Finding an Entrance Into Mexico's Affordable Housing Construction Finance Market

Finding an Entrance into Mexico's Affordable Housing Construction Finance Market

NOV, 2010Mexican Affordable Housing

Construction lending opportunities in Mexico’s affordable housing sector continue to look attractive to us; buttressed by strong fundamental demand for new units, readily available takeout finance provided by Mexico’s two state-sponsored mortgage banks Infonavit and Fovissste, and a structurally constrained supply of construction finance. Existing unmet demand for affordable homes hovers at around 5 million units or so depending on which source you quote, and new family formation increases this amount by around a million new units annually. However, Mexico’s home builders are expected to only meet 60% of this in 2010, not due to any shortage of land or construction capacity but solely due to an ongoing lack of construction finance.

Why Is There a Persistent Shortage of Construction Finance in Mexico?

Post-crisis loan underwriting standards have indeed tightened in this market, resulting in project sponsors now contributing around 50% more equity capital to each project. However, homebuilders have been surprisingly quick to adapt to the new risk paradigm. Faced with little or no ability to raise additional equity to bridge the gap, the industry has adapted in part by improving per-project turnover time: they simply focus the same resources on a shorter list of simultaneously managed projects. But some have gone even further by incorporating sophisticated preferred equity structures into their financing strategy, thereby providing a new form of market participation for total return investors, but more importantly, enabling the home builder to avert production declines entirely. We therefore are inclined to discount post-crisis underwriting standards as a meaningful contributor to the growing backlog of demand.

Mexico’s largest hom.....

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