVISSSTE, labor unions used the loans as part of their system of political patronage. Today, there are important changes, ranging from the online [electronic] channels to the fact that there are fewer requirements [for getting a mortgage]. You also have to add the positive relationships that have been established [between by the public sector] with financial intermediaries. I do not think this means a privatization, but they have opened the door for everyone to access these public sector credits.”


Traditional Banks vs. the ‘Sofoles’


In 1995, Mexico’s economic recession sparked a deep economic crisis. The result was the contraction of bank loans that lasted more than seven years, and a decline in the real estate market that lasted almost a decade.


During the crisis, banks withdrew from the mortgage market, leaving it in the hands of some very young financial institutions — the so-called ‘sofoles,’ or ‘niche mortgage lenders.’ These institutions, established in December 1993, are different from banks   because they can acquire assets through deposits. In addition, ‘sofoles’ can only grant loans for a specific activity, and only to one sector.


“The ‘sofoles’ were born quite innocently but their importance in the market grew after the crisis of 1995, when the banks withdrew from the [real estate] sector,” notes Livier Rodríguez Nava, manager of Metro Financiera, a ‘sofol.’ “A large number of ‘sofoles’ became specialized in the residential housing sector, to the point where they became financial intermediaries capable of controlling the market.” In 2004, the banks finally returned to the market, offering loans at lower and lower interest rates. Banks were prepared to win back their market, but the ‘sofoles’ had already jumped into the lead by then.


“When the banks returned to the market, it sparked an interest rate battle that the banks have apparently won,” says Rodríguez Nava. “In some cases, they offer [mortgage] rates that are below 10%, although the product continues to be rigid in comparison with what the ‘sofoles’ are offering. The minimum amounts [required for] applying for a bank mortgage are at least more than double what a ‘sofol‘ charges. In addition, banks cannot deal with funds that come in from the informal economy, including money from itinerant workers, taxi drivers, waiters and others. Another important point is that the ‘sofoles’ offer products in Bank of Mexico ‘udis,’ or investment units. Sofoles even provide loans in dollars, while banks only offer them in pesos. The period for repaying loans also varies from five years to 25 years, whereas banks offer a maximum of [only] 20 years,” he says.


Rodríguez Nava believes that the ‘sofoles’ are in the process of repositioning themselves in the market, and mergers and acquisitions are an indicator that the system has matured. His ‘sofol,’ Metro Financiera, now derives less than 20% of its total funding from the SHF, which is the largest overall source of financing for ‘sofoles.’ Metro Financiera already uses the banking sector’s mechanisms for financing. Metro Financiera is listed on the Mexican stock exchange, as are such other sofoles and Hipotecaria Crédito y Casa and Hipotecaria Su Casita. These institutions are pursuing strategies for obtaining funds because the SHF will no longer be able to provide them with funds as of 2009, when it will act only as a guarantor of operations.


For the moment, Metro Financiera, which has rejected a takeover offer by Britain’s HSBC, is thinking about purchasing another ‘sofol.’ “Given the fierce competition in the sector, innovation is something everyone wants,” notes Rodríguez Nava. For its part, Su Casita, another ‘sofol,’ has decided to join forces with Mabe, Mexico’s leading appliance manufacturer; they offer a package of value-added housing services. Su Casita provides the actual mortgages, while Mabe supplies its line of “white goods” — including refrigerators, stoves and washing machines – at rates that are 25% below the market price. For Mabe, this alliance will bring a 4% increase in its sales. For Su Casita, the partnership will lead to a 15% increase in its loan portfolio.


Will ‘Sofoles’ Eventually Disappear?


In 2006, there will be mergers, acquisitions and alliances between banks and ‘sofoles.’ These deals will determine which institutions survive and which will not. There have already been some important moves of that sort. For example, Spain’s BBVA Bancomer acquired Hipocetaria Nacional, the country’s largest ‘sofol’ in 2004. The deal enabled BBVA Bancomer to penetrate a market where it previously had no access. For its part, Spain’s Caja Madrid has established a partnership with Su Casita, another ‘sofol.’ In addition, Mexican banks such as the Financiero IXE group and Banco del Bajío, have been acquiring sofoles of their own. Currently, more than 15 ‘sofoles’ are in the process of ‘slimming down’ as a result of competition from banks, and the limitations on funding sources starting in 2009.


According to Peniche, “The challenge for the banks will be to reach low-income segments of the population where they had no access. The ‘sofoles’ must be able to improve their capitalization and their access to sources of financing. Strategies in the sector are oriented toward low- and medium-income segments of the population. For a long time, this market was ignored but it is now a niche that is being exploited. Money is money, no matter where it comes from.”


One advantage for the ‘sofoles is that they can grant credits to Mexican emigrants [to foreign countries] through a program financed by the SHF. Mexicans who live in foreign countries can purchase new or old housing on credit, using remittances as a source of payment. It des not matter where they live, or whether they have emigrated from Mexico. This program is backed by the federal government. The grants come through private-sector intermediaries, including the ‘sofoles.’ The emigrant does not even have to live in the house. However, at least one family member who lives in Mexico, preferably a spouse, must become a co-borrower with the emigrant. Some ‘sofoles’ that participate in this initiative include Hipotecaria Su Casita, Crédito Inmobiliario, Hipotecaria Nacional (which belongs to BBVA), and Hipotecaria Crédito y Casa. Branch offices of these institutions have been set up in such U.S. cities as Dallas, Denver, San Diego and New York.


Is Mexico an Attractive Real Estate Market?


Mexico has only recently become an attractive market, thanks to its public-sector programs. In 2005, the real estate market began to rebound, and it enjoyed its strongest surge forward. Interest rates dropped to historically low levels, and the initial payment required for buying a home is now only 10% of the total cost.


Housing construction has also rebounded. At the end of the third quarter of 2005, the number of workers employed in the construction sector reached 8% of the total population, according to Inegi, the national institute of statistics about geography and information technology. At the end of 2005, housing construction exceeded 460,000 units, according to Softec, a consulting firm. Meanwhile, real estate sales jumped above the $16 billion mark. For Mexico, housing construction represents 2.8% of the GDP. That’s about the same total as the entire auto industry, which is one of the country’s most important manufacturing sectors. Some 2,200 companies are involved in the real estate business, according to the research division of BBVA Bancomer.


For Urbi, a construction firm that has more than 25 years of market experience, the real estate market has significant growth potential over the next 20 years. Key reasons include the current shortage of housing and the country’s population pyramid. It seems likely that housing construction will exceed 1.5 million units each year in both the short and medium term, according to the research department of BBVA Bancomer. In addition, in coming years bank credits are expected to grow at a rate of 1.5 to 2 times the country’s GDP growth rate, BBVA says. The construction sector was the country’s most profitable sector in 2005. On the Mexican stock exchange, companies in that sector registered an annual return of more than 44% last year, propelling the overall market to register its historic highs.


Bernardo Jaén Jiménez, an economist and member of the National System of Researchers, says that there is some risk, but the Mexican market is very attractive because of the differential in rates. “The housing boom has several causes. Most outstanding among these is the stability in prices and interest rates, although inflation remains in a range of between 9% and 12% a year, which is high compared with other countries. However this fact is in itself an important factor in attracting investors eager to make high rates of return,” he notes.


According to Jaén Jiménez, who is also dean at the University of Guadalajara, “Although financial costs are becoming cheaper because interest rates are dropping, things have to be managed intelligently in order to avoid a financial crisis. The authorities are protected by the healthy macroeconomic situation but people have the impression that the risks are not being evaluated seriously.”


To avoid those risks, the government last year reformed its Securities Law, and created a securities market for mortgage credits, the first in the country’s history. The new market will improve confidence in the mortgage market, and provide new technologies for measuring credit risks. The SHF recently signed up two major insurance companies from the U.S. In 2006, both Genworth Financial and AIG United Guaranty will begin operating in Mexico.


INFONAVIT: 750,000 credits in 2006


According to Rodríguez Nava, the structure of the real estate sector is being modernized. “Housing is no longer a burden for the government; it is even planning to eliminate subsidies for housing loans in order to convert this into a profitable business.”


INFONAVIT, the institution that provides 70% of mortgage loans in Mexico, has established new programs that broaden its base. It has done so with the assistance of both the ‘sofoles’ and the country’s traditional banks. Last year, INFONAVIT agreed to authorize and jointly finance loans to workers who have outside income, either as a result of tips or because their spouse is working. INFONAVIT’s goal is to grant 750,000 loans in 2006, up from the 500,000 loans it granted last year. Since President Fox took office, INFONAVIT has granted more than two million loans that directly benefit more than six million Mexicans, say official sources. Nevertheless, “The housing shortage in Mexico continues to be enormous,” states Peniche. “The country needs between 4 million and 7 million more housing units. The total stock of houses today is 25.5 million, but Mexico has 106 million people.”


For his part, Jaén Jimenez says that “the boom has a benefit for society. In 2005, I finally bought my own home, and a professor friend of mine also bought his. I got help from Bancomer, and he got help from a ‘sofol.’ Clearly, the expansion in loans is helping to increase overall demand for housing. However, we also need to confront the social phenomena of young people who live alone as well as new families and people who are divorced. They also need new housing to begin a new life.”  In that regard, Villaseñor notes, “The slowdown in the real estate sector has finally come to an end in the medium term, [as long as] there is not another financial crisis like there was a decade ago.”

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