Residential and office spaces adapt to Peru's changing real estate sector


After a challenging year in 2015, real estate investments stayed quiet during 2016. While some dynamism was shown in the industrial and retail segments, housing and office did not show the signs of recovery that were expected. Many predict a pickup to happen by the end of 2017 and throughout 2018, as housing and office are closing a cycle where vacancy increased steadily.

Modest Recovery

In its XI Economic Report of Construction, the Peruvian Chamber of Construction (CAPECO) shared favourable expectations of 4% growth in the combined construction and real estate sector for 2017, accompanying growth throughout the whole economy. Ricardo Arbulú, president of the Construction and Development Institute within CAPECO general manager at Ciudaris, linked the sector’s growth with actions taken by the central government to unlock large infrastructure projects. The report projects that the A and B class real estate segments will see the greatest expansion, due to the option of withdrawing 25% of AFP (pension) funds to satisfy demand, and from facilities being offered by banks for mortgage loans.

In June 2016 Congress passed regulation that allowed workers wishing to purchase their first home to withdraw up to 25% of their pension funds to do so. The initiative was intended to boost home purchases, but some executives interviewed by OBG shared that the funds were being used to pay off existing mortgages and not for purchasing new homes. At the same time, access to credit remains a challenge for sector development when it comes to the lower-income segments.

Industry Research

A December 2016 BBVA research report ranks Peru 64th out of 109 countries in terms of market attractiveness for real estate investment, and sixth place in Latin America. While the country had become highly attractive for investment in 2014, the cycle has changed in the past two years. Structural problems that affect the market, particularly those related to the regulatory and legal environment, are hampering further development of the sector. The report names land use and zoning rules (urban development plans), building permits, and land and property registration among the issues that need to be sorted.

Historically, the prime market for real estate – particularly for the office segment – is the metropolitan Lima area. However, this market remains oversupplied, as absorption is slower than the rollout of new space. As a result, vacancy rates continue to rise and prices are dropping. BBVA has stated that office supply had increased by 3% but was still below 2014 figures. In the capital, 24,000 units were available in 2016, with the amount of space decreasing, especially in the high-end districts of Barranco, San Isidro, Surco and San Borja.

Purchasing interest in Lima, measured by the effective demand for apartments, stood at 269,000 homes in 2016. Demand was principally concentrated in the low and medium-low price segments, which together represented 80% of demand. With supply being relatively low for this segment, this is the field with the largest investment and development opportunities.

However, apartment sales in Lima have not yet recovered – they dropped 12% during 2016. Lower levels of sales were recorded in areas like San Miguel, North Lima and East Lima. Demand for residential space in the rest of the country was at 90,000 units in 2016, most of which was concentrated in the north (42%).

BBVA forecasts a modest rise in the sale of apartments during 2017 – according to the report, demand will grow by about 6%, or 12,000 units. There is optimism in the sector over the medium term due to an expansion of the middle class and significant unsatisfied demand in the low and medium-low price segments.


In the third quarter of 2016, sales of homes in Lima recorded a year-on-year drop of 18%, according to Tinsa, a real estate consultancy. In previous years, the market went from selling 5000 homes per quarter in 2013 to 2500 per quarter in 2016.

According to sector analysts, access to credit is tightening for sub-segment C – which largely covers the country’s medium-low income earners. In Peru, as in other Latin American economies, credit is classified according to segments that correspond to ratings of the person or institution to whom the money is lent. Martín Bedoya, executive director of construction company Edifica, told OBG that “growth of real estate demand in socioeconomic population segments A and B has continued to increase due to high availability of credit as compared to segments C, D and E”. This credit caution has not changed, leading BBVA to indicate that sales will remain stable at 2500 homes per quarter until the fourth quarter of 2017, when the lower price segments are expected to finally pick up.

Fondo Mivivienda is a government programme that seeks to facilitate access to housing through coordination between the state and the financial and real estate sectors to modify access prices to subsidised homes, mainly for low-income families. The fund reinforces a sector-wide trend of moving away from homes the NSE market classifies as category C and redirecting towards the higher category B. Only homes with prices that range from PEN79,000 ($23,400) to PEN150,100 ($44,500) will be partially subsidised, with amounts ranging from PEN14,000 ($4150) to PEN12,500 ($3700). By minimising credit for the class C homes, which is 40% of the current housing market in Lima, the focus of construction is now on new areas where class B developments are taking place. These are defined by a greater availability of profitable land and more attractive development conditions, such as higher margins and less exposure to delinquent mortgage payments.

The sector’s realignment has also impacted residential format and size. In 2016 alone the average size of new apartments decreased by 4.2%, according to CAPECO. Sizes averaged 83.9 sq metres as compared to 87.6 sq metres in 2015. “In 2017 we may see the average size decrease to 80 sq metres. In Santiago in Chile, the average is 62 sq metres, and in Colombia it is 67 sq metres. This is the trend in the region: smaller and more functional homes that compensate smaller spaces for common areas inside the condominium,” CAPECO’s Arbulú told local press. Furthermore, the Ministry of Housing, Construction and Sanitation plans to build 15,000 units in 2017 – with investments of up to PEN450m ($133.4m) – through the Techo Propio fund. Each home will have a value of PEN80,000 ($23,700) and an area of 35-40 sq metres.


In terms of office space, the average vacancy rate is expected to keep rising up to 30% by the end of 2017, according to George Limache, head of research at real estate consultancy Binswanger. In spring 2017 the vacancy rate stood at 27%. Still, a significant amount of supply is to be added to the current stock before the end 2017, a trend that will scale back in 2018 when only two projects are expected to be delivered, and vacancy should start to be absorbed that year. While the horizon looks promising for this segment, business ventures should wait another year to run the wave of a new cycle.

Adjusting and adapting to challenging times in a market of offices in oversupply, the concept of coworking spaces has gained momentum through its commitment to meet the growing demand from small and medium-sized enterprises. However, the strategy will not compensate for the lower sales of the prime segment and the vacancy rate is above the healthy 8-12% level, according to Binswanger and Colliers.

Prime office demand stays at fair levels, as Diego de la Rosa, general manager at Granadero Inmobiliaria, told OBG. “San Isidro continues to be the heart of prime office real estate. In Peru, there are certain requirements an office must have to be considered prime, such as having at least 250 sq metres. There have been some attempts to develop prime real estate in Surco, but sales in that district have not followed as business continues to be conducted mainly in San Isidro,” he said.


The local business community shares the thought of industrial real estate being a very attractive segment for investors despite some challenges, such as a large amount of informality.

Still, industrial real estate continues to benefit from previous years of economic growth and new opportunities are available. “Lima is in need of industrial parks, as it has none and the demand is there,” Gian Carlo Malatesta, director at Binswanger, told OBG.

Meanwhile, the warehouse market has adapted its format to demand needs; it is now more flexible. “The production cycle of warehouses is nine months while for offices it is two and a half years,” Malatesta told OBG. Warehouse supply can respond more quickly to changes in demand, which contributes to growth coming from the specialisation of formats and locations.


Retail remains an active segment. Consumer-driven growth in the number of shopping centres in Peru remains strong, as retailers ramp up investment in mall construction and expansion. There are 81 malls operating in Peru – up from just eight at the end of 1999 – and another 10 are expected to open by the end of 2017, comprising $388m in investment, according to the Chamber of Commerce of Lima. The segment is seeing robust growth and has allowed a number of developers to still find a way to do business within a general environment of stagnation.

Among recent operations, the E Wong Corporation – former owner of the supermarket chains Wong, Metro and Eco – opened its second mall, Mall del Sur, in March 2017. It plans to open another $18m mall in Santa María del Mar by end-2017. Another local operator, Real Plaza, plans to open a new mall in the Villa María del Triunfo area of Lima in December 2017.

Developments are also multiplying outside of the capital, mostly in Cusco and Arequipa (see Retail chapter). Gonzalo Ansola, a director at Graña y Montero’s mall business Viva GYM, told OBG that “the mall segment is at a consolidation stage in Lima and at a development stage in the provinces. Strip centres are being developed in Lima because there is no land available. These are big strip malls, but have a more catered offer.”

Mortgage Loans

Banking association ASBANC reported that the balance of mortgage loans offered by Peruvian private banks in March 2017 was PEN38.8bn ($11.5bn), up 4.64% compared to the same month in 2016 when calculated with a constant exchange rate. Within the same 12-month period, the balance of mortgage loans in dollars steadily fell, reaching $8.4bn in March 2017, $58m less (-0.69%) than in the previous month and down $1.05m (-11.10% ) from March 2016. ASBANC data also reported that 2962 new mortgage loans were granted in March 2017, totalling PEN956m ($283.4m), compared to the 2612 new loans reported in the same month of 2016 for PEN823m ($243.9m).

Mortgage lending continues to slow in the provinces outside Lima with non-performing loan balances rising gradually and dollarisation declining. Mortgage loans registered lower dollarisation in April 2017, with a coefficient of 21%, down from 24% in April 2016. According to the Central Reserve Bank of Peru, this fall reflected measures adopted to discourage the granting of vehicle and mortgage loans in dollars, due to the exchange risk consumers would face in the event of an abrupt depreciation of the Peruvian sol. The bank said the dollarisation index reached 38% in April 2017.

Competition Rises

Challenging times and a sector focus on one housing segment – the NSE market’s B class – are contributing to increased competition. “The Peruvian market is extremely competitive, with no one single player having more than 10% of market share,” Edifica’s Bedoya told OBG. Many in the sector have stated that a lower turnover of projects, slower pace of sales and more rigid credit conditions will continue for the rest of 2017. Companies are now focused on differentiating their offers and adapting to the new sector pace until the next cycle begins.

Still, business remains profitable for a number of companies. Graña y Montero, Peru’s largest construction conglomerate, posted a profit of PEN79.1m ($23.4m) in the first quarter of 2017, primarily due to the sale of real estate assets. The results represent an 11.6% increase over profits of PEN70.9m ($21m) in the same period one year ago. The company, which owned a 20% stake in Brazilian builder Odebrecht’s pipeline contract, announced a $300m asset sale plan to boost liquidity. While construction income fell by 40% in the first quarter of 2017, sales of property quadrupled.


Market logic, considering the trend is downwards and there is saturation in segments such as office spaces, would be to think of a decrease in prices. Conversely, in early 2017 CAPECO forecasted that prices for new or “premiere” homes would increase by 1.58% in local currency relative to the same period of 2016. According to a survey of real estate developers, 53% estimated that the increase in home prices at the national level would be “moderate”.

However, 60% of entrepreneurs that participated in the “Expectations of the Construction Sector” survey estimated that sales would fall in 2017 compared to the previous year. Bedoya told OBG that “despite the economic slowdown, prices per sq metre in classes A and B in Lima have only experienced marginal drops, rather than a substantial decline in prices per sq metre. Consequently, the real estate sector has struggled to lower prices for the final consumer.”


A cycle could be reaching its end in the Peruvian real estate sector. While the office segment reached saturation in the most crowded areas, new initiatives, such as the option to withdraw 25% of pension funds and changes in mortgage initiatives, could open the sector to new possibilities. The low- and medium-low price segments are central to the current state of the sector, as the emerging middle class will continue to be a decisive factor in housing development. Further, more predictable, opportunities can be found in industrial and retail for the remainder of 2017.


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The Report: Peru 2017

Construction & Real Estate chapter from The Report: Peru 2017

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