Mexico’s 400,000 Abandoned Homes Draw Venture Capital

Mexico’s 400,000 Abandoned Homes Draw Venture Capital

Mexico’s attempt to solve the country’s housing shortage by constructing millions of new homes far from city centers has crippled the nation’s homebuilders and fueled record foreclosures. For Antonio Diaz, a former investment banker with Banco Santander SA, it’s an opportunity.

Diaz’s company, backed by a venture-capital firm whose funders include JPMorgan Chase & Co. and the Soros Economic Development Fund, is buying foreclosed homes for as little as 60 percent of face value, refurbishing them and then selling them for up to 90 percent of a new home price. The number of properties sold by Tijuana-based Comunidades que Renacen SAPI, or ProVive, climbed 10-fold to 530 last year, and its target is to sell 1,300 units in 2013, said Diaz.

For Diaz, 53, it’s not just about making money. It’s an attempt to repopulate towns that face an exodus and plunging property values after the government subsidized developments that sprawled too far from cities and led to unattended buildings that lured criminals and illegal tenants. He estimates there are 400,000 deserted homes and another 200,000 held by squatters, even as the economy is projected by the government to grow 3.1 percent this year.

The number of empty properties “creates a very interesting universe for doing business,” Diaz said.Abandoned Homes

Abandoned homes are in part a result of a government policy that helped back mortgages and provide subsidies for low-income homes on cheap land sometimes hours outside the nation’s cities. During the last six-year administration ended in 2012, the National Workers’ Housing Fund Institute, or Infonavit, gave out a record 3 million mortgages and housing credits.

Many residents have now left and repossessions more than doubled last year to 43,853, according to Infonavit, the state-backed lender responsible for about 70 percent of mortgages in Mexico. The government is trying to reverse course on the sprawl and subsequent home abandonment, shifting subsidies to promote development of apartments in cities instead of single-family homes in more remote towns. At the same time, authorities are seeking ways to improve the environment in the now barren towns federal money helped spawn.

“The location of homes is going to be the central focus of the subsidies and housing credits that are handed out,” Alejandro Nieto, now deputy secretary for urban development and housing, said in an April 29 interview, days before his official appointment. In addition to new development, Nieto said, the government must “come up with a plan that allows developers, whether they’re the original builders or someone else, to take back those abandoned homes and improve the environment.”

Property Auctions

Infonavit has been holding auctions of properties from Baja California to Mexico state, which borders the nation’s capital in the central part of the country, according to documents distributed to auction participants.

An invitation to an April 2 auction of homes in Tamaulipas state, which borders Texas, advertised blocks of 50 to 500 homes and welcomed Mexicans with the “legal, technical and financial capacity” to take part in the bidding. The series of auctions is called the “Program for Improving and Moving” recovered real estate, the release said.

Diaz has so far focused on Tijuana and nearby Mexicali after starting ProVive’s operations in 2010 with the sale of six homes. The company, backed by Monterrey, Mexico-based venture capital firm Ignia, which in turn has limited partners including the Rockefeller Foundation and the World Bank’s International Finance Corporation, plans to expand to other regions.

The company’s holdings include housing constructed by Urbi Desarrrollos Urbanos SAB, Corp. Geo (GEOB) SAB and Desarrolladora Homex SAB, the nation’s three biggest builders.

Sales Fall

Sales fell for all of the nation’s top three homebuilders in the first quarter as cash balances plummeted. The companies have struggled to adapt to the government’s new development plans. Geo, Mexico’s largest builder by volume of houses sold, said April 25 that its sales numbers contracted by 48 percent in the first quarter to 7,086 homes. Geo and Urbi have both defaulted and are considering restructuring debt. Homex has sold assets to shore up dwindling cash reserves.

The Mexico Habita Index of six homebuilders has plummeted 57 percent this year, led by a 77 percent drop for Urbi and a 68 percent retreat for Geo. Urbi’s cash and equivalents fell 95 percent in the first three months of the year, while Homex’s cash tumbled 94 percent and Geo’s cash balance fell 85 percent.

Bond prices have also been retreating, even as President Enrique Pena Nieto projects a housing deficit of 9 million homes, taking into account future population growth and those that already have a home with substandard conditions.

‘New Player’

Homex, the only company of the top three to have avoided defaulting on a bond payment this year, had its securities fall to a record low 39.41 cents on the dollar yesterday.

The increased flow of foreclosed homes “is practically equal to having a new player in the market,” Jose Luis Romero Hicks, a housing analyst at research firm Romero Hicks & Galindo, said in a telephone interview Mexico City. “If the idea is to revitalize a neighborhood, it seems like a good contribution to the market, because it gives added-value to the other homes that are already there.”

While the goal of revitalizing neighborhoods will have benefits for some, Grupo Financiero Banorte SAB analyst Carlos Hermosillo said home sales are likely to prove impossible in some developments plagued by crime and insufficient services, unless steep discounts are offered.

“It’s not an easy task,” Hermosillo said in a telephone interview from Mexico City. “Developments hit hard by difficult circumstances, developments dealing with violent crime for instance, are going to have to offer much lower prices. Everyone is going to be looking for better locations, where you have a proven demand.”

ProVive’s Diaz said focusing on location is key to the company’s strategy.

“We sell well-located homes, because they’re in developments that were built five to eight years ago,” Diaz said. “When they were built they were somewhat far, but now they’re well equipped, with transportation available and places of employment close by.”

To contact the reporter on this story: Jonathan Levin in Mexico City at jlevin20@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: