The Right Hand of SME Real Estate DevelopersThu, 11/01/2018 - 11:38
Q: In which subsegments of the Mexican real estate industry is Banregio most actively participating?
A: Banregio focuses mainly on the midsized enterprise sector in Mexico and has always had a strong pull toward real estate. The founders of Banregio are strong players within the sector. Banregio provides financing for all aspects of real estate development in Mexico, from office spaces, shopping centers, mixed-use projects and industrial parks to housing developments. It also provides financing for the construction of additional infrastructure necessary for the development of a real estate project, especially for large housing developments.
Banregio provides financing for commercial real estate projects either for lease or for sale, which is the second-largest segment within our portfolio. When we provide financing for sale, the spaces are sold to independent investors and the financing gets repaid with the income from the sales. When projects are financed as a long-term asset, then the process involves long-term loans where our client preserves the commercial center as part of its estate and the repayments are made over the following years with the rental income.
The third-largest segment in our real estate portfolio is the financing of industrial park developments, where we participate in financing the infrastructure of the park itself or build-to-suit (BTS) plants and warehouses. As a bank, we are also becoming more involved in the tourism sector with a great appetite to expand our portfolio in the business hotel segment. Lastly, we offer loans for the purchase of land parcels for real estate development, with the understanding that later on we will provide the financing for the project itself.
Q: What have been the main challenges Banregio has encountered in financing the housing sector?
A: 2018 has been a peculiar year with exceptional events, such as the presidential election and the renegotiation of NAFTA. We knew that we had to be more cautious because the dynamics of the housing sector were bound to change. We forecasted that the economic housing segment was going to deaccelerate due to change in policies, a reduction in subsidies from CONAVI and an increase in interest rates. Banregio decided to reduce its position in this segment and focus more on the middle-upper housing segments in Mexico. Before the change in strategy, economic housing was the largest part of our portfolio, and in 2018 we were able to rearrange our portfolio, shifting the middle-upper housing segment to the most relevant position. This has helped us to maintain healthy growth in our housing portfolio.
Many foreign funds are entering the market and looking for guaranteed returns over 20 percent with a series of penalties that could even cause a project to fail. Most funds do not get involved with the projects themselves and base their decisions only on what will provide the best expected return for investors. Many of our clients have explored these types of instruments and end up returning to us due to the importance we place on the projects themselves.
Q: Why did Banregio decide to focus on the SME real estate development market?
A: The risk of working with an SME is that its resources are limited to only a few projects. A successful project could temporarily subsidize another project but SMEs tend to only have the resources to invest in one project at a time. Larger companies tend to have more projects in different geographical areas, which allows them to diversify their income and have a more constant flow. SMEs value that we are highly involved in the projects in comparison to other banks. SMEs and large companies pose the same amount of risk. The important factor is that the project is well-conceived and developed, and that the company has the expertise and ability to execute it. Instead of aiming to have a larger volume of transactions, we look at the quality of the deals and projects we take part in. That has allowed us to have the lowest past-due loan portfolio rates in the real estate market. When it comes to bridge loans for housing development, we have become the third largest bank at a national level.