Andreu Cors
Director General of Gava Capital

Diversification for a Shifting Housing Cycle

Thu, 11/01/2018 - 10:48

Mexico’s housing sector is seeing a shift in demand as young people often cannot afford to buy property, despite a rising middle class. “We are seeing a shift in the market dynamics,” says Andreu Cors, Director General of Gava Capital. “There has been a steady increase in housing prices that is completely unsustainable and people cannot afford to buy. The rise in construction prices and interest rates have impacted the sector greatly.”
Cors adds that, although there is much optimism and investment, there are some red flags that may indicate a new real estate cycle. “There have been many good years with high prices and with a market eager to buy,” he says. But he warns that the emerging cycle will create limitations in purchasing power for the middle class. “Developers must be more prudent when entering this new cycle and should not base their future decisions on how they made past decisions.” He highlights the relatively low penetration of mortgage loans among the middle classes in Mexico in comparison to other countries as a signal that this demographic is suffering a constraint in disposable income.
Gava Capital entered the Mexican housing market at the end of the 2008 housing crisis that struck the US. Previously, Sofomes would help finance projects but after the market grew more complicated and Sofomes became reluctant to invest, Gava Capital saw a window of opportunity. “The market was there and we just needed to offer a different value proposition,” says Cors. He explains that there were already various funds that were focused on financing profitable projects so Gava Capital decided to differentiate itself from other funds by focusing on a specific niche: the middle class.
Gava Capital’s focus is on developing developers that will in return create valuable investments. “Of course, it is important to invest in profitable projects but our real vision is to create long-term relationships with developers and foster the growth of Mexican talent,” he says. The company looks for developers with strong portfolios but it also looks for companies whose values are aligned with its own. Developers are co-investors along with Gava Capital in the projects and then distribute a percentage of the profits back to the fund.
With more than 36 projects in 15 different cities, the diversification of Gava Capital’s portfolio has been an asset to the company, especially when looking to the BMV for funds. Gava Capital issued its first CKD, GAVACK, in 2017 with a cap of MX$2.5 billion to fund housing and industrial projects. “Mexico has very few pension funds and of those, only three are four are actively investing in structured instruments,” Cors says. “One must create traction with Afores to invest in real estate instruments. Gava Capital was able to issue this CKD because it aligned its interest with that of the Afores and co-invested 16 percent into the CKD.”
He says Afores look for companies that have good track records, a diversified portfolio and experienced teams to invest in CKDs. Gava Capital had invested MX$3 billion before it issued its first CKD, which generated trust among the Afores. That money was invested in over 25 projects, providing the company a solid track record.
Half of Gava Capital’s portfolio investment is allocated to projects in Mexico City and the State of Mexico, with an average price tag of MX$850,000–MX$5 million. At the moment, only 20 percent of the CKD has been allocated and the fund plans to invest MX$500 million in the next two years in various housing and mixed-use projects. Cors is optimistic but cautious. “The market looks hopeful but we must definitely watch interest rates,” he warns. “Hikes have been impacting the sector greatly and could stop development, heavily impacting profit margins and the purchasing power of clients.”