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Mexico Real Estate Outlook 2H18

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Mexico Real Estate Outlook 2H18 Mexico Real Estate Outlook Second half 2018 Mexico Unit Contents 1. Summary 3 2. Market Conditions 4 2.a Building surprises with a boost to construction 4 2.b The mortgage market, due to the end of the contraction period. 13 3. Special topics 26 3.a Construction performance below its potential 26 3.b An approach to the prices faced by builders 31 3.c Population, lag and employment; their contribution to the state distribution of the mortgage market 35 4. Statistical annex 42 5. Special topics included in previous issues 46 Closing date: 10 October 2018 Mexico Real Estate Outlook – Second half 2018 2 1. Summary In our previous edition of Mexico Real Estate Outlook, we forecasted that construction GDP would fall in 2017 and not grow during 2018. The first part of our forecast was confirmed, but the rest of it was not, at least until the middle of this year, 2018. The GDP of construction closed 2017 with a fall of 1.1% in the annual rate. This is a result of the 10% decline in civil works and the slowdown in building that only improved 0.4%, both in annual terms. However, for the second quarter of 2018, the construction sector has an accumulated advance of 2%. Civil works are behaving as expected, even on negative ground, explained primarily by low investment in infrastructure works despite the announcement of the most ambitious infrastructure plan of the latest investments, which simply failed. Thus, only building remains as a driver of construction. The level of prices of construction materials has accelerated over the last few months, reaching almost 10%. Cement and ready-mix, the most important inputs in the building materials sub-index, have the largest increases from 2011 to 2018, followed by metal products such as rods. Other inputs, such as rental of machinery and equipment have slowed the pace of price increases but are vulnerable to the exchange rate because leasing is usually defined in foreign currency. We expect the price level to remain high in the short term, but by the end of 2019 we could see lower inflation in construction inputs. We are including a brief study of the economic cycle of construction and how it influences other aspects of the real estate sector. The construction sector has undergone a structural change, shortening its economic cycles in the wake of the economic crisis of 2009. We see this precisely in the early recovery of GDP mentioned at the beginning of this text. These cycles are largely determined by investment, which in turn influences the real estate sector, whether residential or commercial. Residential investment explains the dynamics of housing price indices, as well as those of commercial real estate. Entering the housing market, the number of mortgage loans continues to contract. At an annual rate, 2.3% fewer loans were granted in accumulated figures up to June 2018. With respect to the amount originated, the contraction is 5.3% in real terms. Only Infonavit is growing, thanks to its incursion into the middle and residential segments, while Fovissste and the banking sector have not been able to grow. These contrasting results show that the strategy by Infonavit of increasing loan amounts has been better than the containing of increases in interest rates by banks. However, the level of inventories remains at an acceptable level and consumer confidence in the housing market improved once the electoral process was completed. At the regional level, we see that from 2012 to 2018 mortgage credit both from public institutions and banks has greater opportunities in states with better generation of employment and economic activity, mainly those related to the export sector. By contrast, the housing lag does not define the potential of the mortgage market, nor the allocation of subsidies for housing. So the incoming administration could take a considerable turn from fulfilling its proposal to give priority to the southern states of the country. Mexico Real Estate Outlook – Second half 2018 3 2. Market Conditions 2.a Building surprises with a boost to construction The construction sector is showing signs of recovering earlier than expected. Recovery of 2% in Until the first half of 2018, construction GDP grows 2.0% in annual terms, the construction same rate observed for the total economy. This result is the combination of a smaller contraction of the GDP of Civil Works, which fell 7.2%, and an acceleration of the GDP of Building, which reached an annual rate of 3.4%. The GDP of Specialised Works also contributed positively, although as we have seen previously, its contribution to the sector is marginal. Figure 2a.1 GDP Accumulated Construction Figure 2a.2 GDP Accumulated Construction Billions of pesos in real terms and % YoY change (% change YoY) 1,310 5% 20% 1,300 4% 15% 1,290 3% 10% 2.0% 3.4% 5% 1,280 2% 2.0% 0% 1,270 1% 2.0% 1,290 -5% 1,260 1,265 0% 1,277 -10% -7.2% 1,250 -1% -15% 1,240 -2% -20% 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Construction GDP (lhs) % change, Total Construction Building % change, Construction Civil works Specialized Source: BBVA Research based on data from SCNM (National Accounts Source: BBVA Research based on data from SCNM (National Accounts System) and INEGI (National Statistics and Geographical Institute) System) and INEGI (National Statistics and Geographical Institute) Along these lines, the demand for workers by construction companies increased during the first two quarters of this year. By March 2018, just over 10,000 jobs had been created in the sector, but by the middle of the year there were just over 90,000 additional jobs, based on data from the ENOE conducted by INEGI. This breaks the barrier of 4.5 million jobs in construction. The subset of formal private jobs within the sector also increased as it has been doing for the last five years. In this same period, we see that in the first quarter of 2018 5.3% more workers were registered in the IMSS and in the following quarter, an additional 5.4% in annual comparison. Sometimes the increase in employment without greater investment in physical or human capital tends to deteriorate the productivity of the labour force; but on this occasion both indicators show improvement. The workers’ productivity indicator stopped dropping, as it had during 2017; it now presents a subdued advance of around 0.5%. On the other hand, the productivity indicator in terms of working hours in this sector shot up above 3% at the end of the first half- year in annual comparison. This, together with increased employment, suggests that the good pace of the sector could be maintained in the short term. Mexico Real Estate Outlook – Second half 2018 4 Figure 2a.3 People employed in the construction sector Figure 2a.4 Productivity index in construction Millions of workers and % YoY change (% change YoY) 4.6 10% 4% 4.4 8% 3% 4.2 2% 6% 4.0 1% 3.8 4% 3.6 0% 2% 3.4 -1% 0% 3.2 -2% 3.0 -2% 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 -3% 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Total employed (lhs) Annual % change, total Annual % change, IMSS Employed Hours Source: BBVA Research based on data from ENOE, INEGI Source: BBVA Research based on data from INEGI This progress in construction during the first two quarters of 2018 is even more significant if we think that the cost of inputs continues to rise, although we Prices of inputs rose at the expected a moderation in this period. The prices of inputs continue to grow rate of 9.3% in 2Q18 regardless of the type of construction, although in the case of Building, the National Producer Price Index (INPP) has a higher rise than that of Civil Works. The prices of inputs increase around 10% in annual rate, this figure exceeded 12% at the end of 2017 and the beginning of 2018. In any case, it remains above the headline inflation of consumer prices. Materials such as cement, concrete and metal rods are still those with the most impact; while the cost of renting machinery and equipment has slowed its increases. By contrast, workers’ salaries have grown the least at around 4%. Figure 2a.5 Construction INPP inputs Figure 2a.6 National Producer Price Index (% change YoY) (Base 2008 = 100) 14% 150 12% 140 10% 130 8% 120 6% 110 4% 100 2% 90 0% Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 80 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Headline Construction materials Construction Building Civil works Mach. & equip. rent Wages Source: BBVA Research based on data from INEGI Source: BBVA Research based on data from INEGI Mexico Real Estate Outlook – Second half 2018 5 The gross value of production in construction shows a slight advance this year. The value of private sector construction entered negative figures. In the opposite direction, the value of public sector works has improved since the beginning of the year. A considerable part is simply a statistical effect because the basis of comparison is quite low because of the continuous deterioration over these years. This continues to be the result of lower investment in physical capital by public bodies, to a greater extent by Pemex as it has little room for manoeuvre due to pressure on its finances. In addition, the Federal Government also devoted less resources to this type of investment, which is a close parameter for learning about the performance of public sector works.
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