Acapulco, once a teeming beach resort city, is now one of the most blood-soaked precincts in Mexico. A spike last year in gangland killings by drug cartels has terrorized residents and curbed tourism. It’s also made it even harder to sell real estate in a city already falling behind rival resort enclaves along the Caribbean.
Few real estate developers feel the pinch as keenly as Sare Holding (SAREB:MM), Mexico’s fifth-biggest publicly traded builder that got 36 percent of its sales from Acapulco in 2010. The company is selling $1.4 million luxury condominiums in Acapulco and has seen its sales and stock price collapse in recent months. Sare’s revenue in Acapulco dried up completely in the fourth quarter, dragging the city’s full-year 2011 home sales down 54 percent, to 330.2 million pesos ($26 million), according to the company. Sare’s home sales nationwide plunged 90 percent, in part a result of the violence in Acapulco, it says. As of March 13, Sare’s stock was down 14 percent since the company reported earnings on Feb. 27.
Consumers “have the security issue on their minds,” says Jorge Placido, head of equity analysis at Vector Casa de Bolsa. Buyers want vacation homes “that offer peace and security.” Commercial mortgage lending in Guerrero, the state whose biggest city is Acapulco, last year fell 16 percent, to 922.5 million pesos, from 2008. Across Mexico, lending was down 2.2 percent for the same period, according to data compiled by Banco Bilbao Vizcaya Argentaria.
As it negotiated with bankers over extending maturities on its debt, Sare had to halt land sales from October to February, and bankers temporarily suspended construction financing, contributing to the builder’s 2011 loss of 117.9 million pesos. “The perception of insecurity set back our sales,” says Mauricio Suarez, the company’s investor relations representative. Sare plans to shift its investment focus to the low-income market, which benefits from government subsidy programs aimed at curbing a housing shortage that has left about 8.9 million families either without homes or living in substandard dwellings. Jorge Lagunas, a money manager at Mexico City-based Grupo Financiero Interacciones (GFINTERO:MM), says he is starting to see some demand for Sare’s stock. “The company isn’t going bust,” he says.
Homicides in Guerrero rose 44 percent in 2011, to 2,158. In August the state’s monthly tally briefly surpassed Chihuahua’s to make it the most dangerous region in Mexico, data compiled by the Attorney General’s Office shows. Drug-related violence has killed at least 47,500 people in Mexico since December 2006. The government said in 2010 that the instability shaves 1.2 percentage points off Mexico’s gross domestic product annually. It denies the real estate market has been harmed. “We haven’t seen any evidence that the violence is having any impact on the housing sector,” says Ariel Cano, director of the government’s National Housing Commission. “For sure it’s not helping.”