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 Business News | November 2006 
Hot Market In Housing
 Lisa W. Hess - Forbes.com
South of the border, home builders are hot. Shares of the dominant Mexican builders rose 50% on average over the past 12 months. That's a sharp contrast to the U.S., where a slowdown in housing has doused investors' ardor for anything to do with real estate. But Mexican housing stocks will go higher. You should buy some.
Credit Mexico's President Vicente Fox for rejuvenating the nation's moribund mortgage market and boosting subsidies to low-income buyers, thereby permitting them to get home loans. The need is huge: Two million Mexican families do not have homes, and 2 million more homes are in dire need of repair.
While Fox was unable to get tax code and labor law reform passed in the opposition-controlled legislative branch, he did manage to streamline the bloated bureaucracies that were doing very little to deliver housing. His first step was to consolidate housing planning under one agency he created. Until then there was no centralized source of data on home sales, housing starts or even an inventory of land.
Making mortgages easier to procure had a profound effect. The bottleneck to growth has been the availability of a mortgage rather than how many houses could be built. Unlike their counterparts in the U.S., Mexican developers won't build on spec.
In a country with a 50% poverty rate, the vast majority of mortgage credit comes from two government housing funds, known as Infonavit, for low-income workers in the private sector, and Fovisste, for those who work for the government. These organizations are funded with obligatory employer contributions equal to 5% of total salaries. Between the two they originate two-thirds of all mortgage loans.
Mexican lenders are protected from rising interest rates because all new mortgages are adjustable and indexed to inflation. Borrowers are protected by "negative amortization," meaning that any rate hikes are tacked on to the principal and homeowners don't have to fork over extra cash for their monthly payments. Further, borrowers under the Infonavit program need not put any money down.
In 2006 through September Infonavit originated 435,000 loans with an average balance of 230,000 pesos ($21,500), up 45% from 2004. Fovisste also saw its loan portfolio expand. Infonavit has published a five-year forecast of a 9% minimum average yearly rate in mortgage growth, with an optimistic scenario of 22% growth. I think growth will be closer to the higher number.
More good news is that Fox's successor, Felipe Calderón, wants to increase the housing subsidy program. Calderón, who takes office in December, belongs to Fox's center-right National Action Party (PAN). Home builders got the jitters earlier this year over the prospect that leftist candidate López Obrador might win the election, yet Calderón narrowly prevailed, in something of a replay of Florida 2000. Another plus: PAN has increased its minority membership in Mexico's Congress, giving Calderón more bargaining power.
This growth story is why I am interested in four excellent Mexican home builders with good to great managements, strong balance sheets and geographically diversified activities. Three are found on the Mexican exchange; only one has American Depositary Receipts traded on the New York Stock Exchange. An equal dollar investment in each of the four is probably the best strategy.
Homex, with a $2.5 billion market capitalization, is the one on the NYSE and has an affordable trailing price/earnings ratio of 17. Canny investor Samuel Zell invested $32 million in the company in 2002, which quadrupled by the time Homex went public in June 2004.
Corporacion Geo has a P/E of 20 and is poised for even better growth. Its inventory of vacant land will last it, at its present construction rate, for 4.6 years.
Urbi Desarrollos Urbanos focuses on urban areas and the northern part of Mexico, which have the fastest population growth. Using an electronic system it calls Urbinet, the company helps people get loans. The most costly of the lot, at 25 times trailing earnings, this stock nevertheless is worth the money.
Consorcio Ara has a tremendous balance sheet, with cash (net of all interest-bearing liabilities) of $545 million. It has long traded at a discount to the others, likely because one wealthy family, the Ahumada clan, owns 50% of the stock. But the float is sizable enough and the prospects bright enough for that discount to narrow.
Lisa W. Hess is a New York money manager. Visit her homepage at www.forbes.com/hess. |
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