Deputy Finance Minister Fernando Aportela said development banks will provide at least 5 billion pesos ($387 million) of eight-year syndicated credit lines. The lines, issued through Sociedad Hipotecaria Federal and Nacional Financiera, will produce about 50,000 homes, he told reporters in Mexico City on June 28. The government will also offer guarantees for bond sales of about 5 billion pesos so that issuances can receive higher credit ratings and attract investors such as pension funds and insurance companies, he said.
The measures are part of the government’s plan to arrest urban sprawl without prompting further contraction in the homebuilding industry or impeding efforts to address a housing shortage. While the strategy pushes development toward urban areas, it also provides some concessions to help builders adapt to a shift in subsidies that’s reduced demand for outlying communities, where the biggest companies have accumulated land.
Desarrolladora Homex SAB (HOMEX*), Corp. Geo SAB (GEOB) and Urbi Desarrollos Urbanos SAB (URBI*), Mexico’s three biggest publicly traded homebuilders, are scaling back construction and considering restructuring debt after cash plummeted this year, partly due to the government’s emphasis on urban development. The policy shift follows a wave of home abandonment in the subsidized communities as Mexicans reject multiple-hour commutes to work and return to city living, even if it means bunking with friends or relatives.
The cash slump of the industry’s biggest companies has “reduced the appetite of some financial intermediaries for financing the sector,” Aportela said. “We’re using the development-bank products to supplement that appetite.”
The banks plan to start disbursing funds from the syndicated credit line “over the next few weeks” and the bond-backing program should be ready in about two months, Luis Madrazo, head of the development-banking unit at the Finance Ministry, said June 28 in a separate conference call with investors. Most of the rest of the government’s housing-strategy changes will go into effect in January 2014.
Some companies have been left with reserves of rural terrain, intended for the creation of commuter towns with homes often worth around $20,000, as the government insists its subsidies must focus on urban development in areas with pricier land.
Homex, Geo and Urbi all saw cash balances drop at least 85 percent in the first quarter. All three have been downgraded by ratings agencies after they missed interest payments on bonds.
The government is also increasing subsidies this year by 26 percent as an additional boost to the industry, said Jorge Carlos Ramirez Marin, minister of urban and agrarian territorial development, who spoke at the press conference.
While the government mostly maintained its definition of city limits, it created a path to subsidy eligibility for outlying neighborhoods already under development, according to Ramirez Marin. It also tweaked some criteria that the government said will allow for greater subsidy disbursement per applicant, while at the same time ensuring higher-quality homes.
“The defining of the rules gives the industry greater visibility,” Jorge Placido, an analyst with Monterrey, Mexico-based Vector Casa de Bolsa SA, said in an e-mailed report on June 29. While the largest builders will remain constrained by cash shortfalls, he said, the announcement allows the industry “to make the changes and adaptations needed in the coming months in order to participate in the new model.”
The subsidy program uses a point system to determine whether a property can be purchased with federal help. The 0-1,000 grading scale accounts for quality of location, population density, proximity to jobs and availability of services.
Mexico’s housing shortage, combined with demographic growth, means Latin America’s second-biggest economy needs 300,000 to 400,000 new homes a year, according to a document distributed at the press conference. As of 2015, developments’ location and proximity to jobs and services will also determine whether home buyers can get credit from state-backed mortgage lenders to buy property, the ministry said, with far-away homes less likely to qualify for loans.
The government estimates that 68 percent of companies’ registered land reserves will be eligible for subsidies under the new classification system.
Urbi shares have plummeted 71 percent this year, the biggest decline on the benchmark IPC (MEXBOL) equity index over the period. Homex, down 69 percent, and Geo, losing 63 percent, are the second- and third-worst performers. The Habita index of homebuilders advanced 3.1 percent on June 28, paring its decline to 55 percent this year.
Urbi’s benchmark dollar bonds due in 2022 have plummeted 72 cents this year to 24 cents on the dollar, according to data compiled by Bloomberg. Benchmark dollar bonds from Homex and Geo have declined 76 cents and 64 cents, respectively.
The government, which had planned to present its housing plan in May, delayed the announcement after industry representatives demanded greater input, Alejandro Nieto Enriquez, deputy minister for urban development and housing, told reporters May 30.
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