Year in reviewThu, 01/11/2018 - 10:13
Uncertainty hovered over the Mexican economy in the latter half of 2017 and through the first half of 2018, mainly due to the renegotiation of NAFTA, trade-related actions from north of the border and the Mexican presidential elections in July that swept a populist into office. Despite the disconcerting conditions, the infrastructure industry continued to attract private investment although the country still faces an infrastructure spending gap estimated at US$544 billion. With budget austerity tying the government’s hands, it started exploring further options for PPPs, which could prove pivotal as President-elect Andrés Manuel López Obrador takes office at the end of 2018. AMLO, as the new president is known, has already stated his desire to work closely with the private sector to see through his ambitious development plans, all of which bodes well for the sector.
At the city development level, a key word for the industry throughout the past year was verticalization, a trend that became entrenched as the favored building option for cities, with new skyscrapers transforming skylines in major metropolises and secondary cities taking their cue from their bigger counterparts. Transparency was also a buzzword, especially in the wake of the Sept. 19, 2017 earthquake that shook the capital, Puebla and Morelos states, leaving a devastating trail of fallen buildings that resulted in 370 deaths.
Mexico’s cities are understanding that planning is key to regenerating areas that have been allowed to grow haphazardly, such as Mexico City. Rather than look to the outskirts – a past mistake that continues to haunt some of the country’s biggest metropolises – city governments and developers are embracing a more modern urban planning that emphasizes height and density. Gabriel Ballesteros, Partner at Ballesteros y Mureddu, says a strong urban development plan is the first step in reinvigorating cities while also helping authorities keep abreast of changes and predict new needs. “Urban development plans should estimate how many hectares cities need to regenerate, fill in and expand to better define the incentives and maintain balance. The outcome is a living, compact and working city.” Ballesteros gives two examples of cities achieving this balance, Mexico City being the best. “Mexico City, with all its problems, has done a great job in rescuing, regenerating and reconnecting public spaces,” he says. “It has created the right amount of verticalization.” Another city working for connectivity and re-planning is Aguascalientes. Other cities Ballesteros highlights include Guadalajara, which he says has focused on rehabilitating and regenerating urban spaces. On the other hand, Queretaro is an example of what not to do, as Ballesteros argues that it has grown with no planning. Mexico City, for all its recent advances, still requires the development of more urban infrastructure with a growing demand for water and waste infrastructure and mobility options. Guadalajara, Jalisco, is also thriving with growing industrial and agroindustry development and a flourishing real-estate sector leaning toward residential housing. The municipality in the Guadalajara metropolitan area with the most investment is Zapopan, concentrating the commercial and corporate real estate of the state’s growing “Mexican Silicon Valley.” Monterrey, the Sultan of the North, continues to attract industrial development on its peripheries and is developing symptoms similar to Mexico City when it comes to traffic congestion and basic services. The city is expanding beyond its most developed and prosperous region, San Pedro Garza Garcia, to the downtown area in search of better mobility solutions for commuters. It is pushing for higher densification, with a current population of approximate 4.7 million and a density of 108.3 hab/ha.
The country’s emerging urban areas with the highest growth rates between 2010-2015 are the Queretaro Metropolitan Area (2.8 percent), Puebla Metropolitan Area (1.6 percent) and Tijuana Metropolitan Area (1.1 percent). These cities are booming due to automotive and manufacturing industrial development but share the same challenge related to urban density. Each has a density between 77 and 96 hab/ha, and populations about to hit 2 million people. These cities are looking to increase their infrastructure development to meet the demands of its citizens and not fall into the same mistakes as their megacity counterparts.
According to INEGI, activity of the construction sector from January to August 2018 rose 1.9 percent in comparison to the same period in 2017. This growth was fostered by strong dynamics within the specialized works subsector (7.7 percent growth), which included reconstruction efforts after the September earthquakes. The private sector construction subsector registered accumulated growth of 2.9 percent through the construction of commercial and industrial real estate. The civil works subsector dropped 6.3 percent during this period due to a slowdown in transport and water infrastructure projects.
Overall, the 2018 forecast for construction GDP was for 1-2 percent growth, according to CMIC. The sector’s activity in 2018 slowed, however, due to the election and resulting change in government administration, project delays and inflationary pressures on construction materials. “At the end of 2017, we expected the construction industry to remain steady, neither decrease nor increase. Nevertheless, the sector experienced a 1.1 percent decrease in comparison to 2016. If the projects that are scheduled for this year are completed as planned, such as the Mexico-Toluca Interurban Train or Mexico City New Airport (NAIM) and housing subsidies continue, the sector could grow 1-3 percent in 2018. If this does not happen, we could see negative numbers once again,” says Alejandro Ruíz, Head of Construction at KPMG in Mexico. PPPs continue to play an increasing role, particularly in real estate with the arrival of new domestic and international entities. In CIMIC’s 2018 Top 20 Construction Companies Ranking, Spanish companies OHL Mexico and Grupo ACS took the first two spots, followed by CICSA, IDEAL and Fibra Uno. In 2012, Mexico’s Top 20 construction companies included three international firms: Grupo ACS, Grupo Aldesa and OHL Mexico, while 2017 featured these, as well as Mota-Engil Mexico and Techint Ingenieria y Construccion.
REAL ESTATE STAYS ACTIVE
Since 2016, the real-estate sector has kept the construction industry busy as private sector investment in the commercial, residential and corporate segments boomed throughout Mexico’s developing cities. 2018 was a good year for housing in the country as local governments embraced the 2014 National Housing Plan. Real estate was the industry’s most active segment with a focus mostly on urban areas. The National Housing Plan stipulates the construction of vertical and more compact cities. With the 2016 amendment to the Human Settlements Law, public entities received the basic norms and management tools to organize the development of their territories and human settlements. The results of these policy changes were felt in full in 2017 as local governments adopted these changes in policies and began modifying zoning permits to design more livable cities and bring people back into the city centers. The main trend observed, particularly in urban areas, was the development of multifamily rental housing. “There is a requirement for 40-60 percent more houses because people are living alone or with roommates,” says Eduardo Orozco, former Country Manager of Greystar. Although housing development increased, most of the homes being constructed are within the middle-residential plus sectors, when the main housing deficit exists in the lower income segments. The highest demand in 2017 was in the State of Mexico, Jalisco, Nuevo Leon and Mexico City. “CONAVI is also striving to promote social housing verticalization though subsidies for over 8,000 families that will buy apartments in city centers,” says Jorge Wolpert, Director General of CONAVI.
After housing, commercial real estate received the most investment in 2018, especially in relation to mixed-use developments. Given land scarcity and changing consumer trends, real-estate players are looking at these projects to increase their returns and create a bigger impact on their surroundings. Overall, 857,360 m2 were added to the national inventory in 2017, mainly in the ZMVM, Bajio and northern regions. The 2018 inventory is expected to reach 1.8 million m2, 300,000m2 of which will be developed throughout 2018, according to ADI, through projects such as Mitikah, Parque las Antenas, La Isla Merida, The Harbor Merida and Explanada Puebla.
The industrial sector, meanwhile, faced uncertainty as NAFTA was renegotiated although the USMCA deal that replaces the previous FTA has somewhat settled the air. Although the new deal must still be ratified by all three countries, industrial entities are turning their attention to logistics and warehouse development for e-commerce players. “There was a great deal of uncertainty related to NAFTA and the 2018 presidential elections and nobody knew how the real-estate market would perform. While uncertainty can lead investors to postpone decisions, markets have behaved more or less the same as in 2017. Growth in consumer sales has decreased slightly but demand for distribution centers is still highly dynamic,” says Luis Gutiérrez, President Latin America of Prologis.
PRIVATE SECTOR BRIDGES BUDGET GAP
Both public infrastructure investment and the number of public works projects declined throughout 2018, as the outgoing government concentrated on placing all efforts on its foremost priorities. Enter the private sector, which helped cover the declining budget as the government pushed for the development of more PPP projects. Peña Nieto’s administration embraced PPPs to bridge its financial gaps and began exploring applications in different subsectors. During 2018, SCT, along with BANOBRAS, tendered maintenance, operation and rehabilitation (MROs) projects for various roads throughout the country to ensure the quality and safety of the network. PPPs were also used to develop new ISSSTE and IMSS hospitals and to address issues in the water and waste sector. According to the World Bank, in 2017, Mexico attracted its highest level of private investment in infrastructure in the last 25 years with US$8.6 billion and was one of the Top Five infrastructure investment destinations in Latin America. “Years ago, approximately 5 percent of the GDP was destined to infrastructure development. Right now, the government is only investing 2.8 percent of GDP, which totals MX$625 billion for the construction of public infrastructure. Private works have increased in the last few years and it is predicted that MX$2 billion will be invested by the end of 2018,” says Eduardo Ramírez, National President of the Mexican Chamber of the Construction Industry (CMIC).
In terms of investment destinations, the infrastructure and real-estate segments have grown more attractive to international and national investors, especially through the BMV and investment coming in from Afores, according to Gutiérrez. “New financial products such as CKDs, Fibras and CerPIs are channeling Mexican savings to the construction sector and this will continue,” he says. As of October 2018, there were 11 Fibras, two CerPIs, three Fibra E’s and 73 CKDs in the BMV. Mexico also welcomed its second stock market in 3Q17, the Bolsa Institucional de Valores (BIVA) to provide SMEs with more access to the market and for Fibras to continue growing their portofolios.
KEY INFRASTRUCTURE PROJECTS
Among the most representative of Peña Nieto’s projects, the two emblematic developments that will be inherited to the incoming administration are the Mexico-Toluca Interurban Train and NAIM, both still under construction. The Mexico-Toluca Interurban Train has been delayed due to constant battles for rights of way in the La Marquesa-Observatorio segment, not only setting back deadlines but also increasing construction costs. Work at NAIM is advancing. The foundation for the terminal building is 65 percent complete while airstrips 2 and 3 are 69 and 52 percent finished, respectively. According to Mexico Evalúa, both these projects have suffered time delays and cost overruns due to a need for more structured planning and a requirement for longer tender assignation periods. As these projects go beyond the sexennial presidential term, AMLO’s administration will receive them with an expected completion date for the Mexico-Toluca Interurban Train in 2019 and a 2021 first-phase completion of NAIM, provided the projects keep their original timelines.
After the 2017 incident related to the Cuernavaca Paso Expressway, when a large sinkhole opened shortly after the official opening, and the September earthquake disaster, both public and private industry players have an increased interest in transparency in infrastructure and real estate development. During 2018, stricter construction regulations and standards were enforced and developers found themselves in the spotlight to ensure the development of safe and resilient buildings and structures in Mexico. According to a consensus among Mexico Infrastructure & Sustainability Review interviewees, the country’s Achilles’ heel for infrastructure development continues to be long-term planning and transparency. “The country desperately needs a long-term planning strategy. Government priorities mean an administration generally creates projects for its own political term only, leaving the country with unfinished projects. Infrastructure gives a country credibility in terms of productivity and competitiveness,” says CMIC’s Ramírez. He adds that the sector must work with public entities to create a long-term infrastructure plan that not only incorporates the country’s needs but that interconnects with the needs and duties of state and local governments. This would in return ensure project continuity, financing and quality of projects developed.