Real estate development stays steady in Colombia

Housing demand continues to fuel the real estate sector in Colombia. It is a process happening on two fronts. Firstly, government-sponsored programmes are encouraging the construction of new homes for lower-income Colombians. Meanwhile, the growth of the middle class is galvanising demand for medium-income housing across all regions of the country. Furthermore, other real estate segments continue to provide important avenues for construction activity.

Although office real estate is undergoing a re-adjustment, as a host of office space projects come into the market, retail and industrial development continue to present opportunities. All three segments have become increasingly competitive internationally in terms of pricing, because of the strong devaluation of the peso.

Figures

Colombia’s construction sector is divided between two large segments – building and infrastructure or public works. Building currently accounts for about 60% of the sector, in terms of added value, according to 2015 figures by the Colombian Chamber of Construction (Cámara Colombiana de la Construcción, CAMACOL). Housing sales reached COP29trn ($10.7bn) in 2014, and were expected to hit COP30trn ($11bn) in 2015. Non-residential construction, including commercial, industrial, office and hotel building; contributes another COP25trn ($9.2bn) to COP30trn ($11bn) per year in sales on average to the construction sector, according to CAMACOL figures.

Although the exact figures are hard to determine, Colombia still faces a shortage of housing units. In 2005 authorities based the country’s quantitative housing deficit on a population census done in the same year, putting the deficit at 11.3% of existing households. However, no new overall census has been conducted since then, yet the country continues to suffer from shortages.

Current government figures put the housing deficit at 7.5% of total existing homes, meaning a total of 900,000 homes, according to Edwin Bonilla, director of economic studies at CAMACOL, with low-income Colombians accounting for the majority of the deficit.

Built To Live

Changes in demography and lifestyle habits are also impacting housing demand. The percentage of the total of single-person homes rose from 11% in 2010 to 19% in 2014, according to figures by CAMACOL. This shines a light on the sector’s future challenge, of building smaller homes, but in greater numbers, over the coming years. “Although social housing capacity has increased, the equilibrium between supply and demand is far from being achieved because of the growing population,” Luís Carlos Martínez, manager of CIMCOL, a real estate developer, told OBG.

Government housing policy over the past few years has focused mainly on the implementation of two programmes. The Vivienda Gratuita (Free Home) programme was launched during President Juan Manuel Santos’s first term, and focused on building 100,000 free homes for the country’s poorest citizens. As of November 2015, up to 98,500 of these homes had been delivered, and the remaining 1500 remain under construction as of January 2016.

By 2013, government policy focused on supporting lower-income citizens to acquire homes, with the launch of a second housing programme, Vivienda Para Ahorradores (Home for Savers), targeting those families that had a steady income but still faced challenges gaining access to commercial mortgages. This programme established subsidies to allow families access to the banking system.

This was done by supporting both the down payment on the unit, as well as the interest rate for a mortgage loan. The target number of units under this specific programme is 86,000. As of October 2015, up to 65% of these units had been sold, with the remaining housing units under construction. The programme targets households earning up to the equivalent of two minimum monthly wages (MMWs), i.e. COP1,288,700 ($474.24). In December 2014 the government announced an increase in the amount of subsidies for beneficiary families. For those earning up to 1.6 MMWs (COP1m, $368) the subsidy is COP19.3m ($7102.40).

For those households earning between 1.6 and 2 MMWs (COP1.3m, $478.4), the subsidy amount is COP16.1m ($5924.8), according to the Ministry of Housing (Ministerio de Vivienda, Ciudad y Territorio, MINVIVIENDA). The programme is run in conjunction between MINIVIVIENDA’s Housing Fund and the Cajas de Compensación Familiar (CCF), which receive 8% of workers monthly payments to be allocated to housing, education and health.

Beneficiaries of the Vivienda para Ahorradores can only use the subsidies to acquire housing in government-approved developments, at a maximum price of 70 MMWs (COP45m, $16,560). Overall, total investment for this specific housing programme is set to reach COP2.2trn ($810m). Although initially launched during Santos’s first presidential term, the impact of both these programmes on the housing construction market stretched into 2014 and part of 2015.

Middle Target

Besides securing homes for those in most urgent need, government policy has also had to adapt to the country’s changing demographics, by expanding access to financial support among the growing middle class. “The country has advanced, a lot of people have moved out of poverty. So all these people are now at higher income levels, and have changed their consumption patterns, but were still highly restricted to buy a home. However, some recently adopted housing programmes are focused on quickly closing this gap,” Bonilla told OBG.

Policy now focuses on a full range of instruments, from free housing for the most in need to interest subsidies to support middle-income home-buyers. Existing housing development efforts were reinforced in December 2014, with the launch of a new programme focusing on middle-income Colombians aspiring to own a home. The Mi Casa Ya (My House Now) programme once again combines subsidies, credit and down payment by families. The programme will run until 2018 and is ultimately expected to result in the of building 130,000 new homes.

A significant change in construction trends can be seen in the increased investment in secondary cities, given rising saturation of housing construction in major cities. “Currently Investors are turning their eyes towards middle-sized cities; they are purchasing numerous units as an annual return of 10-12% is expected,” Martínez told OBG.

One key difference is the maximum prices of homes that can be bought with the programme. While the Vivienda para Ahorradores scheme can only be used to acquire homes of up to 70 MMW (COP45m, $16,560) , the Mi Vivienda Ya programme allows beneficiaries to get support in the acquisition of homes worth up to 135 MMW (COP76.5m, $28,152). The programme caters to households earning between two and four MMWs, which currently represents about 40% of the Colombian population. “This is an important engine for the economy. It brings twice as much added value to the industry and the sector. In terms of resources it moves more money, because it’s aimed at the middle-income sector,” Bonilla told OBG.

Moreover, the programme has a smaller impact on the national budget in comparison to previous housing programmes, because it mainly comprises stimulus mechanisms, as opposed to a 100% financing of homes, as was the case with the Vivienda Gratuita programme. Furthermore, Mi Vivienda Ya has a special focus on the regions, which had been partly left out of previous housing programmes. This was the result of the reliance on the CCFs for home acquisition, which were mostly centred in the capital Bogotá and other large cities across Colombia.

Growth Drive

Housing strategies have also been hugely influenced by the Plan for Production and Employment (Plan de Impulso a la Productividad y el Empleo, PIPE 2), a COP16.8trn ($6.2bn) government plan introduced in May 2015 to strengthen the economy in the midst of an acute reduction in oil prices and a depreciation of the Colombian peso against the dollar. Overall, the plan is multifaceted, targeting everything from building infrastructure, improving the business environment, and encouraging key sectors such as mining and tourism. In terms of housing development, the plan aims to strengthen the impact of investments reaching the sector.

One key example was the government financed project to build an additional 100,000 homes. Under PIPE 2, this number was increased to 130,000, in order to magnify the multiplying effect that construction can have on the Colombian economy. Furthermore, instead of focusing those additional homes on the low-income free housing programme, part of it was shifted up in the income scale. “The free housing programme is still on, but instead of building 100,000 additional free homes, the government builds 30,000 free homes and transfers the remainder of the resources towards the other housing programmes that are expected to have a bigger impact on the economy and on the social context,” Bonilla told OBG.

Part of these resources will be channelled towards non-social housing development. Authorities will allocate a stimulus package for homes ranging between 135 MMWs (COP87m, $32,016) and 335 MMWs (COP215m, $79,120) by focusing subsidies exclusively on the interest rates that mortgage takers will need to pay. Average interest rates for a mortgage in Colombia were around 11.5% as of October 2015, and the government subsidises 2.5 percentage points from that under the programme. “The goal is to positively impact the decision to buy a house by the families. This programme was announced in PIPE 2 in May 2015”, Bonilla told OBG. Adequate regulation for this interest rate subsidy has been in preparation, and authorities expect the programme to be operational by January 2016.

These housing policy initiatives focus on Colombia’s middle-income home buyers and are not only designed to adapt to the country’s new demographic make-up, but also to allow the housing construction industry to focus on segments of the population where the risk is lower.

Price Adjustment

Housing prices in Colombia have increased steadily in recent years, caused by the structural demand in the market and the low availability of land for construction spaces. Price hikes led to talk of a bubble; however, this has still not materialised. According to Alejandro Gaviria, general manager at Juan Gaviria Inmobiliaria, “Bogotá is reaching a significant grade of oversupply, particularly with regards to office spaces. However, certain niches maintain much attractiveness even in saturated markets.”

Furthermore, the rate of price increases has stabilised under the economic conditions of late 2014 and 2015. According to figures by the National Statistics Bureau (Departamento Administrativo Nacional de Estadística, DANE), average prices for new homes rose 7.15% in the first quarter of 2015. However, this increase is moderate compared to previous price hikes of 11.76% in the first quarter of 2013, and 12.32% over the same period in 2014. “Some people thought that at the end of an economic cycle, housing prices would come down considerably, but that didn’t happen. The market is controlled through pre-sales, which avoids any excessive amount of stock to accumulate and influences prices dramatically. The market is now somewhat adjusting,” Bonilla told OBG. Not having an excessive amount of stock has been one of the strongest factors in the continuing evolution of Colombia’s housing market. This situation has allowed for a degree of fluidity in the market.

Office Space

Less prepared to deal with shifts in demand than the housing market, the office real estate segment in the country is now coming down from a period of heavy investment. According to second-quarter 2015 figures by Colliers International, a real estate consultancy, Bogotá had a total inventory of 2.3m sq metres of A+, A and B quality office space, a 12% increase compared to the same period in 2014. The most sought-after area for office space remains the Central Business District (CBD), situated between 70th and 127th streets, towards Bogotá’s northern districts. This area accounts for around 62% of the city’s total A+ quality office space, according to statistics from Colliers International.

The focus on the CBD has reduced the number of available land plots in the area, and as a result, 50% of projected office space over the coming years will be situated outside of the CBD. In addition to the availability of land, increasing congestion problems in the capital are making other areas comparably more attractive for future office space development. Of the city’s total office space inventory, 220,445 sq metres were available in the second quarter of 2015, of which 123,350 sq metres were in the A+ category.

Capacity is set to increase further over coming years, with 81 office real estate projects under construction and 34 projects at the pre-sale or commercialisation stage. These projects are expected to be delivered between 2016 and 2018. Together they are expected to add an additional 802,490 sq metres. On top of the 802,490 sq metres expected to be built by 2018, 240,000 sq metres were added to the total inventory in 2015, according to JLL Colombia.

However, the total amount of inventory expected to be added to the city’s office real estate offer over the coming years might see a change, as developers adapt plans in response to subdued demand. Of the 802,490 sq metres in the pipeline in the second quarter of 2015, up to 38% were in the planning stage.

Excess Offer

Part of the push to develop office space in Colombia has been led by real estate development funds (REITs). “With their available liquidity, instead of going into a building that is owned by several people and having to buy it all, they asked construction companies to build the towers, which the funds own and rent,” Aurora Turriago, marketing and research director at Colliers International, told OBG. Paradoxically, the surge of added office space is set to hit the market at a period in which demand is undergoing a reduction. Besides the increase in available space, there are A+ class office spaces becoming available by oil and mining firms affected by the slowdown of the region’s commodity boom.

Average rents in the capital as of the fourth quarter of 2015 reflect the excess amount of office space in Bogotá. According to information provided to OBG by JLL Colombia, the average rent price in the city’s office space market was down by 5% when compared to the same period in 2014. This downturn in rents can be attributed to the high levels of construction and low occupancy rates in the capital, which has depressed prices.

Turriago underlines, however, that these are asking prices, meaning that negotiations between owner and renter can push transaction prices down. “We are going from a market in which the owner had all the bargaining power, to a market in which the renter has more power,” Turriago told OBG. As result, office building owners are now offering significantly more amenities such as parking and build-outs to be able to close deals and secure tenants for longer periods. This means it is also a good time for renters to negotiate. “If you rented a place two years ago, when there was little office space on offer, and you closed at a certain high price, you are now able to negotiate because something cheaper is likely on offer close by,” according to Turriago.

Retail

Steady growth is expected in retail real estate. The development of modern retail outlets in Colombia has accelerated, fuelled by years of steady growth, low inflation and rising employment. But the potential to grow even further is still there. According to BBVA Research’s Real Estate Outlook 2015, the country’s total gross leasable area (GLA) per inhabitant is 0.074 sq metres, compared to 0.177 sq metres per inhabitant in Chile and 0.122 sq metres in Venezuela. The difference is significantly starker when compared to higher income economies such as the US and Canada, with 2.2 sq metres and 1.4 sq metres of GLA per inhabitant, respectively. This points to the fact that the country has more room to mature.

Because it concentrates the largest number of inhabitants and is the country’s political and economic centre, Bogotá remains the most important market for commercial real estate. Over the first half of 2015, the capital had a total inventory of 1,212,600 sq metres of retail real estate, according to Colliers International. These are distributed across 44 shopping malls. Due to extensions taking place in existing malls, Colliers International figures anticipated total inventory to reach 1,259,100 sq metres by the end of 2015. As of June 2015, the total area of free commercial spaces in the city reached 47,000 sq metres.

Additional capacity is set to come on-line over the coming years, with a total of 11 different commercial real estate projects shaping up in the city, five of which are new shopping malls. This will bring much needed improvements to the current retail environment In total, these new developments are expected to take the city’s total retail real estate inventory to 1,670,00 sq metres by 2017.

The added space that has opened up in the city is still short of the market demand. This is exemplified by the average prices, which reached COP105,000 ($38) per sq metre in the first quarter of 2015, a 20% increase compared to the same period of the previous year. The sales prices for retail real estate, on the other hand, reached COP17,539,000 ($6454.4), according to figures by Colliers International. Understandably, prices for commercial real estate vary depending on the area of the city and the type of shopping mall.

Rent in the north-western areas of the Colombian capital Bogotá can reach as high as COP147,000 ($54.10) per sq metre per month. On the other side of the spectrum, rents in less sought after retail space in the southern areas of the city can be as low as COP46,000 ($16.93) per sq metre per month. In the first quarter of 2015 sale prices for commercial real estate in Bogotá also showed the same level of disparity, reaching as high as COP20,327,000 ($7480) per sq metre in the northwest, or as low as COP2,997,000 ($1102.9) per sq metre in the southern parts of Bogotá, according to a report prepared by Colliers International.

Besides the capital’s potential for retail real estate, other areas of the country are showing appetite for new developments. Much of the new offer has gone into the regions, where a growing number of people are seeing their available income rise. “There are about 55 cities with over 100,000 inhabitants, which is an increasingly interesting market for new malls and retail offers,” Bonilla told OBG.

Industrial

The industrial real estate sector remains important for economic development in the country, as firms attempt to reduce logistics costs and ease the linkage of supply chains between production centres and the country’s ports. Although this segment of the real estate sector has not seen a supply surge comparable to what is happening in the office space segment, industrial real estate is being transformed both by the improvement in the supply of industrial spaces, and the growing number of roads and highway projects.

Compared to other segments of the market in Colombia, industrial real estate developers have more flexibility when it comes to responding to shifts in the market. “Since warehousing is easy to build, and developers can adapt better to the demand, they are left with a significantly lower risk than commercial and office space developers,” Turriago told OBG.

As of the second quarter of 2015 the total industrial real estate inventory in and around Bogotá in industrial parks reached 3.5m sq metres, according to figures by Colliers International – a 14% increase on the previous year. More importantly, industrial parks around the city have a projected 2.6m new sq metres in the pipeline to be developed over the coming years, which could potentially push the city’s total inventory of industrial space real estate to 4.8m sq metres by as early as 2017, which would represent a significant increase.

This of course will depend on how the market evolves and how industrial real estate developers react to expected increases in demand. Average rent prices reached COP14,400 ($5.3) per sq metre per month over the second quarter of 2015, a 4% increase compared to the same period in 2014.

Outlook

Economic development has provided stable growth rates for the country’s real estate sector in recent years, although this might change slightly for some market segments. Demand for housing continues to play an important role in the country’s construction sector as well as the national economy. Critically, a strict balance between housing stock and demand has helped avoid any of the perils associated with excessive housing development. A growing population and rising standards of living will allow the housing market to develop sustainably in the future.

On the other hand, excessive accumulated supply in terms of office space has reduced the segment’s investment attractiveness, with further supply expected to push rents downwards. Both the public and private sectors are focusing on development within medium-sized cities throughout the country. This has had a positive impact on the local real estate market, and is likely to continue to influence the overall market over the short- and medium-term. Therefore, the current mood in the real estate sector is one of optimism about the prospects for future growth. Colombia has an economy that is rapidly maturing and evolving, with real estate at the forefront of growth.

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The Report: Colombia 2016

Construction & Real Estate chapter from The Report: Colombia 2016

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