Construction Slump To Drag On Into 2013
BMI View: We expect Mexico's residential and non-residential construction sector to show signs of a nascent recovery in 2013, with real growth of 2 .9% forecast for the year. Upside risks to our forecast will kick in following the swearing in of Enrique Peña Nieto in December 2012, and we expect that an increase in private sector involvement and an invigorated National Infrastructure Plan (NIP) will bolster activity. In addition, we expect commercial banks to begin to make inroads into the underdeveloped mortgage lending sector as the spending power of consumers rises in line with broader macro trends . With these drivers in mind, we currently posit per annum real growth of 3.1% for the duration of our five-year forecast between 2013 and 2017. Saying this, s tructural inefficiencies - especially those evident in the residential housing market - will persist to curtail growth in the sector over the medium term.
In terms of fundamentals, Mexico's residential and non-residential construction sector contains a huge degree of potential. According to World Bank figures, of a population of over 120mn, 30% are between the ages of 0 and 14 years. This, combined with a long period of chronic underinvestment, suggest that the coming years will see a significant uptick in social infrastructure spending. Furthermore, according to the CEO of leading homebuilder Urbi Desarrollos, Cuauhtémoc Pérez Román, to overcome a chronic housing deficit 20 to 25mn new homes will need to be constructed over the next two decades, with the lower-income strata of the market representing the bulk of this demand.
|Moderate Growth Trajectory|
|Mexico - BMI's Residential And Non-Residential Construction Industry Forecast|
Despite the positive fundamentals, homebuilders have suffered hugely from the mismatch between demand and the provision of housing finance. Market leading homebuilders Urbi and Desarrolladora Homex both witnessed larger y-o-y falls in housing units sold in 2011, with demand for AEL housing dropping by 11.2% and 12.4% respectively. Furthermore, demand for medium-to-high end housing - which was relatively buoyant over Q112 - showing renewed weakness over Q212. Both stocks have declined precipitously throughout 2012, with Urbi taking a significant hit after concerns over the firm's debt lead it to be downgraded by ratings agency Fitch. However, from both a technical and fundamental perspective we believe that they bottomed in early September and will now experience a short-term bounce.
The situation suggests that bottlenecks persist within the market, with credit to workers not affiliated to state backed lenders INFONAVIT and FOVISSSTE remaining tight. According to Sociedad Hipotecaria Federal (SHF), this demographic makes up nearly 80% of the entire housing deficit - a lack of loans is therefore stymieing a significant amount of growth potential in the sector.
Furthermore, an over-optimistic assessment of the impact of government subsidies via the 'Esta es tu casa' scheme accounted for annual shortfalls in expectations for homebuilders in 2011, and, with regards to the above, it appears that the housing market continues to be over-exposed to the risk of state entities failing to provide. With the fiscal position of the Mexican government remaining weak in the medium term, we see this as a structural inefficiency in the market. Saying this, we remain confident that the government will continue to commit to support for affordable housing schemes, and that lenders have the capacity to support a significant degree of long-run growth in the market.
|Time To Restock|
|Urbi Desarrollos Urbanos and Desarrollodora Homex - Share Price Performance - 5yr (LHS) / Year-To-Date (RHS)|
Mexico's private mortgage sector remains relatively underdeveloped, with subsidised lending by the large state-backed lenders providing a significant barrier to growth. Compounding the issues is that fact that entities within the sector, such as Sofoles (a non-bank specialising in housing finance), is still recovering from the 2008 downturn that put large constraints on liquidity. Consequentially, finance is becoming increasingly harder to access for the informally employed. Policy efforts by, amongst others, INFONAVIT, Conavi and SHF, are focusing on closing the financing gap with measures that aim to increase the amount of private funds available to lenders. However, we highlight that the market will remain cautious as long as the risk of defaults remains high.
Despite a dip in residential construction activity, government-backed penitentiary construction will continue to provide some respite for the sector, with low-risk investment opportunities for firms continuing in H212. Under the provisos of the NIP, the government will carry-on with plans to construct 12 penitentiaries, extend the penitentiary in Nayarit, and open a penitentiary in Papantla at a cost of US$242. The builds will continue to be offered as long-term service contracts (LPS) under the public-private partnership (PPP) model.
|Increasing Reliance On State-Backed Lending|
|Desarrolladora Homex, Sources Of Mortgage Financing, Q312|
Courting The Private Sector
We highlight that changes in Mexico's banking sector could bolster investor confidence in the raft of projects we are expecting from the new NIP by offering new debt market options for project financing. We expect the private pension market, the Administradoras de Fondos Para el Retiro (AFORES), to play an increasingly larger role as an institutional investor following a raft of regulatory changes implemented by the Calderon government.
A revision in the laws governing public-private association, and, in AFORES', investment in equity will encourage the type of long-term investment necessary for infrastructure projects. Also suggesting a move in this direction is the fact that, in November 2010, incumbent President Peña Nieto oversaw the country's first example of a pension fund, investing in a greenfield PPP project - the USD60m Tlalnepantla Hospital PPP.
In addition to intensifying these efforts, we also expect the Nieto administration to streamline Mexico's PPP legislation (Nieto will assume office in December 2012). A national PPP law was passed in January, yet further steps must be taken to streamline the tendering of projects. Most importantly, we highlight the need to devolve greater powers to debt-ridden municipal governments and strengthen, whilst concurrently strengthening the central agency for PPPs.
As governor of the State of Mexico, Peña Nieto proved himself to be an exceptionally keen advocate of the PPP model. During his time in office, the state significantly outperformed the rest of Mexico in the private procurement of healthcare infrastructure, awarding three hospital concessions with a value of USD234mn between 2010 and 2011.