Venturing into Lower Budget MarketsWed, 11/01/2017 - 12:25
Q: How does Mexico fit into Grupo Lar’s international strategy?
A: Grupo Lar is a Spanish multinational present in seven countries, and in Mexico since 2004. We are real estate developers and investors in different sectors and in Mexico we are focused on the niche of residential real estate with a maximum value of MX$4 million. The company also plans to venture into a lower price segment due to the high demand in the State of Mexico and Mexico City. Mexico City is our main niche at the moment. We are looking for well- connected areas in terms of public transport. For example, Azcapotzalco is a neighborhood that interests us and, despite complicated soil conditions that can compromise the integrity of buildings taller than four stories, we believe it meets all our criteria and demand is growing quickly in the area.
Q: What are the biggest challenges for real estate developments in Mexico?
A: Mexico is an atypical market compared to others we have worked in. For example, in Mexico City about 16,000 residential units priced above MX$1 million can be sold annually. Given the city’s population, this is very low in comparison to similar markets. It is also atypical because of those 16,000 units, 10,000 will cost over MX$4 million, which is unprecedentedly low in any capital city in Latin America. The supply of development units below MX$2 million in the city is lower than that for units above MX$4 million. I believe the main challenge for the Mexican market is to implement incentives that allow developers to supply housing under MX$4 million, which is a neglected segment in which there is huge demand. Also, the land available to develop projects in this price range is almost nonexistent, given the high price of real estate in the city.
Q: What strategies are you implementing to develop affordable social infrastructure in well-connected and centric urban areas?
A: The general belief is that there is a need for apartments under MX$2 million in downtown Mexico City. But in my opinion allocation of land for low-cost developments within the city would create an uneven development of the sector. Instead, the government should offer the possibility of living in the suburbs and being able to commute to the city in less than 30 minutes. Instead of pushing to find space in the city, public investment should be focused on improving transport infrastructure. Mexico lacks policies that foster a transport network that would allow families located outside the city to commute to work, schools and businesses efficiently.
I believe the issue is rooted in two main causes. First, there is a need to improve public transport infrastructure, which demands higher budget allocations. Second, the government should reinvest the income generated by real estate developers to improve infrastructure for the surrounding areas. As it stands, the government often redistributes resources to other areas that are unrelated to the project that was tax burdened.
Q: How do you collaborate with the public sector to guarantee investment in transport infrastructure when choosing where to develop a project?
A: We collaborate by meeting all our lawful obligations. For example, our last developments were projects of more than 2,000 residential units, which implies compliance with environmental and urban impact standards, among others. This demands a substantial tax payment. Also, investors must donate 10 percent of the land value to the government. These are the resources that I believe should be allocated to infrastructure improvement in the surrounding areas. The problem is not a lack of resources but their mismanagement, which often discourages investors.
Q: How do you manage your joint ventures and strategic alliances in Mexico?
A: Grupo Lar has a strong culture of forming alliances in all the countries in which we work. Most of our projects abroad have been developed with an industrial or financial partner, but in Mexico 100 percent of our current developments have been entirely independent. We are open to having partners, but we are working alone at the moment because we have not ventured into new markets in which we would require the expertise of an associate. Our focus remains the State of Mexico and Mexico City, where we have more than 14 years of experience.
We want to gradually venture into projects below our usual price of MX$4 million. If we eventually begin projects under MX$1.5 million, then we would not have the required expertise and would need to enter a strategic alliance with a partner that could help us understand that specific market. Mixed-use projects, if developed by our firm in the future, would also demand a partner, wherein we would use our expertise for the residential portion and our associates would be experts in other areas, like office spaces or shopping centers. We find that the current land opportunities favor these kinds of developments.
Q: What strategies does Grupo Lar use to finance its projects?
A: Grupo Lar Mexico works entirely with the resources generated by our projects, without requiring corporate or additional financial sources apart from project bank debt. We are aware that some companies raise capital through CKDs to expand their operations. We think that is a good idea, but it takes about a year to complete this process and with the coming change in administration, it could be even longer. For this reason, we are not looking at CKDs at the moment. We are considering other financial alternatives, like raising corporate debt, to accelerate our investment plans in the country for next year, given that our outlook for Mexico is strong.
Q: What is your most significant project in Mexico at the moment?
A: We have an available land portfolio that would allow us to build 6,500 residential units. Our most important investment at the moment is developing 2,800 units in Bosque Real, which is extremely interesting as we are convinced that the new tunnel connecting it with Interlomas will lead to a significant increase in demand. We believe Bosque Real is the city’s last oasis as there is no comparable area given its connectivity.
Our goal is to be a reference point when it comes to housing development by playing a meaningful role in the MX$4-8 million range. Also, in five years’ time we want to have gained expertise in the MX$2-4 million segment. The opportunities we want to take advantage of remain in the State of Mexico and Mexico City, as we have a deep knowledge of this market.