Investors Chase 14% Yield in Mexican Housing Recovery: Mortgages

To Adrian Parra, the 436,375 peso ($30,000) mortgage he got in Mexico in 2008 is a burden he can’t shake. He says inflation-linked increases to the principal have helped push the amount he owes to more than 500,000 pesos after six years of payments.

To investors, mortgages like Parra’s are an opportunity to seize in Mexico’s rebounding housing market.

This must be “a very profitable business,” said Parra, 37, a financial adviser in Mexico City. “But since I’m a homeowner, it’s really not.”

Foreign investors have poured into Mexico’s first mortgage real-estate investment trust, which is using some of the 8.625 billion pesos raised in a share sale last month to fund purchases of inflation-adjusted mortgages. Investors in the REIT, known as FHipo, benefit from an interest rate of at least 8.5 percent on the mortgages, an inflation adjustment that boosts the principal and exposure to a resurgent market.

“We found mortgages which we believe are more appealing than the mortgages you can buy in the U.S.,” said Carlos Vara, a shareholder and former chairman of Mexico City-based Concentradora Hipotecaria SAPI, which manages FHipo. “Mortgages do not grow by book value typically on a yearly basis. However, in our case, they do.”

Government-backed Infonavit, Mexico’s largest mortgage lender, sought to protect itself from inflation starting in 1987, when the rate soared to more than 159 percent from 64 percent in 1985. Infonavit began issuing mortgages in which the loan principal would increase annually based on the growth of the minimum wage, which the government adjusts with inflation.

9% Rate

FHipo is funding loans under a program called Infonavit Total. The average interest rate is about 9 percent for the 1.6 billion pesos of mortgages that the REIT has purchased so far. About half of them are held by borrowers earning more than $16,800 a year. That’s more than one and a half times the $10,307 per capita gross domestic product the World Bank estimates for the country.

The 372,000 Infonavit Total mortgages outstanding have an average non-performance rate of less than 2 percent, according to the lender. Infonavit, as the National Workers’ Housing Fund Institute is known, collects the payments, mainly by deducting them directly from workers’ paychecks. Bank mortgages had a non-performance rate of 4 percent in October, according to regulator data.

Best Returns

FHipo has an exclusivity agreement with Infonavit and will be the only nonbank buyer of Total mortgages until at least late 2015 -- locking out other REITs. FHipo’s funding will free up money that can be used to finance additional borrowers, said Alejandro Murat, the head of Infonavit.

“These securities only mean that more institutions of another kind can generate more resources for the Institute, that’s basically what FHipo’s doing,” Murat said from the company’s headquarters in Mexico City. “Infonavit Total continues to be the most solid product that the Institute has to offer. It gives the most certainty and the best returns for investors.”

FHipo aims to pay a dividend yield of 14 percent based on the share price in its initial public offering -- partly by using borrowed money to supplement shareholder equity, according to company filings. That’s four times the average dividend for the 168 members of the Bloomberg NA REIT index, which includes U.S. trusts with a market capitalization of at least $15 million.

Low-Risk Opportunity

Rodrigo Nunez, head of credit and alternatives at pension fund Afore XXI Banorte in Mexico City, said he bought FHipo shares because they offered a low-risk opportunity to get relatively high yields.

“In Mexico, since the asset is yielding much more, you can have some kind of a premium,” Nunez said

Global investors bought more than 60 percent of the REIT’s shares in its Nov. 4 IPO. The REIT has outperformed Mexico’s benchmark IPC index since selling 7.5 billion pesos of shares at 25 pesos each. The REIT, which also sold an additional 1.125 billion pesos in shares, has slipped 2 percent to 24.5 pesos a share since the IPO, compared with a 5.3 percent drop for the index.

Credit Suisse Group AG analysts last week gave FHipo an outperform rating and a target price of 30 pesos a share. They called the REIT an attractive vehicle to access Mexico’s underpenetrated mortgage market.

“We expect FHipo to offer very attractive yields with low leverage risk,” analysts led by Vanessa Quiroga wrote in the Dec. 15 report. “This looks very attractive when compared to the U.S. mortgage REITs.”

While FHipo currently has a self-imposed leverage limit of 50 percent of the trust’s assets, it will post a 10 percent dividend yield in 2016 and 12.1 percent by 2018, the bank projects.

Lending Expands

In early 2013, changes in federal housing policy shifted subsidies to encourage city development over commuter towns. That rendered some land holdings belonging to homebuilders useless and pushed Desarrolladora Homex SAB, Urbi Desarrollos Urbanos SAB and Corp. Geo SAB into default.

Investors lost billions of dollars on the industry as projects froze and many owners abandoned homes that hadn’t been connected to utility services.

Less than two years later, the mortgage market is recovering as bank and credit union lending rates for all types and maturities of home loans hover at a record low of 10.8 percent.

Bank mortgages, typically available only to Mexicans with a more established credit history, rose by 13 percent in the 12 months through October to 552.6 billion pesos, according to data from the regulator known as the CNBV. Infonavit estimates that the number of mortgages it will originate each year will increase to 394,000 in 2018 from 380,000 in 2014.

Inflation-Linked Mortgages

As more borrowers like Parra face growing balances, Infonavit has started reviewing its inflation-adjusted loan program, Murat said. The lender is planning a pilot program next year that will let workers convert inflation-linked mortgages into loans with fixed amounts, he said.

With annual inflation under 5 percent since August 2009, a policy change may be warranted “in recognition of the macroeconomic stability that Mexico is now enjoying,” Murat said.

Alfredo Vara, chief executive officer of the company that manages FHipo, said while the principal on the loans may increase early on because the amortization is small, the balance doesn’t go up in real terms since the worker’s salary also grows.

“What you have is a credit with a real rate that grows with inflation,” said Vara. “As much as the salary grows with the minimum wage, in reality what this does is create greater buying power.”

Parra’s Payments

Vara said that inflation-linked mortgages are unlikely to dry up because they allow for more borrowing than loans with fixed principals. The REIT could also fund fixed-amount mortgages as long as rates are similar, he said.

Parra, the adviser, said the Infonavit loan hasn’t worked out for him. He secured the mortgage at a rate of 10 percent and planned to pay it off in a decade while earning about 25,000 pesos a month.

He lost his job at a pharmaceutical firm just a month after getting his mortgage and was out of work for a year. During his time out of work, the payments he made out of pocket as well as those from his unemployment insurance policy were sometimes less than the amount that Infonavit would have deducted from his paycheck.

As an adviser paid partly in commissions, Parra now earns about two-thirds of what he used to make even after receiving base salary increases, he said. At the same time, his principal payments have increased along with the minimum wage to keep up with inflation.

“I’m putting a very significant part of my salary toward this,” Parra said. “I haven’t finished paying or even advanced.”