Middle Segment of Houses a Market Opportunity

Q: How would you describe the landscape for the residential real estate sector?

A: The sector lost investment momentum about a year and a half before López Obrador came to power, mainly due to a rise in interest rates. Previously, the medium to high segment of houses – US$215,000 and above – was seen as an attractive refuge for investment but investors started to look elsewhere. Our activities in the residential sector have focused on this segment, so naturally it affected us.

When the current administration entered office in December 2018, many of new government's decisions generated further uncertainty. Currently, there is a massive availability of houses priced over US$215,000 but lackluster sales. We expect the situation to improve as interest rates go down. Banco de México could lower interest rates to between 6 and 6.5 percent in 2020. In other markets where we are present, a reduction in interest rates has generally pushed up demand.

It is possible that the uncertainty we see today may continue for another few years. However, sales will increase because those who are confident in their employment status will continue buying. Now, you can buy a residence at an interest rate of 8 to 8.5 percent. Before it was 12 percent.

Q: How are you adapting to the current market conditions?

A: We are looking at a lower residential segment, specifically between US$135,000 and US$155,000. In this segment there is very little investment. Investors do not know it very well. Many have doubts about the profile of the final user of these residences and whom they could contract to develop such products, in addition to other risks that have yet to be analyzed. In the last year, many people who bought houses in this segment have suffered uncertainty regarding their employment. However, since there was little prior investment, the segment has not seen losses as big as in the medium to upper segments.

Generally, demand in this segment is more stable and availability of houses is more limited. To present a strong product, however, you need to study the locations and look for attractive characteristics, such as access to public transport. Interestingly, in Mexico City, the eastern areas have the best public transport and availability of commercial areas. Our group has been studying zones with potential in this segment. We recently started a project in the Mexico City area of Gustavo A. Madero. Other interesting zones include Azcapotzalco, Iztacalco, areas of Benito Juarez, Coyoacan and certain areas of Iztapalapa. With the explosion of shopping malls across the city, the right conditions for good residential areas are not hard to find.

Q: What benefits can Grupo LAR get from accessing a lower housing segment?

A: We use only Grupo LAR’s resources; we have not raised additional funds in Mexico so far. With fewer high-end residences being sold, it might take longer to get a return on our investment. Stable demand, coupled with lower investment costs, could make the middle to lower segment more interesting. However, in terms of the conditions for buying the house, I think there are no significant restrictions. We are looking at young families, who have a total monthly income of between US$3,500 to US$4,000 and can pay a mortgage between US$1,000 and US$1,250. The apartments are around 65m2 and they can be financed through INFONAVIT, Fovissste and commercial banks. The latter are relatively open to providing mortgages to anyone with formal employment. It is in the area of funding development and construction where banks are slightly more restricting.

Q: What other regions are you analyzing for new developments?

A: We are certain that the most interesting market by far is Mexico City. It is complex and has more restrictions regarding its offer. It has large demand and limited space. Procedures for projects take longer, which makes this market a slow-walking giant. Because of all this, the existing competition is not as strong. We have worked in the past in Jalisco, Queretaro, Cancun and Monterrey. The Bajio, for example, may have considerable economic development and a lot of inward migration from other parts of the country. However, there is a great deal of product there and the competition is almost infinite. Guadalajara has a wealthy population with purchasing power, too, but the offer there is also without restrictions. Perhaps the biggest opportunity there lies in lower segment residences.

Q: What responsibility do the governing authorities of Mexico City have in creating suitable residential areas for the population?

A: I think the role of the municipal government should be to carry out solid urban planning, with reasonable designation of zones for residences, offices, factories, hospital, hotels, parks, schools and commercial developments. The authorities have failed miserably at doing this in the past. Instead, land owners have been able to sell property to the highest bidders, which was usually residential or offices developers. Now you have zones where you do not have hotels, schools or hospitals and there is a limited commercial offer. In addition, a lot of the money that has been paid by companies for licenses and procedures has not been reinvested by the local government into the areas where all these developments have been built. This stunted growth of public infrastructure, such as water and transport. Overall, this has limited the livability of many areas. Another problem is that the government does not solicit the opinion of inhabitants in the planning phase, but at the moment when licenses are being handed out. This creates uncertainty among investors who fear their project could be canceled or changed in its last stages.

Grupo LAR is a Spanish real-estate services company present in six countries. In Mexico, it has consolidated as a leading housing developer with activities in Quintana Roo, Nuevo Leon, Jalisco, State of Mexico, Puebla, Queretaro and Mexico City