Buoyant buildings: Major housing and infrastructure projects drive sector development

Closely tracking patterns in the general economy, the construction sector expanded by 3.6% in 2012, significantly lower than the 10% gain in 2011. Even so, prospects for 2013 suggest the sector will regain momentum, driven by aggressive government spending programmes aimed at closing wide gaps in infrastructure and housing. Contributing 6.3% to GDP and employing some 1.16m people, the sector’s healthy performance is in the interest of all.

HOUSING DEFICIT: Though exact deficit figures are difficult to measure with a constantly growing population, the last census by the National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadística, DANE) in 2005 gauged it at nearly 4m units, with 1.3m corresponding to the construction of new homes and the rest requiring major improvements. Efforts have been made to close this deficit, but thus far construction averages around 140,000 homes per year, far below the rates needed to meet demand. Considering the number of housing units slightly surpassed 12.6m in 2012, this deficit is quite significant. “Housing projects will continue until every Colombian achieves the dream of homeownership,” Sergio Mutis, president of real estate developer Grupo Valor, told OBG.

According to the Ministry of Housing, Cities and Territory (Ministerio de Vivienda, Ciudades y Territorio, MVCT), around 45% of the demand for homes is in urban areas. Families living in rural regions have traditionally been more likely to be subjected to extreme levels of poverty due to a lack of social services and violence between the Revolutionary Armed Forces of Colombia and private militias – much more over drug trafficking than political ideologies in recent years. These conditions have spurred migrations to cities, referred to in Colombia as “displacements”, which only aggravate urban housing problems.

STRUCTURE: Housing is divided into three categories: Priority Interest Housing (Vivienda de Interés Prioritario, VIP), Social Interest Housing (Vivienda de Interés Social, VIS) and non-VIS, which includes all segments above those rankings. Government policies concerning social housing systems are quite proactive and in 2010 the newly elected government of President Juan Manuel Santos announced measures aimed at closing the housing gap, which entailed the construction of 1m homes during his four-year term.

The VIP segment, which targets “displaced” families or families living in extreme poverty, provides beneficiaries registered with the Administrative Department for Social Prosperity with free housing solutions. There is an equally strong focus on marginalised Afro-Colombian and indigenous communities. The construction of VIP homes normally falls under the scheme of programmes such as the 100,000 free homes (see analysis), which involve the construction of multi-family apartment buildings, with each unit measuring around 35-45 sq metres.

Within the VIS segment, families that earn up to COP2.26m ($1360), can apply for partial subsidies towards the purchase of a home, ranging from 35-70 sq metres. The maximum value of a home under the VIP category is currently COP41.26m ($24,759), while VIS homes can go up to COP79.58m ($47,749).

REMAINING PROFITABLE: Though margins per unit can be small for the social housing segment, the demand is such that many opportunities await developers. Large-scale constructions tend to make up for the difference in low unit prices and several public-private partnership (PPP) programmes have proven successful for consumers and the private sector, increasing the social housing potential (see analysis).

Informal construction remains a common practice among low-income segments. While most sector specialists interviewed by OBG agree that the problem is not as severe as it was several years ago, informality still affects sector activity and the quality of life of those who resort to it. Clemencia Parra, executive president of real estate appraisal company Unifianza, refers to informal construction firms as “pirate” developers, saying they are a serious problem for the housing segment as they often construct in high-risk areas where landslides or floods can easily occur.

“There are state entities that clearly establish highrisk zones where construction is prohibited, but the control of such restrictions is rarely fulfilled,” she told OBG. “On the other hand, public service companies often provide water and electricity to these areas once a large portion of people already live there, which only aggravates the problem. It is a complicated situation since people believe they have solved their housing needs and often encounter more serious problems.”

PERFORMANCE: Overall residential construction lacked dynamism in 2012. However, compared to 2010 and 2009, it continued to display positive signs, according to the Colombian Chamber of Construction (Cámara Colombiana de la Construcción, CAMACOL). Project launchings decreased, closing the year with 112,121 new homes on the market, 13.7% fewer than in 2011. Sales decreased 6.7%, affected mainly by the VIS segment which sold 5384 fewer units than the previous year. As for beginning new projects, less activity in the VIS segment greatly influenced total residential numbers, which fell 12.4%.

Despite these figures, the government’s recently announced Stimulus Plan for Production and Employment (Plan de Impulso a la Producción y el Empleo, PIPE), is due to significantly affect residential construction in 2013 by injecting resources into the sector. Additional initiatives to construct sets of 100,000 homes aimed at several social segments, not exclusively free housing, are included in the new measures, channelling COP2.1bn ($1.26m) to meet demand. Results have already begun to show and in February 2013 alone 2.2m sq metres were granted for new construction projects, representing 27.6% year-on-year (y-o-y) growth, according to DANE.

One important measure that has mitigated risk factors in residential construction involves the common practice of pre-sales, which delays the onset of development until the economic viability of the project is ensured. The money collected from sales goes into a trust fund and the project can begin only after reaching a break-even point. Once a certain amount of money towards this total has been invested, the developing company freezes the price of the potential home in order to avoid price speculation.

MIDDLE RANGE: Some PIPE measures also aim to boost the economic activity of middle class segments that fall under the non-VIS housing classification. Specifically, one initiative involves providing a similar subsidy programme for families looking to purchase homes valued at up to COP195m ($117,600). Jorge Luis López Esguerra, president of construction company Apiros, attributed this move to trends in regional policy whereby many Latin American countries are attempting to strengthen their middles classes. However, he pointed out that this initiative will also benefit construction activities due to the sector’s natural multiplying effect. “The sector absorbs much more income through the construction of highend and middle-income properties because the amenities demanded in these homes have much more value. This creates added demand that reaches different industries,” he told OBG.

However successful these government-sponsored initiatives are in creating demand for social housing and catering to the growth of middle classes, the private sector’s most common criticism is the lack of institutional attention given to the supply end.

César Llano Zambrano, executive president of umbrella real estate association Fedelonjas, supports state initiatives, but believes 100,000 homes is a small number for the deficit Colombia faces and is confident in the private sector’s ability to construct at least 600,000 homes per year. “These programmes have not been as successful as they could be, because the response of municipalities to prepare land for residential projects has been virtually non-existent,” he told OBG. Access to land is one of the largest problems the sector faces and will prove complicated to resolve in light of municipal government structures. LAND IN BOGOTÁ: Scarcity in major urban areas, particularly in Bogotá, is not the only challenge in accessing land for construction. The shortage of sufficient public services in peripheral zones and the lack of municipal willingness to properly urbanise plots has also proved a challenge. “The issue is not the ability to urbanise land, but rather the laws that permit municipalities to have such governing power over plots that are possible construction sites,” López told OBG. As independent governing entities, municipalities oversee the granting of construction permits, meaning that available plots are subject to each municipal development plan, which often contrasts with of the central government or developers’ views.

NEW PLANS: This is the case in Bogotá, where the current mayor, Gustavo Petro, had proposed several structural reforms to the city’s Territorial Organisation Plan (Plan de Ordenamiento Territorial, POT), the framework for development projects and land urbanisation. The city council has shut down Petro’s initial proposal, but the mayor is trying to keep the debate alive and looking for alternative channels to make these reforms a reality. The new POT would prohibit urban growth from horizontally expanding and concentrate future efforts on further rehabilitating the somewhat deserted historic downtown area in what has recently been denominated the “extended downtown”, encompassing a larger radius.

According to Llano, there are between 2m and 3m sq metres of empty stock in the historical downtown, much of which Petro would like to transform into VIP housing solutions. Llano shares the mayor’s ambition to utilise the empty space in the area, but sees much more potential in creating offices and constructing more skyscrapers, which are visibly lacking in Bogotá. Llano summed up the controversy by saying “the municipality offers stimuli but no strategies,” adding that “the local government has a positive will and a macro vision but it is not pragmatic and the city is being left without clear orientation.”

DISAGREEMENTS: The regional branch of FEDELONJA, Lonja de Bogotá, had more adverse criticism of the POT reforms. According to the association’s executive president, Jorge Enrique Gómez, the changes would eliminate Zone Planning Units (Unidades de Planeamiento Zonal, UPZ), which define the appropriate building and population density for each zone. This mechanism has traditionally allowed the city to develop in an orderly manner, but without planning it could fall into chaos, Gómez said, a sentiment that has already spread among many in the construction, banking and commerce sectors in general. “Eliminating UPZs will only allow for plans to enter into regulatory contradictions in many areas of the city and hamper development,” he told OBG.

One major conflict that has already arisen in Bogotá involves a decree requiring new projects to allocate 20% of the development to VIP housing. Companies have a choice of building the social housing next to their development, place it in another part of the city or pay a special fine. According to Gabriel Mesa, general manager of local construction company Construcciones Planificadas, this creates obstacles for high-end developers who do not want to put social housing next to luxury properties, and the decree has increased the cost of land in Bogotá, he told OBG.

EXPANSION: According to the government’s National Planning Department (Departamento Nacional de Planeación, DNP), Bogotá has been growing at a rate of around 3.8% over the past decade. Rapid growth is visible in several areas of the city that have seen heavy development, such as the north, which has transformed into the new financial district and is characterised by high-end social and residential neighbourhoods. Expansion further north is another controversial issue within the ongoing POT debate. According to López, further expansion to the outskirts of Bogotá is virtually impossible.

“The discussion of peripheral development has basically been cut off. Even if the private sector can access land, the issue of providing the necessary public service infrastructure, such as potable water, becomes another hurdle,” López told OBG. Potable water and wastewater management services are run by municipal companies on a national level. In the capital, the local utility Acueducto de Bogotá acts in accordance with the mayor’s office, having cut off proposals to provide new aqueducts to peripheral areas where construction firms are keen to develop. These issues are restricted to Bogotá, and do not have an impact elsewhere. In fact, López lauded the government’s success in expanding water services to regions where coverage had been non-existent.

ALTERNATIVES: The restricting conditions in Bogotá are pushing many to look for alternatives. Though the capital city is by far the largest in terms of space and population, Colombia’s particular distribution of several major cities already provides the infrastructural platform to consider entering these markets with new projects (see Real Estate). The fact that land prices in these cities are much lower than in Bogotá is one major stimulus for this diversification.

Though viable proposals have yet to be presented and several contradictions in policy are leading many within the private sector to grow weary over the uncertainty, intentions behind the new POT appear noble. While densification of idle space for social housing needs aims to increase social inclusion and desegregate the city, prohibiting peripheral expansion falls in line with policies for nature conservation efforts. However, as many sector specialists interviewed by OBG noted, without clear strategies that integrate all social and economic players, these concerns will fall short of being overcome. In light of this, a group of private associations in Bogotá has drafted several proposals for integration into a reformed POT. According to Gómez, the document has been received well by local authorities and he remains optimistic for their inclusion in the POT’s final version, expected to be published by the end of 2013.

As a private sector representative association, CAMACOL believes that construction policies should not be concerned with housing only, but rather take on the challenge of building efficient urban areas. Sandra Forero Ramírez, the executive president of CAMACOL, told OBG, “It is not just about ensuring that people have access to a subsidy for housing, but to ensure that the framework contributes to the development of better cities. Housing policy should be linked to urban development.”

INFRASTRUCTURE: Since a law to facilitate PPPs passed in 2012, infrastructure needs in Colombia’s major developments should provide consistent demand for construction activities and the industries supplying materials. Roads are a key part of the scheduled developments; in the first quarter of 2012 alone 18 contracts were granted for upgrading highways under a general project called Corredores de la designed to increase economic connectivity.

According to Bernardo Gamboa Castilla, former CEO of infrastructure developer Conciviles, this law is providing a platform for strategic planning and solid initiatives to be carried out, primarily administered by the National Infrastructure Agency (Agencia Nacional de Infraestructura, ANI) and the DNP. Gamboa supports further standardisation of contracts and instruments, but noted that as the programme gets under way it remains critical that the public sector maintains a strong leadership role.

For Gamboa, one of the major obstacles for infrastructure development is the lack of coordination between government entities on issues concerning communities and the environment. He believes additional public sector capacity could be achieved via a separate administrative agency. “Time is passing. If we do not restructure the process well, countries in the Western world and elsewhere will start to recover and the investment focus will have moved on,” Gamboa told OBG. “There is still a lot of opportunity in terms of investment in infrastructure projects. We have more than seven cities with 1m plus inhabitants and connectivity is one of the main issues.”

MODEL PARTNERSHIPS: The government aims to triple investment in transportation infrastructure by 2014 via the PPP model, which has shown significant leaps. In 2012 alone 205 km of new double-carriage highways were constructed, adding up to more than 1000 km throughout the country, according to ANI statistics. Some of the most important projects in 2012 included the Ruta del Sol 2, which entailed 50 km, the Ruta Caribe, with 21.8 km, and a highway running from Bogotá to Girardot, amounting to 20.8 km. By the end of 2013 ANI expects to have finished the construction of 300 km of roads and forecasts adding nearly 430 km by 2014. Most of these new concessions will have 20-year contracts.

Outside of the PPP model, the options for project financing for engineering companies are through standard corporate loans or through a financial institution. While private equity does provide any viable option, it is still new and not many domestic companies use this alternative. Aside from transportation infrastructure, the country is still lagging behind in public facilities such as schools, hospitals and public offices, among others. According to CAMACOL’s Forero, plenty of investment opportunities exist in these areas for private firms as well through PPPs.

HOSPITALITY: In general, tourism has increased in recent years due primarily to Colombia’s ability to reverse poor images of a country overwhelmed with violence and drug cartels. This work, largely carried out by the state’s promotional agency Proexport, has also sought to attract investment, which has subsequently brought many corporate visitors requiring executive-level accommodations. Recently signed free trade agreements (FTAs) and further positioning of the country on the international radar will only increase the level of business tourists.

Responding to these needs, the hospitality industry has shifted significantly in recent years, largely prompted by the passage of Law 788 in 2002, which provides an income tax exemption over 30 years for new facilities or for the remodelling of existing facilities. This tax break, along with other favourable investment conditions, has precipitated the entry of several international hotel chains, such as Hyatt, Marriott and Hilton, among others. However, according to Mesa, the law has saturated the market. “Those brands that have an established name and global network of clients will continue to succeed, but hotels that do not have an affiliation or those brands that are not known by Colombians will suffer from the tax law in the long-run,” Mesa told OBG.

Other sector specialists interviewed by OBG believe the contrary. Luis F Correa, president of his namesake business network, Luis F Correa y Asociados, considers the tax exemption for hotels to have been a successful and positive initiative, but 20 years instead of 30 would have been sufficient.

Correa, who just opened a new TRYP hotel by the El Dorado International Airport in Bogotá, said the hotel business is susceptible to high and low seasons, which influence the success of a project. While major tourist strongholds like Cartagena on the Atlantic Coast still provide options for hotel development, Correa remains optimistic regarding the industry’s expansion in the capital, since “factors holding back the leisure tourists have no impact on business travellers because there is money to be had in Bogotá,” adding that hotels near the airport have steady occupancy rates of 70-80% year-round.

LABOUR & MATERIALS: The construction sector remains a driver for employment, representing 5.7% of the labour force, and with major resources channelled through the new PIPE measures that percentage will surely rise. However, according to Gamboa, one persistent problem is finding skilled labour.

“Engineering was once very attractive in the country, but now it is declining, particularly civil engineering,” he told OBG. In terms of improving technical studies, the government has long run the National Learning Service (Servicio Nacional de Aprendizaje, SENA), which provides educational services through regional headquarters set up around the country. SENA has contributed to tackling the problem of securing qualified labour by working closely with the private sector, which has resulted in a successful job placement programme (see Education chapter).

As for construction materials, prices tend to remain stable aside from cement, which can fluctuate due partially to the industry’s oligopoly structure (see analysis). Nonetheless, most of the basic materials, such as steel bars and brick, are locally produced and their prices change according to inflation rates. Residential building costs rose 2.25% in the 12 months to March 2013 while costs for heavy construction increased 1.19%. These hikes are lower than those experienced in 2011, when residential building costs grew 5.79% and heavy construction 7.23%.

General consensus exists among sector specialists interviewed by OBG that materials and their prices will continue to sufficiently meet demand and that no major problems in this regard appear to be on the horizon. Even if prices skyrocketed for a certain locally produced material, newly signed FTAs would provide the means to accommodate the construction industry’s needs at affordable costs.

OUTLOOK: In the midst of some uncertainty in the sector, several factors will be vital for the construction sector’s resilience in 2013. First, government spending on infrastructure and housing projects through the PPP model should add to the effervescence briefly lost in 2012, propelling activity and employment. Second, articulating spending plans through development strategies that integrate the private sector to channel concerns that often get overlooked in the public sector. This entails many legislative measures, such as the POT and municipal authority structures, affecting access to available land for projects, one of the major obstacles standing in the way of sector growth. While structural changes to municipalities are not likely to occur any time soon, programmes such as the macro projects to sidestep holdups in land access will be key to further development. Finally, from the private sector’s end, the continued practice of pre-sale for residential projects will prevent any onset of a real estate bubble and provide security for developers.

Despite uncertainties around the future of development in Bogotá, cooperation between the public and private sectors will likely resolve conflicts since it is in the interest of both groups. While many developers have begun to eye alternative cities, business in Bogotá will not be abandoned. Residential developments such as the 328-ha Ciudad Verde have proven to be viable solutions, slightly on the outskirts of the capital in Soacha, which provide housing for people living and working in Bogotá.

Both social housing and infrastructure developments will likely receive the most attention from investors over the year. These segments continue to attend to large demands that will exist in the near future. Such indicators imply that construction is nowhere near finished in Colombia and, although several structural problems have yet to be fine tuned, there is much potential in this burgeoning country.

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The Report: Colombia 2013

Construction & Real Estate chapter from The Report: Colombia 2013

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