A Real Estate Boomlet in Latin America
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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.
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