SAVE | EMAIL | PRINT | MOST POPULAR | 
RSS | REPRINTS
Web Exclusive Feature: Analysis: Latin American Housing Opportunities on the Rise
Published: September 17, 2007
By Angela M. Burriesci, Moody’s Investors Service
The residential construction markets in both Mexico and Brazil are in phases of steady growth, with good prospects. Mexico’s housing sector benefits from a large housing-needs deficit, estimated at approximately five million units. This situation has prompted the Mexican government to create programs that support the housing sector. Strong housing demand and governmental support have helped improve the availability of long-term mortgages, which are often difficult to get in developing economies, especially for low-income borrowers. Government initiatives have also helped create more participants in the mortgage-origination market.
Brazil’s housing deficit is larger, approximately seven million units. In Brazil, recent economic stability, including lower unemployment, reduced inflation, and a decline in interest rates have led many real estate developers to tap the capital markets via IPOs. This situation, in turn, has contributed to a boom in construction and mortgage lending, especially in the more densely populated cities of São Paulo and Rio de Janeiro.
Mexico
Government entities such as Sociedad Hipotecaria Federal, INFONAVIT, and FOVISSSTE are among the key players in helping provide mortgages for Mexican consumers, especially in the lower income sector. Over 700,000 mortgages were granted by various mortgage-lending participants in 2006, and President Felipe Calderón has made it a goal to grant one million mortgages in every year of his six-year term.
The housing deficit, combined with a population that is largely under the age of 35 and growing at an average annual rate of 1.3%, indicates that demand for housing should continue to be strong. The housing deficit is largely concentrated in the low-income sector, and the majority of homes built are single-family, one- or two-story structures.
However, there are also some developers that construct apartment buildings and mid-rise, for-sale product. These buildings are located mainly in large metropolitan cities, such as Mexico City, which represents roughly 20% of the nation’s housing stock, and the apartments are also built to address the need for low-income housing. In Mexico, multi-housing for low-income buyers often consists of a simply constructed, five-story walk-up; a building with more floors requires an elevator. Because a unit in such a building cannot be sold until the entire structure is complete, and because of the more complex nature of this type of construction, the production cycle is longer, and inventory turnover is slower.
Consequently, the completion of a low-income, mid-rise building can take nine to twelve weeks, whereas single-family homes at grade are usually built in four to six weeks; moreover, they can be sold as completed, and they are built in phases.
For these reasons, sales volumes and profit margins are often slightly lower for multi-housing developers than their single-family peers, and in low-income housing the name of the game is volume. With respect to middle- and high-income housing, a building can take 18 to 24 months to complete, depending on the number of floors.
Moody’s rates some of the largest homebuilders in Mexico, such as Sare Holding and Desarolladora Metropolitana, which focus on the affordable segment. As the Mexican housing sector has grown, some home developers have expanded geographically into more urban, densely populated areas. Certain firms that have traditionally constructed grade-level single-family communities are now beginning to construct mid-rise multi-unit housing. Urbi Desarrollos Urbanos and Consorcio Ara (both rated) have acquired land in major metropolitan areas and moved into this type of construction.
Future Trends in Mexican Multi-housing
Home construction should stay strong during the medium term because of population demographics, government support, and the housing deficit, especially in the low-income sector. As people move to metropolitan areas for employment, there will be more mid- and high-rise construction for all income classes. The affordability of Mexican real estate in resort towns has also attracted both wealthier locals and foreigners looking for retirement or vacation homes, a trend that is also likely to continue.
Brazil
Brazil’s housing deficit is largely concentrated in the lower-middle income segment. Demand, and likewise multi-housing construction, is concentrated in the mega-cities of São Paulo and Rio de Janeiro, where approximately 10 percent of the Brazilian population resides. These cities also have comparatively higher purchasing power and are experiencing economic and population growth.
Like Mexico, Brazil’s population is young: more than half the population is under 35. In addition, inflation, interest rates, and unemployment have been declining, and minimum wages have risen. All these factors boost consumers’ disposable income.
Moreover, recent changes to Brazilian lending and tax laws have provided broader protection to borrowers and lenders, which has in turn improved consumer confidence and helped people with low purchasing power more easily obtain mortgages. The combination of these positives has led to a boom in the home construction and mortgage businesses as numerous real estate developers came to the capital markets in recent quarters via IPOs to fuel their capacity to pursue these opportunities. Many of them have a multi-housing component.
Multi-housing in Brazil consists of high-rise buildings that take, on average, 24 months to complete. Some of the major real estate developers in São Paulo and Rio de Janeiro include Rossi Residencial, Cyrela Brazil Realty, and Gafisa. Their residential construction focuses on middle-income, multi-unit apartment/condo-style buildings.
Future Trends in Brazilian Multi-housing
The Brazilian residential housing market should continue to grow as population demographics, a housing deficit, and improving economic conditions support the expansion of housing. Although most publicly traded residential developers now focus on the middle-income segment, they may expand into lower-income construction because this part of the population needs housing too, and access to credit is becoming more widely available for such consumers. As the industry grows, homebuilders will likely become more efficient as construction techniques become standardized and access to public capital becomes better. Public bonds are likely next.
Angela M. Burriesci is an associate analyst in real estate finance at Moody’s Investors Service.
