Leading Opportunities In Mexican Affordable Housing

Lending Opportunities in Mexican Affordable Housing

JULY, 2010
Mexico
By Lawrence McDanielMexico

The collapse of foreign investment in the Mexican affordable housing sector has created a significant opportunity for debt capital in search of compelling risk-adjusted returns on construction lending. Our confidence in this market is underpinned by continued strong fundamentals combined with increased government support of existing mortgage programs to provide exit strategies for newly developed housing units. We believe that current dislocations in the construction finance market, and commensurate yield decompression, is driven entirely by structural flaws in Mexico’s affordable housing sector and not by fundamentals.


STRONG FUNDAMENTALS

As Mexico successfully winds down its first-ever counter cyclical monetary policy intervention we believe its sovereign debt looks more attractive at present than that of any other G-8 country. The countries central bank, Banxico, shows signals of rate tightening in 2011 buttress our view by easing inflationary concerns even as tourism and industrial, auto and consumable exports have rebounded sharply since reaching their respective 2009 troughs. With currency flows now moving in the opposite direction, and consensus expectations of 4.5% inflation by year-end, we see possibilities for peso strengthening as well as a case for peso-dollar swaps to revert to pre-crisis costs.

Within this macro context, the Mexican mortgage industry trailed the broader 2008 economic slowdown by nine months or so and in our estimate, will lag the recovery by about the same length of time. Current consensus is that mortgage delinquencies, now approaching 8% industry wide, will not find bottom until Q4 of this year. Meanwhile, one million new housing units are required annually in order to keep pace with natural population growth. Despite the Mexican government’s unprecedented 90% direct and indirect participation in the funding of mortgages, the industry has struggled to keep pace with this demand. In the last 12 months the problem has exacerbated as home builders lost access to SOFOL (Sociedad Financiera de Objeto Limitado)-supplied construction finance; temporarily slowing the pace of development. Government sponsored mortgage programs simultaneously increased lending capacity, paradoxically leaving the industry in a state of high pent-up demand and readily available mortgage takeout finance which is stymied by the limited availability of construction loans.


PERSISTANT STRUCTURAL PROBLEMS

On the other hand, the global credit crisis exposed multiple structural weaknesses in Mexico’s affordable housing industry, as well as some previousl.....

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