White Paper Mexican Residential Real Estate Toronto, Canada April, 2017 1 Table of Contents Investment Thesis Why Invest Capital in Mexican Residential Real Estate? o Strong Demographics will Drive Growth o Growing Middle Class = Favorable Demand Dynamics o Supply Shortfall (The Opportunity) o Government Support o Evolving Mortgage System Residential Market Overview o Product Segmentation o Housing Market Results 2015 o Housing Market Projections o Final Thoughts Barnhart Asset Management Corporate Overview 2 Mexican Residential Real Estate Investment Thesis Due to a young population in their early household formation years, low unemployment, strong economic growth and a government supported mortgage market, sustainable demand for housing in Mexico is anticipated for years to come. From a supply perspective, a fragmented home builder industry, a non competitive lending community and a non existent apartment rental sector has created a persisting housing deficit year over year. As a result of the supply and demand imbalance, BAM sees an opportunity to make significant risk adjusted returns by partnering with small and mid- sized local developers to provide new housing alternatives for the emerging middle class of Mexico. 3 Strong Demographics Will Drive Growth 4 Wealth Creation and Emerging Middle Class • Mexico has the 6th largest GDP per capita in the Americas with significant room for growth in the years to come. $60,000 GDP per Capita PPP $USD $50,000 $40,000 $30,000 $20,000 $10,000 $- Argentina Brazil Canada Colombia Mexico United States Source: International Monetary Fund (IMF), World Economic Outlook Database, April 2016. 5 Wealth Creation and Emerging Middle Class • Between 1992 and 2010, 42 million people became part of the Mexican middle class (annual income US$18-$50,000). Mexico is home to the largest middle class in Latin America. Size of the Middle Class as a % of Population Source: Council on Foreign Relations 6 Demographic Bonus • In what is commonly called the “Demographic Bonus” the country will have the largest working age population in its history between 2015 – 2035. Mexico Canada 127 million people in 2015 36 million people in 2015 Source: CIA World Factbook 7 Growing Working Class • Population aged between 25 and 65, the group demanding the largest portion of housing, represented 47.4% of the population in 2015. It will continue to grow until 2030. Population and age groups 1970-2030 100% 90% 80% 70% 60% 65+ 50% 25–64 40% Population 0–24 30% 20% 10% 0% 1970 1980 1990 1995 2000 2005 2010 2015 2020 2025 2030 Source: Softec 8 Growing Working Class • From 2005-2020, about 43 million individuals will be added to this group. • It is estimated that this market will drive a housing demand of approximately 6 million new homes by 2020. Population aged 25-64 1970-2030 54% 64,996 2030 53% 63,251 2025 52% 59,992 2020 50% 55,677 2015 47% 50,747 2010 population 44% 45,564 2005 32% 39,964 2000 31% 35,115 1995 28% 28,741 1990 and % of total of % and 26% 22,394 1980 Year 28% 11,937 1970 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 Population '000) Source: Softec 9 Urban GDP Growth • 16 cities will represent 50% of this growth doubling their combined GDP by 2025. Source: Softec. 10 Low Unemployment • Consequently, Mexico has one of the lowest unemployment rates in the region, historically ranging between 4.5%-5.5%. Unemployment rate 25% Projected 20% 15% 10% 5% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Argentina Brazil Colombia Mexico Canada United States Source: International Monetary Fund (IMF), World Economic Outlook Database, April 2016. The IMF estimates final figures for 2016 and forecasts thru 2019. 11 Growing Middle Class = Favorable Demand Dynamics 12 Strong Demand Dynamics • Mexico has a growing middle class with an increasing purchasing power. It is expected that Mexico’s annual housing demand will increase by approximately one million homes per year. Source: Dent Research 13 13 Increase in Household Formation • A majority of this demand will come via household creation. For decades, household formation has been a major driving force behind the growth of cities. Yearly household formation was above 815K in 2015, and is expected to reach 830K by 2030. Source: GEA 14 Increase in Household Income • Although segments D, E and D+ represent the majority of households in the Mexican economy, segments C and C+ have the highest growth projections due to the increasing middle class. Household by income levels 35,000,000 30,000,000 D/E 25,000,000 D+ C 20,000,000 C+ 15,000,000 A/B 10,000,000 5,000,000 0 D/E = annual household income US$3-9,292: D+ = annual household income US$ 9-$18,584: C = annual household income US$18-$43,926: C+ = annual household income US$43-$109,815: A/B = annual household income >US$109,815 Source: Softec 15 Supply Shortfall (The Opportunity) 16 Residential Market – Supply Shortfall • In 2009, subsequent to the financial crisis, the Mexican real estate market suffered a major economic shock. • The number of subsidized developers decreased by 40%. • Due to financing restrictions worldwide, by 2010 the homebuilder market found it difficult to obtain financing for new projects and bridge loans had become scarcer; the balance of bridge loans contracted by 38%. • In result, housing production decreased leading many developers of all sizes to file for bankruptcy. Sources: Infonavit, Conavi 17 17 Fragmented Supply • Due to the large shock suffered in 2009, the housing market has become highly fragmented and regionalized. No single developer has a market share greater than 10%. Main players in the mexican housing market (unit sales) 2015 estimated Otros Casas Javer RUBA desarrollos 31% 34% Consorcio ARA Hogares Unión INFONAVIT vivienda Reasignada Grupo Garza Ponce Grupo Sadasi CADU inmobiliaria 4% 18% 3% GIG Desarrollos inmobiliarios 2% 1%2%2% Empresas Medianas 1%1%1% Empresas Pequeñas Sources: Softec 18 18 Residential Market – Supply Shortfall • Thus in result, the emerging middle class combined with the decrease in housing production has led to a significant supply shortage. Potential & Estimated Market for Homes 2005-2020 1,800,000 1,600,000 1,400,000 Potential 1,200,000 Market 1,000,000 Units 800,000 Softec Estimate 600,000 400,000 200,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Potential Market = those who need or want a house and can afford to do so Estimated Market = housing purchase transactions or constructions in Mexico Sources: Infonavit, Conavi 19 19 Government Support 20 New National Housing Policy Starting in 2014, in an effort to combat the housing deficit, the Mexican government implemented a new National Housing Policy with an aim to boost access to home ownership and bring much needed long-term sustainability to the sector. • The President aimed to lift housing by triggering close to US$25 billion in investment in the construction of 500,000 homes and the development of 1 million acres of land. • This reform will have the goal to incentivize developers to build, providing them with much needed liquidity and cash flow all the while implementing a subsidized mortgage program to further ease the access to affordable financing for the entire Mexican population. 21 Increase in Government Subsidies • In result, In 2014 the Mexican subsidy budget increased by 33% reaching MXN $10.6 billion. • In 2014, Conavi, the Mexican Housing Commission, increased the upper limit for subsidy eligibility from 2.6x to 5.0x the minimum wage, resulting in 1.7M additional subsidy eligible workers. Federal Subsidies for New Home Acquisitions $12,000 $10,000 $8,000 M$ Pesos M$ $6,000 $4,000 $2,000 2010 2011 2012 2013 2014 2015 2016 E Sources: Infonavit, Conavi 22 22 Increase in Housing Inventory • Starting in May 2014, registered housing supply showed signs of recovery, however current housing supply is still insufficient to meet demand. • Due to the continued downwards pressure on the price of oil, In 2016 Mexico announced a cut in government subsidies. Estimated units titled for the coming years are expected to be in line with 2014 levels, despite increasing demand. Annual Registered Housing Inventory (Thousands of Homes) 700 600 500 400 300 Units 200 100 – 2008 2009 2010 2011 2012 2013 2014 Sources: Infonavit, Conavi 23 23 The Evolving Mortgage System 24 Mexican Mortgage System • In light of the national housing program, progress has been made and mortgages have become easier to find. The challenge however remains in the increase of funding and coverage. • The release of the programs announced for housing in 2013-2018 have the potential to reactivate the market by taking advantage of the growth of existing demand led by the emergence of the middle class over the last ten years. • In order to bridge the housing gap, it is imperative that the government continues its effort in providing accessible and affordable financing options to the “bottom of the pyramid” as it is the largest group in terms of volume and also the least penetrated. 25 Main Mortgage Providers Source: Softec 26 26 Main Mortgage Providers • With over 50% of the market share, INFONAVIT is the largest mortgage provider in Mexico. • In an effort to further widen its scope, In 2014 INFONAVIT increased its maximum mortgage amount from MXN$453,000 to MXN$884,000. Mortgage Portfolio 2015 $80,000 $70,000 $60,000 $50,000 USD $40,000 Million $30,000 $20,000 $10,000 $0 Infonavit Banks Fovissste Bohris & Bonhitos Source: Softec 27 27 Main Mortgage Suppliers – INFONAVIT In 2016, INFONAVIT remains the leader in mortgage loan placements in Mexico, with a 73% market share providing loans to that aforementioned “bottom of the pyramid”.