FINANCING UNIQUE HOUSING & URBAN DEVELOPMENT
- Infonavit: Building a nation, home by home, by David Penchyna, General Director of Infonavit
- SHF: The private sector trigger
- FOVISSSTE’s Mission: home shortage eradication
- Reality on REITs
BEYOND MOVE, integrating sustainable mobility into Mexico
- Needs & Opportunities in Financing urban Mobility by Jesus Padilla, Chairman of the Mexican Transport & Mobility Association (AMTM) and Angel Molinero, General Director of the Urbanism &Transport System Corp (USTRAN)
- Investing our way out of our mobility crisis by Giovanni Zayas, Mobility and Road safety consultant for the World Bank.
- How to measure accessibility and transport infrastructure in Cities by Bernardo Baranda and Jacob Mason, Institute for Transportation and Development Policy (ITDP)
- Homes & Cities, a reflection by Sara Toppelson, General Coordinator of the CIDOC Foundation, Chairman ULI Mexico (Urban Land Institute)
- From 3D to 3C cities, the Mexican challenge, by Adriana Lobo, Director World Resources Institute, CTS Embarq Mexico
- How to prepare the field? The Mexican way. by Gabriel Ballesteros and Manuel Mureddu, partners Ballesteros Mureddu Law Firm
Mexico's urban future is being built on a fundamental shift in practices: developers and the government are committed to building sustainable, smart, efficient, and interconnected cities under the changing face of housing and urbanism.
After more than 50 years of government initiatives to fulfill much-needed social housing, coupled with the effects on the US crisis, incoming President Enrique Peña Nieto was prompted to immediately enforce a National Housing & Urban Development Policy in 2013. Its objective was to shift the government’s focus from single-family to vertical housing. Rosario Robles, Minister of the newly created Ministry of Agrarian, Territorial and Urban Development, claims its impact is aligned with further urban development. “This housing policy devises housing as an organizational instrument, as an axis to build cities and not only houses.”
Moreover the policy establishes contention perimeters, for new and existing housing, including services and facilities linked to attractive subsidies aimed at re-densifying the metropolitan zones.
Indeed, it was a far cry from the social housing options provided some decades ago when most of the population couldn’t afford homes, and the prospect of a home in the suburbs led to millions of city residents to flee to remote urbanizations. With housing agencies doling out subsidized mortgages and healthy relocation packages, social housing construction made a much-needed transition.
“Progress towards diminishing the housing deficit was achieved but the model was unsustainable. People moved away from the pick of the jobs and services, increasing traffic, reducing productivity and in all quality of living. Urban stains were created and we now need to fix the scars of abandoned properties and social segregation,” says Robles.
Grey hills swamped by precarious self-built shacks, where entire families live in one single room, now aim to be replaced with better, bright and luminous accommodation units.
|Social Housing making a much needed transition towards better, bright, luminous accommodation units. © CONAVI|
“We are now working towards building inclusive cities that provide the basic benefits of agglomeration: lower transportation costs, security, better schools, lower carbon emissions, innovation clusters and proper public services. But above all to rescue the citizens’ dignity by tackling overcrowding and violence caused by whole families living in one same room.”
For this highly urbanized country – three out of four Mexicans live in cities, of which almost 60% live in 59 Metropolitan areas – the urban reform is committed to United Nation’s HABITAT III New Urban Agenda for the 21st century.
A tall order indeed, Robles agrees, “Habitat III puts human rights to the forefront and we believe it’s a new generational need to be incorporated in our Magna Carta.”
Leaders agree the turning point in urbanism was the creation of the Ministry, providing coherence, structure and development to the sector. Underway remains the total recovery of state rectory, centralizing compact, sustainable and resilient housing commitments and adhering to the creation of one million homes in the most impoverished regions.
The immediate challenge is to resolve the metropolitan management and planning, which currently cannot be undertaken individually by municipalities as the laws that apply are from the 70s and happened prior to the urban sprawl.
“Metropolitan planning will allow us to reorganize the land, equip with infrastructure, contribute to sustainability and avoid the occupancy of risk zones,” explains Robles.
Blatant strides are being taken towards the Smart City concept in line with the creation of a long-term holistic 2030 Vision.
“For many years planning was overlooked. Now we are working towards compact cities – and some progress has been made- we need to instill this way of thinking in mayors and governors. This will definitely be the hardest part.”
Robles’ staunch commitment to the recently promulgated “Special Economic Zones” (SEZ) Law aimed to foster economic development in four lagging regions in the south of Mexico, so as to address the gap between the north and the south of the country. The transversal, institutional project includes the deployment of important investments in infrastructure and the establishment of special labor, fiscal and trade conditions to firms establishing in those Zones, with the objective of attracting industrial investments in those regions. SEDATU will be investing $US 537 million dollars in the SEE and 59 metropolitan areas.
“We will be working along with the Ministry of Finance towards the urban development component: demand for homes, schools, services, which we want to anticipate and plan in order for them to be forward-planned and avoid errors committed in the past.
“We will be working hand in hand to overcome lags, promote legal certainty and attract investments.”
Macroeconomic stability has certainly contributed to housing and urban development market stability. Mexico has achieved significant progress in macroeconomic stability over the last decade, with relatively low inflation rates of 4 per cent (+/-1) and low interest rates, healthy public finances and a solid banking system that stimulate business investment and support consumer sentiment and spending. It should come as no surprise that this year’s expected GDP growth will most likely not surpass 2.6 per cent. Experts from international financial institutions and major world economies under the Financial Stability Board Programme (FSB) have recognized the strength of the Mexican financial system, which can be explained by recent years’ efforts to improve financial regulation and supervision. Among all of the G20 countries, Mexico is one of the best placed by the IMF regarding economic overheating indicators, showing no internal, external nor financial risk factors.
The housing sector represents 14% of the GDP in goods and services with a more prominent participation than agriculture, education and mining. It employs close to 3 million people, directly or indirectly, 7.3% of the nation’s workforce.
|The National Housing Organizations Terminology Box
CONAVI: National Houisng Commission
SHF: Mexico's Housing Development Bank
FOVISSSTE: National Houisng Fund for State Workers
INFONAVIT: The Institute of National Housing Fund for private sector workers, founded in 1962 as an autonomous organization. Its institutional governance consists of the equal representation of workers, employers, and government.
CANADEVI: The National Chamber for Housing Development & Promotion
REITS: Real Estate Investment Trusts (FIBRAS)
We have applied resources responsibly in an efficient and transparent manner enabling to overcome housing deficit ensuring decent housing, in line with the Mexicans’ needs, helping them consolidate their heritage and to prosper.
The transformation of the urban housing policy is thanks to well-oiled teamwork between key names such as INFONAVIT, SHF, FOVISSSTE and CONAVI (see Terminology table above).
Mexico is exemplary proof of how emerging nations can drastically overturn direction with the right reforms in place. Since President Enrique Peña’s appointment in 2012, he has partnered with Congress to approve a total of 11 key structural reforms, each aimed at uplifting productivity, expanding citizen rights, and essentially consolidating a more efficient democracy.
“The federal government has shown a strong commitment with this sector. At the beginning of 2015, President Peña announced fiscal and financial measures supporting housing financing and development with aims to provide 1.1 mln new housing solutions with an expected investment of $19.85 bn. By the end of year the figure increased to $22.75 bn resulting in the creation of 1.3mln housing solutions, a 14.6% increase to the announced investment,” says Silva.
Albeit housing market problems are not easily fixed; the ruling administration’s well-intended structural reforms should boost both the country’s productivity and competitiveness, and it should also generate sustainable economic growth in the region of five percent and upwards by 2018.
Having braved the US housing crisis relatively well due to the fact there was no price bubble in Mexico, the sector fought hard to keep pace with lending, to mitigate the decline in housing supply and to secure its affiliates’ access to housing.
The market today is a transformation from the crisis-stricken climate of 2008-2013. Bolstered by its fair share of macroeconomic stability, Mexico has solid economic fundamentals that should allow the country to cope with any global adversities. The federal government has also demonstrated sound financial responsibility in the face of crisis and managed to adjust public expenditures accordingly in an enduring low oil price environment.
“Due to Mexico’s macroeconomic stability, both commercial banks and governmental institutions are increasingly becoming credit lending for the housing sector. On the one hand, commercial banks are lending more money for the high-end market. On the other, governmental institutions are fostering credit for developers and both subsidies and more credit for low-income households,” says Silva.
The government is also expanding its solutions to build better and more sustainable housing closer to city centers, where jobs are more readily available and transportation costs lower. It is leading the way in promoting better coordination from all the relevant stakeholders, which will ultimately bring people to consider formal jobs, improve the sector’s productivity and overall quality of life for the average citizen.
The vertical housing segment, in parallel, has received an impressive push - its share in the Unique Register of Housing has increased from eight percent during the 2007-2010 period to 27 percent from 2013-2016.
|Social Housing Development in the State of Hidalgo, Mexico. © ARA CONSORTIUM|
Silva adds that not all investment can come from the government and they are actively seeking to attract private investment. “Housing has now consolidated itself as one of the great motors of the economy and therefore a great opportunity for European and US investors. In line with the new stock investments we have real estate companies that operate with shares and other companies with emission trading. We have triggered the REITs market and there is also a big opportunity for investors willing to promote the development of sustainable housing through the green bonds, we expect housing developers will start submitting very soon.
Long-term financing and mortgages are the catalysts of the whole housing process. The financial system is undergoing constant development, including the saving and pension fund schemes. In 2016, it is showing optimistic trends with resources flowing from banks to national housing organizations’ loans.
Below we speak to the orchestrators of the sector’s financial backbone.
How to blend social vocation, financial solidity and generate security to strengthen the legacy of Mexicans.
Mexico’s workforce boasts one of the largest mortgage lenders in the world and the largest in Latin America, INFONAVIT. This institution, which started operations in 1972 has granted 88,000 credits. Fourty-four years later, Infonavit has consolidated its existence following the granting of its nine millionth credit.
Housing is the basic axis for social inclusion and the first item on the agenda of policies aimed at improving family welfare. To this end, Infonavit has become the most solid financial institution of the social security system based on the government’s efficient austerity scheme. It provides for Mexican workers’ current housing needs through cheaper loans with installments that better meet their payment facilities. Consequently, the Institute’s consolidation is based on the implementation of actions that respond to the workers’ housing demands and not the supply.
Fitch Ratings with AAA qualification recently recognized the Institute’s stability and financial solidity with counterpart risk on the long-term national scale.
Thanks to the regained trust generated in markets, a collaboration agreement with the Mexican Bankers Association was recently signed, allowing more and better credits to be granted, in accessible and more flexible conditions for the rightful claimants with lower interest rates, achievement that was made possible thanks to the Financial Reform pushed by the government.
Furthermore this agreement will help increase the attention cannel network via bank subsidiaries and the Institute’s Service Centers, while fomenting training and specialization of the mortgage advisors so they can deliver a better service and the credit product that is adapted to each families needs.
Participation from other institutions contributes to maintain the highest standards of transparency and rendering of accounts, pillars that preserve the workers’ savings.
Another change that contributes further to this consolidation took place on April 26th, 2016 when President Peña signed reforms to the Infonavit Law with the objective to preserve and improve the performance of the Housing Under-Account maintaining the Institute’s financial viability.
These modifications will enable better tools for workers to access their heritage. Alternatively, they can transfer resources from their Housing Under-Account to their retirement fund increasing the amount of their pension. Additionally, the balance of the mortgages will be updated according to the workers’ interest, be it increasing the minimum wage or the inflation.
This Administration is totally convinced that our obligation is to work to meet demand – that is the claimants.
Mexico’s Housing Development Bank (SHF) has become the sector’s leading bank, in line with its General Director’s well-defined objectives for 2018. “A structured, well-capitalized bank in tune with its legal mandate: to boost the housing sector.” After the crisis in 2008, SHF received a non-performing loans ratio of above 50%. When Cano assumed the management of SHF, the bank’s role – apart from managing its loan portfolio – was not all that clear.
Crisis turned into opportunity when further lack of financing in 2013 led the bank to participate in direct financing to the housing developers contributing directly to the recovery of the sector. Housing has grown consistently above the GDP and has become one of the motors of the Mexican economy. Coupled to the direct financing to developers, adjustments were made to practically all financing solutions provided by the SHF.
“We realized we had to make our products more flexible and go out to find our clients and help the private players in housing.” As a result, direct or induced credit granting has grown fast. Last year, SHF placed more than $5 USD billion more than 9 times placed in 2012. SHF’s performance has mostly been felt in the housing construction sector. Last year SHF granted credits and guarantees for more than $2.1 billion for the construction of houses, twice as much as in 2014, with a steady growth rate of 40% annually to April 2016. These figures showcase how SHF has become the national player in housing construction. “Not only have we been successful in funding the developers, we have also managed to work in coordination with commercial banks so they return to the market. Last year, we insured the portfolios of the two lead players,”
This new relation with most of the commercial bank sector is a stark contrast to SHF’s performance in 2012. In mortgage lending last year, SHF insured commercial bank mortgages for $1.6 billion. The banks efficiency and attractiveness in long-term operations has additionally led to larger mortgage funding with commercial banks.
Cano sees the bank as a catalyst in attracting foreign capital. In 2014, SHF ensured a stock certificate for CADU Real Estate enabling the company to obtain better financing conditions and create a track record for its eventual IPO. SHF has been a main component of the securitization of portfolios of FOVISSSTE (TFOVIS) by the granting of the Timely Payment Guarantee that was key to reducing emissions and obtaining best funding rates.
SHF’s views on the housing sector are positive. In line with its placement results, innovative solutions are being created, including the first financing for multifamily rental, an unexploited market in Mexico that presents a unique opportunity to generate institutional offerings. Another example is the internationally-acclaimed program Ecocasa aimed at reducing CO2 emissions in housing - a joint initiative with the IADB and KFW.
The bank’s Executive Board recently announced the creation of a trust approved by the Ministry of Finance, which will concentrate non-performing loans and will allow the removal of risky assets received during the 2008 crisis from SHF’s balance sheet.
We are excited about this new phase. In three years, we have managed to reposition the bank as the leader in triggering the private sector in housing, with other projects underway to materialize shortly. Cano concludes, “Our legacy, at the end of this administration will be to leave a reformed, focused, healthy bank with enormous potential for growth.”
|Houses constructed in Atizapan municipality. Financial innovation is reshaping Mexico´s housing market|
The National Housing Fund for State Workers (FOVISSSTE) has committed itself to eradicate the housing deficit in the country with 120,000 loans destined to promote housing actions for both new and used houses.
Luis Antonio Godina, General Director of the Fund, will meet objectives with an investment of more than 40 billion Mexican pesos ($2.11 billion) in the form of 80,000 loans per annum valued in 110 billion pesos ($ 5.8 billion)
Since President Peña Nieto has been in power, $5.81 billion worth of loans have been granted to this end – approximately 80,000 loans per annum.
“Despite efforts, the shortage still exists nevertheless we are making steady progress. Our objective is to provide decent homes with two rooms close to work places. The trend is now moving towards apartments and options in rental.
“We aim to be more efficient in granting loans. In the past 3 years we have granted loans to every single worker requesting [them] and we keep on aiming to do so,” adds Godina.
Since its inception in 1973, FOVISSSTE granted 1.5 million homes to state workers. Whereas before the Fund would build homes, now it is a financial intermediary with a healthy array of options given the scope of public servants it provides for.
Schemes have finally been developed to be able to provide to the whole range of civil servants, from teachers, nurses and policemen to doctors and judges.
Today new financing mechanisms are being created to increase the loan base that traditionally comes from three avenues: 5% of workers’wage retainer, loan recovery, and leading commercial banks.
“Financial market volatility will not impede FOVISSSTE to be the main issuer in the housing sector. We will shortly be announcing an important securitization of $898.9 million on the Mexican Stock Exchange (BMV) and we look forward to attracting international markets.”
Dates and amounts have yet to be defined but the overall objective is to “duplicate our loan capacity before the end of the year,”concludes Godina.
Reality on REITs
Known as Fibras in Mexico, REITs package real-estate portfolios for sale on the stock market and pay out dividends based on rents they collect. In 2012-14 analysts from Credit Suisse Group AG to Itau BBA rode a wave of optimism over Mexico’s real-estate investment trusts to later face, end of 2015, the sector’s first potential annual decline.
A pending increase in U.S. interest rates, sluggish domestic economic growth and an oil-price rout stripped real-estate trusts of their luster, forcing analysts to pare their target prices for the investments once designated as top picks. Today we speak to the experts on their expected projection.
Q&A with Luis Gutierrez, President, Latin America Prologis
How do you assess the performance of the Mexican REIT market since 2011 and what are the perspectives for the future?
R. Mexican REITs (FIBRAS in Mexican) generally benefitted from the strong performance of equities since the launch of the first FIBRA in 2011, but this outperformance paused last year. The catalysts for the recent reversal of Mexican REITs include the financial market selloff of Emerging Markets globally, driven chiefly by the slowdown of the commodity super-cycle. The sector saw a modest recovery in the first half of 2016 as markets began to stabilize. We anticipate a moderate expansion over the medium term. However, this expansion faces risks from a number of factors, among them monetary policy mismanagement, the recent rise of nationalistic politics around the world, the prospect of a U.S. recession, global currency wars, and the mismanagement of favorable economic reforms (e.g., financial, energy).
Logistics real estate continues to advance, and operating fundamentals have improved considerably in the year to date. The structural drivers of logistics real estate that unfold gradually over time—particularly, rising consumerism and nearshoring of manufacturing activity—continue to support demand despite cyclical macroeconomic growth. In addition, Mexico continues to benefit from the modernization of its supply chain, as the country is undersupplied relative to global norms. As an example, modern logistics stock is around 80 square feet per consumer household in the United States. By comparison, the modern logistics stock per consumer household in Mexico City is approximately 20 square feet.
Last year, macroeconomic turmoil caused a deep disconnect between private and public valuations—we believe this is temporary and that both valuations will meet somewhere in the middle.
How do you assess global investors’ interest in FIBRAs?
Global investors’ interest in FIBRAs decreased during the second half of 2015 but saw an improvement in the first half of 2016.
Those who focus on value or net asset value view some Mexican REITs as attractive, especially due to peso depreciation and the disconnect between private and public valuations. Also, we are seeing more interest from investors that focus on yield. In light of the current macroeconomic environment (negative interest rates and uncertainties in emerging markets), investors are looking for high-quality assets with sound fundamentals, strong balance sheets and stable dividends.
Some experts argue FIBRAS are still struggling to find their footing due to lack of investor-friendly governance and management measures. What is your opinion on this?
The sector is young and is in a continuous learning process of what it means to have appropriate corporate governance, which includes transparency, fee structure alignment, and disclosure regarding financial and operating results, in addition to guidance. This is one of the key differentiators of FIBRA Prologis, and we are leaders in corporate governance in the sector. With Prologis as our sponsor, we have the right tools and the experience of best-in-class corporate governance. In fact, Prologis has been recognized for more than 10 consecutive years as having the best corporate governance by the research firm, Green Street Advisors.
One of the most remarkable efforts by the sector is the creation of the FIBRA Association (AMEFIBRA), an organization similar to the National Association of Real Estate Investment Trusts(NAREIT) in the U.S. Through AMEFIBRA, the sector is working to standardize industry definitions and metrics and achieve better corporate governance.
While FIBRAs in Mexico are structured similar to US REITS, which main differences would you point out?
In my opinion, the main difference is that most US REITS are managed internally. The intention of the Mexican law is that FIBRAs be managed externally.
What is your diagnosis of the commercial and industrial real estate sector in Mexico?
Because my expertise is in industrial real estate, I will comment only about this sector and the six markets in which FIBRA Prologis operates: Mexico City, Guadalajara, Monterrey, Ciudad Juarez, Reynosa and Tijuana. The drivers of demand for industrial real estate are growing. Consumption and manufacturing have been the key drivers of demand for product and are the main engines of growth in the Mexican economy.
Despite currency and financial market volatility, the first quarter of 2016 retail sales increased by 7 percent year over year. Retail sales have consistently headlined economic growth in recent years and are a primary driver of demand for logistics real estate. The labor market continues to improve with the unemployment rate currently less than four percent, the lowest since 2008. Growth in retail sales fuels retailers, e-commerce and 3PL customers to continue to increase their requirements for modern, well-located logistics facilities, driving strong demand for our buildings.
We see e-commerce as a future driver of demand for modern logistics real estate in both the medium and long term and a great area of opportunity. Today, e-commerce is in its early stages but we are seeing a growing number of customers starting their e-commerce operations in Mexico. Many important companies and local retailers are investing in the e-commerce aspects of their businesses, requiring new distribution space with good location and quality.
Manufacturing has generally outperformed industrial production, which has been hindered by the contraction of mining due to low oil prices. Exports have received added stimulus from the devaluation of the peso. A new trend we have observed in the border markets is the emergence of new companies, and the majority of this growth has been driven by expansions of existing operations. We have seen several new entrants in Tijuana, Reynosa and Juarez — from Japan, India, Korea, Taiwan, France and the U.S. and across diverse sectors such as medical supplies, electronics, equipment and consumer goods, in addition to the automotive sector.
The logistics real estate operating environment continues to improve. The overall vacancy rate for the six main markets in which we operate is below seven percent. In the first quarter, demand in Mexico City was the strongest on record, driven by multinational retailer demand for large facilities in the premier industrial corridor in northern Mexico City, along the highway that connects the US and Mexico.
We expect that supply and demand in Mexico will remain in relative equilibrium in 2016, leading vacancies to remain quite low in the near term.
How do you assess the achievements of Mexico’s housing and urban reform agenda and its impact on industrial real estate?
R. Mexico’s housing and urban reform agenda allows new housing developments to be situated closer to peoples’ places of work and focuses on placing homes in areas where utility and water services are already in place. Industrial developments are located in main transportation connections, such as highways and ports, and are near vibrant labor pools so that urban growth can attract industrial development.
How do you foresee the sector and related agents evolving in terms of quantity and quality?
R. I do not see many other FIBRAs of considerable size coming into the market due to a lack of availability of big portfolios to be acquired. That said, there is a need for modern, well-located industrial buildings on all fronts—from product quality to disclosure and corporate governance. I believe this will come in time.
How would you describe the competitiveness of the sector for foreign investors? Which regions of Mexico do you believe offer the most opportunities in the medium term?
R. I believe there is still work to be done to improve the competitiveness of the sector. The lack of transparency in disclosure and inconsistencies in the definition of some metrics makes it difficult to evaluate and measure performance.
We strongly believe that the largest and most dynamic industrial markets in Mexico will continue to offer the most opportunities in the medium and long term for manufacturing and logistics. These markets are Mexico City, Guadalajara, Monterrey, Juarez, Tijuana and Reynosa.
What is the value of the Mexican real estate market within the global and Latin American activities of the firm?
R. Prologis is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. Prologis leases modern distribution facilities to a diverse base of approximately 5,200 customers across two major categories: business-to-business and retail and online fulfillment.
As of March 31, 2016, Prologis owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 667 million square feet (62 million square meters) in 20 countries. Assets under management amounted to $63 billion globally and $3 billion in Latin America (Mexico and Brazil. FIBRA Prologis owns the operating portfolio in Mexico, which at the closing of the first quarter was valued at $2 billion.
What has been the performance of FIBRA Prologis in 2015 and what are the perspectives for the medium term?
R. FIBRA Prologis benefited from an excellent environment for logistics real estate in Mexico in 2015, and our results are also a testament to the exceptional execution by our team. We realized the embedded earnings potential of our portfolio by increasing portfolio occupancy and rents. We ended the year with an operating portfolio occupancy of 96.5 percent – above the top end of our guidance range and outpacing the market by approximately 300 basis points. Our average occupancy for 2015 was 96.1 percent, up 220 basis points from 93.9 percent in 2014. Net effective rents on rollover grew 10.5 percent and same store cash NOI grew 4.5 percent, up from 4.1 percent in 2014 and in guidance. The increase in rent and occupancy partially offset the headwind of the peso devaluation in 2015. Excluding the devaluation, our same store cash NOI would have been 5.6, above guidance for 2015. Our in-place portfolio rents remain around 6 percent below market, setting the stage for more growth in 2016.
Also, we grew our investment properties by nine percent, the result of capital deployment activities and property appreciation. We also successfully executed our 2015 debt-restructuring plan to strengthen our financial position and enable us to take advantage of future growth and the opportunities that may arise.
For 2016, we will increase our distribution to 11 cents of a dollar per certificate, which represents an increase of 10 percent over 2015 distributions and which will be paid in quarterly installments of 2.75 cents of a dollar per certificate. In the realm of funds from operations, we expect to range between 16.5 and 18 cents per certificate. We expect 2016 year-end operating portfolio occupancy to range between 95.5 and 96.5 percent, and full-year cash same-store NOI growth between 2 and 3 percent for the year. We anticipate a G&A range of between $18 and $20 million, and we expect to acquire $100 to $150 million worth of property.
Our most successful investment has been the Tres Rios Industrial Park in Mexico City. Tres Rios is a 2.1 million square foot enclosed industrial park that Prologis has developed over the past 10 years; the last building was completed in 2015. This park is in an infield location in the premier logistics submarket of Mexico City, where land is scarce. Tres Rios was developed with global industry standards that give our customers the opportunity to improve their operational efficiencies. For example, Geodis Mexico teamed with Prologis when they began operations in Mexico, and the company now leases 600,000 square feet, most of which is in Tres Rios. FIBRA Prologis is the sole landlord of Geodis operations in Mexico.
Mexico´s real estate market has been buoyed by strong demand in resort communities, according to the International Consortium of Real Estate Associations (ICREA). American and Canadian buyers started returning to Mexico in 2015, after a several-year slump, thanks to low oil prices and the strong US dollar, pushing home values up.
American buyers are very important consumers as they are owners of beachfront properties, which were badly affected by the slump of 2009-10 in areas like Baja California Sur, Baja California, Guerrero, Nayarit and Sinaloa.
However, there is a huge domestic market which is steadily aided by the government investing in housing and tax reform; these are forecasted to continue enjoying double-digit growth figures this year.
Carlos Medina, President of the National Chamber for Housing Development & Promotion, justifies their success thanks to the flexibility in joint decisions being taken between the public and private sectors. He says, “The sector has enjoyed ongoing growth during the past 24 months. It is therefore essential for us to continue working together to boost housing in a fashion that contributes to the creation of sustainable cities in line with government incentives which will motivate the private sector to keep on creating worthy homes for Mexican families.”
Developers now boast that they are in a booming market – unthinkable just five years ago. Changes in tax laws made it possible to open REITs that are unique to Mexico in Latin America, providing a greater scope for not only housing but also the entire real estate sector.
German Ahumada, CEO of ARA, one of the four largest home-builders in the sector, and the only one to not go bust during the collapse of GEO, URBI, and HOMEX between 2013- 2014, supports the new measures. “We started building cost-efficient, quality vertical homes many years before the authorities said we should start going vertical and now we are building entire towns in line with the new requirements.”
|Vertical Housing Units in Villalta, State of Jalisco © ARA CONSORTIUM|
While fellow builders faced insolvency after the government imposed contention perimeters for the granting of subsidies in 2013, ARA proceeded to reschedule its debt for 2.3 billion MXN ($121.39 million USD) to improve its maturity profile.
Ahumada says, “It was a tough process but we managed the debt reschedule through a syndicated loan in exchange of part of our land reserve in guarantee reserve – this was new as banks did not request this before, all they use to requested were simple unsecured loans.
“Fortunately we had closed 2012 with 1.6 billion MXN in cash in our balance, allowing us to clear our debts in 2013, when banks closed the tap to developers due to the problems manifested by the big players.”
ARA continued to brave the storm by generating sales from diversifying into producing compact projects at all levels: affordable entry level, middle income and residential, as well as the sale of land for commercial use, mainly.
Ahumada continues, “We expect our income to increase by 8% this year with the sale of 12,500 homes, net profit of $35.85 million, and expected 12% growth. Additionally we expect to open 10 developments this year, between residential and others.”
The co-founder of the 39-year old company claims the success is due to their strong diversification strategy and a prudent financial policy.
“We have been the most conservative company out of the housing companies in the stock market. We have very little debt given our shareholders’ dividends. But fundamentally our land reserve has been key to [allowing] us to expand to build improved homes with the right infrastructure within our developments.”
While Inmobiliaria Cadu and Casas Javer debuted on the Mexican Stock Exchange (BMV) earlier this year Vinte awaits the right moment to list on the Stock Exchange. “We are completely prepared according to the National Banking & Stock Commission but presently markets are volatile and we, unlike the rest of the players, are planning an IPO.”
“To this end it is important to select the right moment in international markets. Right now, we do not need to pay short term credits, but that moment may come in December when the markets are settled,” explains Sergio Leal, CEO of Vinte.
Specializing in middle and residential housing, Inmobiliaria Vinte is an international reference with partners such as the IFC, the financial arm of the World Bank and the IDB (Interamerican Development Bank).
“Our partners World Bank and the IDB have contributed greatly towards the institutionalization of Vinte because we are aligned – we want families to have a home with added value that improves the quality of their lives and increases in value with time,” says Leal.
With a very strong focus on green housing solutions, Leal optimistically expects to keep on growing during 2016. “We expect 15% net profit from the construction of approximately 5,200 homes with $32,000 in line with the government’s new initiatives.”
Samuel Klein, Planning Director of Casas Javer, with operations in seven of the Northern states, said the successful completion of the company’s Initial Public Offering and trading on the Mexican Stock Exchange in early 2016, assists their strategy in further building “communities,” not homes.
“Our clients deposit full trust when they purchase homes from us given that we are creating communities, environments that guarantee green areas, schools, churches, supermarkets – including transport and leisure areas resulting in them not only purchasing the land but the whole setting.”
For Derex, a construction company in the State of Sonora, sustainability has been the key to the development of highly dense projects in line with compact cities. Aurora De León, CEO of the company, explained that unlike in the metropolitan cities of Mexico City, Guadalajara and Monterrey, verticality was not an option in the State of Sonora.
“We swapped the verticality concept to densification and explored new sustainable products that allowed [us] to build a larger number of houses per hectare with the objective of reducing the cost of urbanization of the developments. These homes have two bedrooms, kitchen, dining room and a small patio in modern, innovative areas allowing 60% densification compared to traditional homes.”
The positive changes imposed by the government have continued to provide opportunities for SADASI, a 40-year old company that has over the years built 350,000 homes in 50 large scale housing projects spun across the country, with all the infrastructure and amenities designed to fully satisfy clients’ expectations.
This year, they are again building in Mexico City, where scarcity of land prevails, with several residential blocks of apartments. CEO Enrique Vainer says, “It is the first project of many we are assessing in the Capital as well as beginning operations with new housing projects in Veracruz.”
Further innovation has been coined by young entrepreneurial brothers Jose and Salomón Shabot who have forged their way into building close to 2,000 apartments per year since the creation of Quiero Casa in 2009, all of them in Mexico City. Prior to the creation of the new Ministry and housing policy they were already focusing on well-positioned, sustainable, and vertical projects.
“Despite the difficulties in securing land in the City – scarcity of it, [how it was] coupled to hydraulic works, seismic challenges and neighbors – our mission was to become the provider of middle-class homes that contribute to a more sustainable city where workers do not need to commute most of their day to get to work. The overall result is better quality and a reduction of carbon emissions all round,” says Jose Shabot.
Quiero Casa was initially funded with seed capital from friends and family. Their homes were aimed at middle class workers who benefit from INFONAVIT, FOVISSSTE, and bank credits. Today, Quiero Casa has credit lines with the leading banks. In their group, they also own a non-bank financial institution, ION FINANCIERA that enables credit for the growing array of City home-seekers who do not have access to credit.
“ION is a non-bank lending and finance institution with different sorts of credit; however, for purchase, equity loans, and bridge loans we adapt to the needs of each and every one of our clients. It is a fully independent company, as less than 5% of the sales of Quiero Casa or ION depend on each other.”
Ambitious 31-year old Shabot explains plans for 2016 include more than 1,800 apartments in 35 projects across 12 boroughs in Mexico City.
Additionally, in line with their philanthropic roots, the company will keep on promoting their Foundation CONSTRUYENDO Y CRECIENDO (Building & Growing). Joined by other household names in the sector, its objective is to educate construction workers who construct in the mornings and study in the evenings. The foundation has graduated more than 850 elementary and middle school students.
Shabot said, “We are proud of the model we created and we hope it will be taken as a reference so that the cities in our country may keep on growing in an orderly manner, allowing their citizens to live close to their work, study and entertainment places.”
Conversely, the new urban direction has led industrial real estate players to further consider the housing market. Entrepeneur Jorge Rivadeneyra, CEO of Dale Developments, explains how this regional’s group’s core business was large industrial parks in the centre of the country, in the Querétaro region.
Parque Industrial Nuevo San Juan, one of the largest of its kind is currently seeing a huge increase in investment. “It is one of the largest parks in the country with about 100 companies already aiming to house 2-300 - 44% are Mexican companies, the rest international. Obviously our number one partner remains to be the US, but we are seeing increased investment from the Japanese, Korean, German, Austrian, Italian and Spanish.”
The success of their industrial parks led to the construction and sale of commercial areas: plazas, malls, hotels, and housing.
“Especially after the demise of housing company GEO we took a strong position in the housing market, taking over a portion of their business by producing the units they stopped builidng.”
Their residential offer focuses on middle ($50-80,000) to high range but considering social and even high end homes, of approximately $100,000.
“We now know that first you have a factory, then you must provide the services, then the houses. Our objective now is to have integrated projects. What companies are looking for is the Mexican labor. Therefore we join the factories, services and homes to provide for this labor.”
Because of demographic growth, Mexico will have to double the size of most of its cities in the next 30 years – in new homes, workspaces, public spaces, and infrastructure. This will create tremendous opportunity in terms of real estate development but will also prove to be a challenge as cities decide how they will grow, and how to accommodate this massive demographic shift.
|Mexico will have to double the size of most of its cities in the next 30 years – in new homes, workspaces, public spaces, and infrastructure, creating tremendous opportunity in terms of real estate development.|
According to the 2015 intercensus survey, Mexico’s current population is shy of 120 million people.
Figure 1. Mexico’s population by age group 2015
Of the current population, 54.2 million are under 25 years old, and only 12.4 million are over 60 years old. Over the next 30 years, these young people will grow and eventually need a place to live and a place to work. At the same time, there will be very few people that will vacate their homes and places of employment as they get old, retire and finally pass away. The construction of places to live and places to work necessitates investment in urban land, infrastructure, public spaces, and real estate product for all categories of use.
New home estimates
Based on Census information from 1895 onwards, Softec research has found that the best estimator for new home growth in the next 30 years is the number of people under 25 divided by two (the division is a proxy for household formation by two people). From the information available from Inegi (Mexico’s Census Bureau), the data for population under 25 and the variation of households was compared. The result yielded a R2 correlation of 98% with a slope of 1.05.
Figure 2. Relationship between population under 25 divided by 2 and household growth 30 years later.
Given the relationship between population under 25 and household formation rates, the number of people under 25 as of 2015 predicts an increase of 28.4 million new households between 2015 and 2045.
With new household growth comes new workspace requirements. Softec research has yielded that every new job requires some form of workspace. This space varies according to the type of job and the function it solves. In addition, every new household in Mexico generates a marginal demand for an additional 4m2 of retail space. Examples of the space that Softec has identified for various types of jobs, and the Real Estate investment cost per job are show in the table below:
|Type of Job||Space per person (in m2)||Investment per person (in USD)|
Figure 3. Space required per type of job and Real Estate investment required per job.
Every new job created of these types requires between $15,000 and $80,000 of real estate investment in order to have a place to work. Thus every million jobs require between $15 billion and $80 Billion of new investment. Mexico needs to generate at least 54 million new jobs in the next 30 years to keep up with demographic demand. This implies an investment between $27 billion to $144 billion USD, or $800 billion to $4.3 trillion MXN, per year year for the next 30 years. The current rates of real estate investment are summarized in the table below:
|Unit of measure||Growth||Unit Value||Total US$|
Figure 4. Real Estate investment estimated by Softec for 2015
Quite clearly, there is a significant opportunity in order to satisfy potential demand for housing and real estate workspace
In order to be able to satisfy demand, urban land and infrastructure have to lead edification. Since the late 70’s, when Mexico dismantled its land financing system, there has been no functional way to finance urban land creation. Recently the CKD’s (Certificados de Capital de Riesgo) have tentatively gone into this space and are investing about $200 million a year in land development. Softec estimates that Mexican cities grow about 30,000 Hectares (1 Ha= 2.47 Acres) of which one third is housing and the rest is roads, public space, retail, industrial, office, hotel and other. In order to satisfy this growth, it would be necessary to invest approximately $10 billion per year to serve land.
Mexico has to rebuild itself in the next 30 years, as it did in the previous 30 years. These warnings have been stated since the 1970’s by talented demographers like Dr. Luis Unike, and public planners like Arq. Pedro Ramirez Vazquez. They were not heeded, and the result was the growth of Mexican cities lagging demand and infrastructure but making up its in vigor and enthusiasm. Today there is a significant opportunity to imagine what cities will look like in 30 years - including the planning of major roadways, infrastructure conduits, and superblocks - and, for once, get ahead of demand.
This year marks the ninth anniversary of the “Muévete en bici” (Bike Move) program in Mexico City. Streets are closed to cars and opened to pedestrians who move (dance, skate, jog or bike) and connect to their community in new ways. This phenomenon has rapidly grown to become the fifth largest car-free day in Latin America, with 4.2 million users and 48kms (30 miles) of streets closed on this day. Beyond the Sunday morning trend Muévete en bici has transformed the culture of the city, run by the Non-Motorized Mobility Strategy Office, the creator of the ECOBICI bike-share program and dedicated bike lanes network which position the city as a pioneer in best practices in promoting active transport.
|ECOBICI is a fourth generation public bike sharing system, implemented by Mexico City Government as a bike mobility strategy.|
It is not so long ago that Mexico finally decided to try to cope with its rapid and often uncontrolled urbanization. Residents can spend up to 2.5 hours and 30 percent of their monthly income commuting from the suburban outskirts into Mexico City. Experts agree that shifting urban design to focus on the needs of people—not cars—can expand access to opportunities, jobs, education, and healthcare for urban residents. Below, views from the experts.
By Jesús Padilla, Chairman, Mexican Transport & Mobility Association (AMTM)
and Ángel Molinero, General Director, Urbanism & Transport System Corp (USTRAN).
Urban transport in Mexico requires an investment of $88 billion to accommodate the needs of public transporation by 2020, according to a study by the Mexican Transport & Mobility Association (AMTM) and the Urbanism & Transport System Corp (USTRAN). These figures reveal a huge challenge given that in US or Europe at least 60% of such investment proceeds from the private sector is in need of new sources and mechanisms of finance.
Cities such as Mexico, Guadalajara and Monterrey must expand their rail network by 2020 with at least 10 lines worth $6 billion. It is estimated that for that same year, ideally an additional 38 lines for light railway should be developed worth no less than $23 billion. Improvement for the bus corridors and their revaluation towards Bus Rapid Transit (BRT) will request, in total for the 93 metropolitan areas considered, approximately $10 billion to be able to meet the objective of 94 additional bus corridors.
The effort to improve mobility lies in the operational improvement and substitution of environmentally-friendly units in 4,000 routes with a proposed investment of $50 billion. The need for renovation is obvious, with the vehicular fleet’s average age being of 10 years, the AMTM considers a minimum of 60,000 units to be substituted by low emission unities in line with international commitments towards climate change.
These actions not only assist direct needs for service delivery, they consider nonnegotiable improvements in the following areas: transfer points and the integration of the diverse mobility modes and maintenance workshops with adequate levels of service and emission production for the provision of full service to its users, pedestrians and cyclists.
Despite the federal government’s ambitious program to support mass transportation through the National Infrastructure Fund since 2008 via Mexican development banking, local resources are still insufficient to cover the blatant needs in this sector. A stronger push towards PPPs is needed, especially in rail network and in some cases in BRTs, considered by AMTM to be the areas of opportunity for joint financing and investment between public private entities.
Financial structuring requires knowledge of the demand to reduce risk that applies to projects of dimensions such as rail networks and BRTS given that they bring about changes in the user conception, operation and acceptance. Nevertheless, the percentage of captive users in most cities in Mexico is above 60% ensuring a guarantee - especially when actions are focused on operational improvement and cleaner units, thus being areas of great opportunity for low risk financing schemes for the private sector.
Finally, the increase in Mexicans’ buying power in the past 20 years, today allows them to offer a better quality service at fairer prices securing a desired scenario. The user may pay fair prices but several taboos have so far impeded to reach an objective vision of the tariff concept. Therefore the public transport sector in which AMTM operates seeks to offer better mobility that avoids the breach of a positive modal distribution but in need of a more realistic contribution by the user resulting in an improvement in the quality of the service, the environment and mobility. Or, in need of a grant which has generally been uncommon practice for mass transport.
The challenge is great as mobility needs in growing populations are huge but low risk financing opportunities do exist.
The Mexico City Metrobús is a bus rapid transit (BRT) system that has served Mexico City since 2005. As of November 2013 it comprises five lines that traverse the city and connect with other forms of transit, namely the Mexico City Metro. © AMTM
There is no doubt that Mexico’s mobility crisis is taking a severe environmental, social and economic toll on its population. This crisis is a national one and there is one main cause: money. Or the way we are investing it. And in the end, it is money, along with the political will to invest it wisely, that is the only real solution to this crisis.
Javier Garduño’s report Invest to Move Ourselves: A Diagnostic of Mobility Investments in the Mexican Metropolitan Areas 2014 (http://itdp.mx/invertirparamovernos/Datos/IPM-VF.pdf) offers a thorough analysis of the national budget situation regarding urban mobility. The ITDP document concludes that Mexico’s 11% expenditure increase in road expansion and maintenance is “unfortunate considering its decrease in public transport (-3%) and public space (-4%) investments.” Thus, Mexico’s investment policy is still promoting the use of private automobiles while discouraging the use of transit and non-motorized transport.
A true national effort to change the urban mobility paradigm can only be achieved by a decently funded and well-coordinated strategy led by the federal government. After sustainable mobility received a historic mention in the 2013-2018 National Development Plan, Mexico’s Agrarian, Territorial and Urban Development Ministry (SEDATU) created in the $27 million Urban Mobility Support Program (P007) in 2014. P007 would spur the planning, design, implementation and evaluation of transit and active mobility projects across the country. However, congress and the finance ministry failed to allocate any resources to the program for both the 2015 and 2016 national budgets.
Even with the financial constraints that prevail at the federal level, the states and municipalities can find a way to fund sustainable mobility projects. In fact, some already have. Plenty of transit projects in the country have been financed through loans and grants from a blend of local, federal and international funds. Puebla’s BRT and Monterrey’s metro rail system used the World Bank-supported Federal Support Program for Mass Transit (PROTRAM), along with regional and federal funds. Guadalajara’s light rail expansion and the creation of Tijuana’s BRT were funded with the Urban Transport Transformation Project (PTTU), a loan program coordinated by the National Bank of Public Works (BANOBRAS) with World Bank funds. PTTU offers below market interest rates and institutional and technical support in project development. One of PTTU’s objectives is to finance non-motorized mobility infrastructure that complements PROTRAM projects.
Local governments could also include sustainable mobility projects in the yearly requests that they deliver to congress through the federal deputies that represent them. PTTU and PROTRAM funds could match these investments while providing technical support.
There is no quick solution to our mobility crisis. Mexico needs to prioritize its investments in a way that we discourage the use of private cars in our cities while making transit, cycling and walking much safer and more comfortable. We need to start that long, but necessary, process if we want to slow down the trend of environmental degradation and social fabric deterioration.
What is PNT?
ITDP developed the People Near Rapid Transit (PNT) metric to better approximate accessibility at the city level. The metric measures the number of people that live within one kilometer of rapid transit stations in a city or metropolitan area. While it is not a direct measure of accessibility, PNT assumes that people within walking distance of rapid transit will have much greater access to the rest of the city by public transport than people who live beyond 1km of rapid transit.
PNT can be used to measure the impact of changes to both the rapid transit network and urban development. Urban development near transit stations will typically increase the number of people near transit, as will new rapid transit stations in densely populated areas. In contrast, urban development that is farther from transit will decrease PNT, while new rapid transit stations in sparsely populated areas will only increase PNT very slightly.
The metric can also be used for planning purposes, as future transit and urban development can be assessed before they are built. Scenarios of transit and development can be compared based on their impact on PNT. It can guide the investments needed on two key infrastructures that are usually controlled by governments: Mass Transit and Affordable Housing.
PNT = Population within 1 km of Rapid Transit / Total population of urban area
PNT is calculated using a Geographic Information System (GIS) software. The next steps are followed:
The methodology assumes that population is spread evenly across each urban parcel (a.k.a. census tract, subdivision, etc.). The methodology also assumes that a complete street network, including sidewalks and crosswalks, provides roughly equal access to transit for all locations within a one kilometer circular buffer of rapid transit stations. The methodology assumes BRT, LRT, and Metro all provide a comparable level of service.
PNT does not account for varying population densities within parcels. Parcel data may not be available at small enough geographic sizes for this assumption to be valid. Parcel-level data may only be available after long intervals (e.g. every 5 or 10 years), making it difficult to assess progress in smaller time increments. PNT does not distinguish between different levels of accessibility at different stations. For example, PNT provides the same level of improvement for directing development to a rapid transit station on the outskirts of town with few services (low accessibility) as directing the same development to an inner area with excellent connections to other transit and services (high accessibility). PNT is probably not appropriate for small, dense cities, which are often able to provide high levels of access and mobility without rapid transit. In such cities, walking, bicycling, and local transit services more easily accommodate the short trip distances. In addition to these limitations, PNT also does not account for the following factors that affect accessibility:
- Street design
- Street network
- Trip Distance
- Location of services
Examples of PNT
|City||People Near Transit (1 km)|
|Rio de Janeiro||37%|
Source: LSE Cities. (2012). Going Green. How cities are leading the next economy. London School of Economics and Political Science and ITDP
As seen from above, the two biggest economies in Latin America, Mexico and Brazil still have a gap in PNT compared to some of the most advanced cities that integrate mass transit and urban development. This is especially relevant in Latin America where most of the trips are still made by other modes besides the automobile (mainly, public transportation, walking, and cycling) and therefore the investment to improve the conditions of this majority and to keep this modal share composition should be a priority. Although Mexico has made important efforts at the national level through its Program of Support of the Urban Mass Transit (PROTRAM) and the creation of the Ministry of Agrarian, Territorial and Urban Development (SEDATU) as well as the construction of BRTs at the state level with around 300 kilometers in the last 10 years, cities keep expanding without much control and coordination especially at the Metropolitan level. PNT can be a good measure for cities as we could, for example, aim that we reach that at least 50% of the inhabitants in cities of one million or more, live one kilometer away or less to a Mass Transit Station by 2030.
PNT measures the percentage of population near Rapid Transit and therefore it can be a relatively easy way to measure how well urban development and transport infrastructure are integrated in cities. As governments seek ways to remain competitive while increasing the equity and quality of life, how easy it is for the majority of the population to access jobs, services, and education, for examples, becomes a key factor for a prosperous low carbon economy in our cities of the 21st Century. Therefore governments at the national and state level should strength their institutions to be able to invest effectively in high quality mass transit and urban planning to make cities more compact, connected and coordinated.
 On average Mexican cities have doubled their population in the last 30 years while their physical expansion has increased 6 times (SEDESOL, 2012)
Experts on the matter agree that the most important reform of all the legislation needed to prepare the ground for smart cities is the one needed by the Human Settlements Act issued in the 70's. Mexico needs a new national urban law that recognizes the metropolitan phenomenon, promotes the mandatory partnerships between municipalities, but above all, understands and addresses the new urban sociability that prevails in every Mexican metropolis. Secondly, it is necessary to develop a portfolio of financial instruments, tax model, management, etc., that allows us to implement what the regulations establish. Finally, a set of regulations and urban standards need to be developed to generate the regulatory structure according to the levels of government that articulates with the adjustment of the regulatory framework and local planning.
Only then will the Mexican future city offer a compact, coordinated and connected city. The smart city integrates institutions, policies, instruments and planning. The best indicator of success will be economic, social, and sustainable urban growth.
We speak to the experts on the matter.
Three million homes have been built in Mexico in the last decade as a result of a strategy focused on assisting housing demand and the UN Habitat Housing Rights.
Housing Rights are interlinked to the Right to the City, given that today, for homes to fully function as such and provide a space for individual, couple or family development in sync with an urban surrounding close to the workplace and connected to communcation and transport networks.
Countries have integrated schemes whereby the construction of homes is integrated in the city-making concept. Mexico is currently undergoing this necessary change process. Housing used to be based on numbers disregarding location or closeness to services. Actually this has changed to achieve quality and not just the quantity of homes. Urban perimeter contention has been a powerful tool to this end, however the challenge still remains; at a rate of 300,000 homes built per year these need to provide integrated environments that are urban continuities doted with articulation axes, urban centres and subcentres.
The Right to the City is the citizen’s right to live in territories that favor cohabitation with diverse uses whereby the space and the public facilities are collective and individual development factors. It is the right for all to enjoy a safe environment that favors personal progress, social cohesion and cultural identity. To this end, we need dense, compact and well-communicated cities with diverse uses that generate riches for its inhabitants.
For the last years, we’ve been talking about the smart city and we often assume we’re talking about technological development. However ,a smart city is more than that. The smart city is the one that is intelligently planned in order to provide social and economic development.
Mexico is a predominantly urban country 78% of its population lives in urban zones over 2,500 inhabitants and 63% live in urban centers of more than 15,000 inhabitants. The Aztec country has great potential to be a nation of cities; to achieve this it requires addressing urban problems holistically. Urban solutions should be the priority in the public and political agenda. We need to develop and implement compact, connected, coordinated and competitive urban areas. For this, the great challenge is the establishment of planning, financial and institutional tools that allow cities to have the resources, institutions, policies, programs, and incentives to achieve transformation processes.
Cities are the doors that open our economy and connect us to the rest of the world. The impact of cities on the economic development of the country is important because the set of the 93 cities with more than 100 thousand inhabitants contributes to 88% of the gross domestic product and 83% jobs of jobs concentrated in the city. However, our current urban model is characterized by being distant, dispersed and disconnected (3D). Cities lose competitiveness and our urban model does not guarantee access to a clean environment, dignifying housing, life protection, or health. It instead promotes social and spatial inequality.
Furthermore, the pattern of widespread and fragmented growth makes Mexican cities inefficient to supply and manage. While Mexico's urban population doubled in the last 30 years, the urbanized surface multiplied by six. Under the 3D model it is expensive to provide electricity, water and sewage, collect garbage, and provide services of maintenance and surveillance of streets and public spaces. Plus, it’s difficult to provide quality public transportation systems. It is estimated that if a city managed to reduce the rate of expansion of its urban sprawl in half, savings would be achieved in the costs of infrastructure investment in 30% and 68% in maintenance costs and operation public services. In this sense, growth in 3D contributes to financial instability of Mexican municipalities, of which it is estimated that 70% are in bankruptcy.
The 3D model promotes social and spatial inequality; it segregates low-income sectors, confining them into areas that are underserved and poorly equipped and far from sources of employment and social networks. It is also necessary to consider that 35 million urban low-income people today spend more to meet their basic needs, with a correlation between the increase in household expenditure and the fact of living in urban extreme periphery. Currently, two out of three low-income people in Mexico live in a city. Thus, the increase in the distances into the city has resulted in many families spending up to 25% of their income just to mobilize, which is unsustainable for low-income sectors situation (it is estimated that in Mexico City people spend about 5 years in traffic during their productive life). This has contributed greatly to the phenomenon of abandoned housing in the country.
Reversing the trend
Building the Connected City means reversing the 3D trend from the distant, disconnected and disperse city to the compact, connected and coordinated city (3C). The 3C city considers urban land as a scarce resource that must be managed under the public interest. It commits with low-carbon growth, favoring a compact development that brings people near their activities and reduces distances and travel times, avoiding development of new peripheries and in turn promoting the use, recovery, and improvement of the existing city. The Connected City articulates its growth through the infrastructure networks and integrated transport systems, efficiently connecting the city with the rest of the territory and inside through open neighborhoods, complete with privileging the movement of people and not vehicles, it is well-equipped and friendly with safe streets. However, as the name implies, the Connected Cities are not developed in isolation, but in conjunction with other cities and within a framework where local policies are part of a national urban strategy.
We need to instrument, implement, and consolidate a new model of urban planning and management that require seven specific actions:
- From isolated cities to regions
- From sprawl to the compact city
- From the disperse city to infill development
- From new land to improvement of the existing city
- From dorm to complete cities
- From moving vehicles to moving people
- From streets for cars to streets for people
Mexico’s urban challenges
There are significant changes in this direction: 1) the creation of the National Ministry of Agricultural, Territorial and Urban Development (SEDATU) to plan, coordinate, manage, create, and implement land management policies to ensure decent housing and urban and rural development; 2) the development of the National Development Plan (PND), which for the first time incorporates urban targets that promote sustainable urban mobility, public space, densitity, and compact growth; and 3) the publication of the National Urban Development Programme (PNDU), that is clearer and has more specific definitions of the new urban model for Mexican cities.
This text is based on the publication “Urban Reform: 100 ideas for Mexican cities” that you can download here.
Ede. Urban Reform: 100 Ideas for Mexican Cities. September 2013.
The enthusiasm that some Mexican mayors are showing by following models of urban innovation, integrating technology into their processes, and redirecting both the vocation and the identity of their cities, some of them the most intense cities of Mexico, is leading various sectors to wonder: What should we do to transform the traditional decision-making structures into visionary, intrepid agencies, but mostly, into efficient municipalities that can handle the eager change we’ve been waiting in the mindset of the city?
|Legislation is being created or reformed to prepare the ground for the Smart Cities model creating opportunities to invest in urban regeneration. © BALLESTEROS MURREDU|
The 59 Mexican metropolitan cities involve 263 municipalities where there is an everyday battle to financially fund the city: addressing the problems of lack of plumbing, electrical, and mobility infrastructure becomes a real challenge for the public administrators that must work with the old models of messy bureaucratic organization, terms of reference, and administrative certifications – mostly when it comes about investments and legal supervision. This means at least 263 daily conflicts or opportunities, as you prefer to see it; fortunately, there is a movement that seeks an opportunity in this scenario.
During the last 20 years, an expansive urban growth model was chosen among most of these cities; local governments authorized the incorporation of cheap agricultural land to the urban sprawl and the development industry simply limited itself to cover the $5 million national housing deficit according to the Federal Government statistics in 2000, while doing so with a misunderstood business efficiency criterion, with minimum quality.
Human settlements have grown in almost every Mexican city in locations settled far from the cities, which has led many of them to be partially abandoned because of the lack of services, and the high costs of the coarse public transportation systems. Today that inertia continues in cities like Cancun, Hermosillo, Reynosa, and Queretaro that annually expands their territory by more than 4%, or Playa del Carmen on the Riviera May) where the annual rate is up to more than 11%.
How to set the stage for rethinking the model?
While the public policies follow this inertia and the public debt continues to grow, mostly because infrastructural projects are still being dedicated to motorized vehicles, there is a small but growing group of mayors that share a different metropolitan vision. They are opting to innovate in the use of their financial resources, including the private sector in alliances made for the provision of cleaning services and the management of water, designing policies for the rescue and the attention of the public spaces, or creating infrastructure designed for non-motorized vehicles. We are talking about municipalities with a population slightly bigger than one million inhabitants, who are combining tactical urbanism with a very Mexican way of improvising, seeking to transform their cities into Smart Cities.
For a city to transition into the Smart City model, it is essential to measure and clearly know the sum of their problems. This is a pending issue, or at least it is when it comes about the process to generate public information; it would be very useful for this urban trend that the sources of information had more diffusion. Today in Mexico, there are several local strategies to insert different kinds of methods that require certain information as an input to create new systems and networks, and help through the decision-making processes. To measure, estimate, diagnose, and organize the data is a new area of opportunities for the Mexican cities.
On the other hand, the structure of the Mexican cities tends to go up. Some governments are betting for vertical growing, even showing themselves as fiscally hostile to the expansion of the urban area on a horizontal model. This strategy, with relevant examples such as the Tec District in Monterrey, or new directives to recover gains (plusvalias) in Culiacan, is creating new opportunities for the entrepreneurs to invest in the urban regeneration while filling the empty spaces beneath the cities, rather than continuing to look for cheap soil far from the consolidated urban areas. Thus, it is driving a rethink of both pedestrian or non-motorized mobility networks because they are giving life and strengthening or recovering the vigor of the old neighborhoods in some historical residential spaces that were dying.
From another angle, there are people who demand more services such as more traditional, comfortable, friendly and inexpensive processes that won’t become an everyday obstacle as in the past. The new era of digital citizens, digizens, came to even push for a constitutional reform in 2013, where the internet went from being a simple commodity to acquiring the level of a fundamental right which must be guaranteed by the State.
In the legal field, there is legislation that is being created or reformed to prepare the ground for the Smart Cities model. For example, the Public Private Partnership Act, which is giving the opportunity to replace the street lighting systems by streetlights with the latest technology, but that still has the problem that local governments are struggling with adjust their ossified regulations to the new legal opportunities brought by new legislation and obstacles brought by the lack of innovative and creative thinking, which is sometimes expressed as local officials that consider that there are more important things to do in the cities than investing in their future and in their sustainability.
|Some Mexican federal laws that favor the Smart City model|
|Public Private Partnership Act||Sets the rules for joint investment between governments and companies to provide services, perform or provide infrastructure assets.|
|Science and Technology Act||Has been reformed to boost integration of technological advances in everyday life.|
|Housing Law Act||Along with federal guidelines for comprehensive sustainable development, it defines a new housing model for the whole country with a more humanist vision.|
|International Cooperation for Development Act||It regulates how international support must be invested in vanguard activities.|
|Advanced Electronic Signature Act||Regulating the electronic signature process to streamline and eliminate time in many administrative fields.|
|Foreign Investment Act||Has been reformed to facilitate the investment of other sectorial global players.|
|Transparency and Access to Public Information Act||Created to enforce the government agencies to create, provide, and facilitate public information, documents, and data.|
In June 2016, Mexico enacted a federal law to create Special Economic Zones (SEZ) in four of the poorest regions of the country – its objective is to reconcile the drastic unequal levels of economic development within the agricultural South with the prosperous Northern region.
The first Mexican SEZ is being created in the Pacific port of Lázaro Cárdenas, on the border of the states of Michoacán and Guerrero, and other three will follow at the Isthmus of Tehuantepec (Veracruz and Oaxaca states), Puerto Chiapas (Chiapas), and the Coatzacoalcos Corridor /Ciudad del Carmen (Campeche). The goal is to have at least one “anchor firm” operating in each SEZ by 2018, the last year of current administration.
The SEZ policy is created by Mexico’s Presidency inspired by the relative success of China. An SEZ is a geographically delimited area designed to attract Foreign Direct Investment (FDI) by providing tax incentives, trade facilities, duty-free customs benefits, infrastructure development prerogatives, and easier regulatory processes. Industrial real estate will be an important piece of this initiative because it provides the backbone for economic growth.
The SEZs that were created in China during the eighties (Shenzhen, Zhuhai, and Shantou in Guangdong Province) became economically successful, now accounting for as much as 22% of national gross domestic product, 46% of FDI, and 60% of the total exports of the country. China’s SEZs also generate about 30 million jobs (Zeng 2015).
Despite China’s precedent the Mexican model is foreseen with skepticism by many following previous failed attempts of regional economic development such as the Plan Puebla Panama.
In order to reap economic benefits the usual ingredients are imperative - rule of law, business inducing environment, clear legal framework, transparency, education and reducing informality in the workforce. Above and beyond, the region needs to identify its competitive edge to be able to propose competitive cities and clusters within.
Sergio Adem, Minister of the newly created Ministry of Urban, Territorial and Mobility Development in the State of Michoacán ensures the strategy is aligned with the promotion of creating cities that will ensure quality of life to induce investment.
“ The Lázaro Cárdenas Port boasts a privileged location that links Asian markets to Mexico’s central markets representing 70% of the countries GDP, known as the Diamond of Logistics and Production. The SEZ law aims to double the existing population of 350,000.
Our state’s new government is committed with the development of cities that aim to have good quality of life to receive investors and quality workforce to be employed by investors. With urban planning, guaranteed basic services, public spaces and better mobility for pedestrians and transport. This formula allows for the development of Port + City in line with the SEZ formula and their influence zones. Integrating the quality of citizens and their lifestyle.”
José Berzunza, Minister of Economic Development of the State of Campeche, is confident the plan will further boost the not only the Oil State’s economy (responsible for 78% of Mexico’s production) but the wider region and will help to reduce emigration to the US.
“We are working to change the local economic development law to be ready to attract investment but also the other communities surrounding the state and the whole region. We are focused on providing the correct business environment and rule of law and the mechanisms to prepare investors to seize this opportunity.
“By embracing the SEZ formula, along with our infrastructure and number one position in security (we are the safest state in Mexico) our free trade agreements with North America and Central America will provide special clusters in the areas of energy, services, infrastructure and information technology.
|Model of the Lazaro Cardenas Coast Boulevard, as part of the SEZ development of Port and City, to be completed by 2018|
Opportunities to Attract Investments
by Gustavo Almaraz, Executive Director, Grupo Estrategia Politica (GEP)
Economic inequality is an issue that has recurrently come up in recent years in the debate on public policy at the international level, asking how we can explain that there are regions that develop more than others while poverty and underdevelopment prevail.
Economic inequality is defined as the disparity that allows some people to have access to income distribution and determining how to distribute growth and development among different social groups, as elements that serve to differentiate between societies that are more developed and others that are not.
We find both scenarios in Mexico in this sense, where we have poorly developed social groups while others have higher levels of growth. This disparity is clearly seen in other problems such as education, health care, employment, and sufficient income, and it affects corruption and democratic development indices.
According to the figures published in the National Council for Evaluation of the Social Development Policy, CONEVAL’s 2014 Report on Measuring Poverty in Mexico, 46.2% of the national population lives in poverty. Ten of Mexico’s 32 states account for 81% of the population living in poverty: Chiapas, Oaxaca, Guerrero, Puebla, Michoacán, Veracruz, Estado de México, Guanajuato, Jalisco, and Mexico City.
Other countries experiencing situations of extreme regional inequality, with polarized economic growth rates that lead to a limited development at sub-national level, such as China, have implemented a Special Economic Zones (SEZ) model.
China's establishment of Special Economic Zones in the 80’s was sought to increase foreign direct investment in areas that did not attract FDI and improve technology transfers. This model accompanied the country in its decentralization and economic openness processes.
The Chinese government used joint ventures, the generation of government incentives, a public-private partnership plan, the reduction of government procedures, tax exemptions, and payment of customs procedures to transform some of its provinces into export areas, improve infrastructure, attract more foreign investment, and develop a profile based on the potential and economic vocation of each region, with Shenzhen as the best example of these changes.
The policies implemented by China, India, Poland, and South Korea have broad similarities with the contents of the decree issued on May 31, 2016 by President Enrique Peña-Nieto to enact the Federal Special Economic Zones Act.
The new regulatory framework for Mexico seeks to develop most backward regions, established in ten states with the highest incidence of multidimensional poverty and populations ranging between 50,000 and 500,000 inhabitants. The first four zones established by a decree issued by the Mexican President will be located in Puerto Madero, Chiapas, Lázaro Cárdenas, Michoacán, and in the trans-isthmus corridor that runs from Coatzacoalcos, Veracruz to Salina Cruz, Oaxaca.
The Federal Special Economic Zones Act seeks to regulate the planning, establishment, and operation of the Special Economic Zones to reduce poverty and expand productive vocation, investment, competitiveness, and development of each region.
Companies that choose to invest in these areas will operate as Integral Managers or Investors and may receive tax, customs and financial benefits, as well as administrative facilities and access to competitive infrastructure, and preferential financing from development banks, among other benefits. It should be noted that tariffs will be eliminated on the goods entering these zones and services will benefit from a special tax treatment.
The Act guarantees that such incentives shall prevail for eight years and cannot be changed, thereby assuring investors of long-term projects.
The decree authorizes the Ministry of Finance and Public Credit to create an Agenda for Development, in coordination with the relevant government agencies and government-controlled enterprises, and with the participation of the state and municipalities governments involved, which is the model that investors must adhere to. This program includes transparency and evaluation mechanisms and shall be reviewed every five years in order to make the necessary adjustments.
The Act also provides for the participation of academics and the business and labor sectors, including unions, working from an autonomous multidisciplinary technical board that will serve as the intermediate body between the Ministry of Finance and Public Credit and investors, who may make recommendations for designing the development plan, will monitor the actions taken, and assess performance of the Zone. Companies may obtain permits for up to 40 years, considering the existing infrastructure, the amount of investment, the existence of skilled labor and the long-term financial viability.
Investors may submit a Master Plan for the Special Economic Zone to the Ministry of Finance to determine the industrial areas where they are located, and the mechanism they use to operate. A fundamental aspect of the Act is that it opens the door for the government and private sector to work together in the developing these zones through Public Private Partnerships.
The Ministries will also create a coordination entity including the entities responsible for planning of matters related to environmental, civil protection, governance, social development, fiscal and customs regulation, agriculture, communications, transport, education, employment, and urban and scientific development at the national level, among others.
It bears noting that the SEZ evolution process will be a long one. In 2016, the government coordination authorities will be created and a series of adjustments will be made to the Act's regulations. Later, starting in 2017, the coordination agreements with states and municipalities will be signed, and the development programs for each zone will be published and released to potential investors interested. It won't be until 2018, that the first investments will be announced.
Though potential outcome of the new regulatory framework is yet unknown; however, this new regulatory framework is a good advance to allow Mexico’s progress. Lastly, it is important to note that in countries like China, it took about 20 years to consolidate the economic potential of the zones created and emerge as one of the world's major economies.
Mexico is one of the fastest growing countries on the continent with over 117 million people and more than 31 million houses inhabited. The country had an important population expansion in the last decades, and its population grew 1.7 times in the last 30 years. This growth in population and an intensive migration from rural areas to the urban communities created and expanded the urban areas and housing construction.
The urban migration to cities is the cause that leads to 70% of the population living in 55 cities.
Figure 1 Population Growth in Selected Countries 1980-2010
Latin America is a young region with an average age of its inhabitants of 23 years. In Mexico, the average age is 26 years. This means that the population demands education, job opportunities, and spaces to develop their lives. A high percentage of the population is still studying and is not yet part of the workforce. We are in the process of the Latin America baby boom. The driving force in the housing demand is the formation of new families and households. The growth of the population is a secondary driver, and it is more related with the use of space and characteristics of the dwellings than the demand for brand new houses.
During the next years, from 2016 to 2025, the number of new households in Mexico will increase to over 8 million and they will demand over 7 million new houses in the medium and large cities. The quality and conditions of the cities and houses will depend on a series of factors, but if the trends continue, an important percentage will be produced as informally built (self-built) houses.
This will require investments in infrastructure, real estate, housing and mortgages with a value of more than $300 billion for the decade.
In the past ten years, the government and the leading private sector institutions have worked together to create a common vision and a framework to use the best practices in the North American continent. The participants of this process have identified four strategic lines to enhance the situation of the housing and urban sector.
1. Public and Private coordination that promotes the creation of long-term institution: This is essential to keeping a long-term vision and setting the economic and social development as the key driving force.
2. Develop a Real Estate market in order to reach 4% of GNP per year:
Housing and real estate are important elements in the economic process of every country. The estimated contribution to the GDP of the developers of real estate and housing is 3%, which compared with other economies is relatively low so there is room for growth.
The housing sector has a positive effect in the value chain of the industries that are connected to the production of houses. This promotes employment, market development and local economy.
The challenge that Mexico faces today is a balance between the growth in the housing inventory and the quality of the dwellings.
Every year the housing stock of Mexico grows about 1 million houses. Of these houses, it is estimated that over 30% are informal houses that do not comply with the legal requirements, property title, building conditions and public services that in theory should be met. Informality is part of the social and economic reality in the country, and housing and labor informality are facts of life.
The combination of savings, subsidies and mortgages is a major bottleneck. Savings are limited and often informal, so many families opt for solutions where they can have shelter and self-built houses.
It appears that the options are industrial housing production or the disordered use of land with informally built dwellings.
Figure 2 Formal and Informal Housing (Mexico)
|ECOBICI is a fourth generation public bike sharing system, implemented by Mexico City Government as a bike mobility strategy.|
The positive combination of public and private sectors seems to be the solution to better housing. Urban development is a long-term process so the policies need to be consistent over long periods of time.
3. Use the Real Estate and Housing Sector as the driving force in economic and social development.
Housing and real estate have two dimensions in the perceptions of policy makers. One of these is the social implication of housing in the well being of people and families. The other is the economic dimension of the housing development process.
The social perception of housing is a major political theme in the agenda. In the case of Mexico, where the growth of both formal and informal houses is a key topic, some initiatives having been taken.
In the next ten years, urban development, including offices, commercial centres, factories and services, will be the major driver in the development of the cities in the region.
4. Promote the development of competitive cities with urban design, that creates wealth, employment and sustainable growth.
The development of Competitive Cities with planned solutions for housing and real estate is the key driving idea in regional development in Mexico. Mexico is among the six leading counties in developing and producing houses in the world.
The major challenge is to develop a focused strategy for the cities in Mexico. The Competitive Advantage of Cities is the key to Regional development. The argument is that Cities have a specific concentration of industries and they integrate the value chains that offer specific capacities and that perform particularly well.
Long-term financing and mortgages are the catalysts of the whole process. The whole financial system requires to be developed, including the saving and pension fund schemes. The stages of development at this moment require measures similar to the ones that where taken in Europe or the United States 50 yeas ago, in terms of urban planning, economic importance of the housing and real estate markets and the mortgage system.
Mexico is, at this moment, an area of opportunity. New companies and schemes will emerge and those who understand the momentum and trends will be in an excellent position to be part of the development of the markets.