House hunting: Credit is pushing home purchases, while there are ample opportunities in social housing

A large unresolved housing deficit is one important factor that will continue to generate activity for both the construction and real estate sectors. While consistent economic growth has paved the way for long-term development, many Peruvians continue to live in conditions that belie the country’s wealth and which authorities are determined to change.

A Healthier Landscape

Subsidies and increased mortgage penetration have strengthened the potential for many first-time homebuyers, and the provision of social housing is also proving more profitable for private developers. One major factor favouring the real estate sector, according to Eric Rey de Castro, general manager of Colliers International Peru, the local branch of an international consultancy firm, is the “demographic dividend”, Peru’s version of the baby boomer effect. He explained to OBG that with the majority of the population aged between 15 and 65 years old, the dependency ratio is much lower, translating into high levels of production and consumption. “Peru is experiencing a virtuous cycle – sustained growth, long-term credit and baby boomers,” Rey de Castro said. “Every month the economy is growing due to internal demand. But this is not only due to more income, but also because young people are entering the market. And this all has a positive impact on real estate,” he said.

Credit Performance

Real estate has been displaying positive figures in both rentals and sales, influenced in large part by the expansion of mortgage credit. According to numbers published by the National Statistical Institute, in June 2013 year-on-year mortgages grew by 24.7% to reach $27.8bn, sustained primarily by government-supported schemes such as the New MiVivienda Credit, which expanded by 17.5% in 2012. The Ministry of Housing, Construction and Sanitation (Ministerio de Vivienda, Construcción y Saneamiento, MVCS) provides assistance with several schemes that pinpoint the needs of beneficiaries ranging from the burgeoning middle class to the country’s poorest and most vulnerable. Beginning at the bottom, Techo Propio is mainly for families outside Lima, in poverty stricken areas, and includes options for beneficiaries to build their own homes or buy a new one. The maximum value of a home for Techo Propio is placed at 12 Applicable Tax Units, which currently translates into PEN44,400 ($16,570). The programme offers loans as well as special one-time family housing subsidies (Bono Familiar Habitacional, BFH) to those who meet qualifications, the most important of which are not owning a home and having a household income that does not exceed PEN1665 ($627) per month.

While the number of beneficiaries who contracted professional developers under this scheme fell in 2012 from 5991 to 4498, the number of self-built homes more than doubled from 5947 to 12,597, displaying the potential of informal construction activities. The 2013 budget designated PEN367m ($138.2m) for this programme and in March the distribution of a further 20,000 BFHs was announced. These figures also reflect growth from 2012, increasing the number of subsidies by around 2000 and the designated budget by some PEN60m ($22.6m). Carlos Lock, chief of housing at the MVCS, told OBG these programmes have had a huge impact in the provinces, where regional capitals are experiencing a sharp rise in immigration from those chasing the benefits of economic growth.

Catering to a wider range of property seekers, the New MiVivienda Credit scheme offers mortgages for the middle to lower-middle-class segments, aiming to purchase homes with the possibility of paying them off during a period of 10-20 years. The qualifications to access this credit are slightly stricter, since target property values range from PEN51,800 ($19,508) to PEN259,000 ($97,539), 10% of which the beneficiary must pay as the first instalment.

However, more importantly, the state does not directly administer the mortgages; they are handled rather via private banks, which are also responsible for deciding whether applicants are able to qualify for a loan. Banks set their own interest rates for this scheme, which in 2012 averaged 9.5%. MiVivienda distributed more than 10,000 loans, amounting to PEN1.11bn ($418m) in 2012, up PEN166m ($62.52m) from 2011, according to Fondo MiVivienda. It expects loans for 2013 to reach PEN1.5bn ($564.9m).

MiVivienda also offers what is known as a “good payer bonus”. Under this, if a homeowner makes his or her mortgage payments in a given six-month period on time, he or she will be given a discount equal to PEN12,500 ($4708) for homes valued at between PEN51,800 ($19,508) and PEN185,000 ($69,671), falling to PEN5000 ($1883) for homes worth PEN185,000 ($69,671) to PEN259,000 ($97,539). The programme only applies to second-hand homes.

The state’s role in the MiVivienda scheme is essentially that of regulator, not least in ensuring that loans are not too easily granted and do not spiral out of control. One incentive programme has moved to cut the risk of extending credit to undisciplined or unsuitable borrowers by slightly lowering interest rates every six months for beneficiaries that comply with payments. As evidence that such incentives work, Lock pointed out that as of July 2013 the nonperforming loan rate for mortgages was 0.94%.

However, it is important to note that this has not been the case with all lenders, a lesson learned in October 2012 when the state’s Banco de Materiales went bankrupt. Lock attributes this loss to a cultural trait. “When state banks distribute credit, people believe the money is free and do not pay off their debts,” he told OBG. “With private banks people tend to uphold their commitments because the consequences seem more severe.” This is one reason why MiVivienda credits are administered privately.


Tapping into pools of credit beneficiaries, developers have begun to capitalise on the seemingly endless need for housing needs, especially for lower income groups that rely on these types of government-sponsored schemes. In 2012 estimates placed the qualitative deficit at 1.5m, measuring homes that require extensive improvements to reach decent living conditions, while the number of new homes that need to be built amounted to 500,000.

According to Herles Loayza Casimiro, head of statistics at the Peruvian Chamber of Construction (Cámara Peruana de la Construcción, CAPECO), fewer than 100,000 homes are being built per year, meaning the deficit will continue to grow. In past years, the average was around 40,000 new homes annually, indicating the increased attention that sector leaders are paying to the housing shortfall. President Ollanta Humala has repeatedly promised that 500,000 homes will be built during his five-year term.

Social Projects

Developers are aware of the opportunities that exist in social housing since so many have already been attracted to the segment. Many of these projects have targeted the middle social segment C, which makes up around 35% of the market, according to Juan Pablo Vásquez Ganoza, general manager of local real estate group Paz Centenario. Vásquez told OBG that his company, which is mainly focused on constructing large apartment buildings, sees significant growth potential in this segment as opposed to the high-end A segment which makes up only around 5% of the market.

At the same time, according to Loayza, affordable social housing projects for the very poor are still lacking in number. “Homes of $35,000 and below are what the county most needs,” he told OBG. “For this to work and become more attractive, the government will have to increase participation by reducing construction costs and creating shortcuts.”

While local firms such as Líder and Besco are leading the construction in this segment, several foreign players have also entered the market, like Spain’s San José. Within Lima, San Juan de Lurigancho, the city’s largest district with some 1m inhabitants, has been the target for many social housing projects.

Peruvian developer Obras de Ingeniería ( Obrainsa), which concentrates mostly on infrastructure, is also involved in social housing projects. One ongoing development will soon introduce almost 2000 flats for around 10,000 people. Ernesto Tejeda, president of Obrainsa, said there were many opportunities that remain in the low-end housing segment, with the only obstacle being a current lack of suitable space. “There are difficulties in finding good land and that translates into difficulties with the final price for the buyer, which must be reasonable and accessible,” Tejeda told OBG. “The government should tender more land to those who can use it efficiently.”


Although the majority of demand for homes is for social housing, CAPECO’s Loayza said that there are two basic problems to entering the market. Firstly, banks can be reluctant to provide financing for such projects and may require companies to sell 30% of the homes before receiving loans for further construction. Spanish developer San José was met with these conditions, Loayza said, and became a model to follow. A second and wholly different kind of problem, in Lima at least, is that the majority of social housing projects are on the outskirts of the city, where few services reach. This requires government participation, which is beset with slow procedures and legal complexities regarding land ownership and transfer.


On the upside, there is also legislation that provides some leeway for developers. Law 29020 on building permits, for instance, includes two different ways of automatically issuing licences, thus cutting through the red tape often encountered in municipalities, the governing entity that grants construction permits. The first covers single-family homes no larger than 120 sq metres, requiring a developer simply to fill out the appropriate application forms to begin construction. The second is a semi-automatic licence, applicable to buildings no taller than five storeys and no larger than 3000 sq metres, requiring the project be previously approved and signed by a professional commission before application. According to the MVCS’s Lock, most delays have been caused by administrative issues and the law has drastically accelerated procedures, which previously could take anywhere from a year to a year and a half for any sort of project. “The municipality’s role has become more efficient,” he told OBG. However, such benefits have not come without municipal resistance and criticism from professional associations, which believe that in a country as seismically active as Peru, any building needs to be carried out with precision and care, and revising proposals is part of that process. The MVCS runs yearlong workshops with municipalities to coach them on procedures regarding the law.

Urban Development

The MVCS’s view is that although growth can lead to development, without proper urban planning Peru’s cities could quickly become overrun and collapse. Luis Tagle Pizarro, national director of urbanism at the MVCS, is well aware of such risks and hopes to instil some change in policies from his government position. Current initiatives include the drafting of a new law for urban development that will consider the issue of surplus value for lands and establish regulations for when the state should intervene in large projects. Tagle hopes the law will pass by the end of 2013 so measures can begin to be applied quickly. Meanwhile, the MVCS has several land development initiatives in the works, which may prove useful for the sector.

One programme involves transforming unused military land into urbanised plots, mainly for residential usage. According to Tagle, more than 500,000 ha of former barracks that belong to the state are available for this type of project. However, many land transfers operate along semi-political lines that generate conflicts of interest and reluctance from the armed forces to participate. This also causes procedure delays for permit applications.

Even so, private firms have yet to fully take advantage of the programme’s potential benefits. “It’s easier said than done,” Tagle told OBG. “Many people expect the government to intervene in issues of sanitation, services or highway access so that the value of these lands automatically rises and they can sell them to a third party.” These conflicts have led to many plots remaining unused. However, others have succeeded in steering a path through the morass, such as the Collique development, Hoyos Rubio in Lima’s Rímac district and La Pólvora.

This last project comprises 23 ha with the construction of 3000 new homes, all of which were sold before construction finished, according to Lock. Aimed primarily at MiVivienda clients, Lock said the government would like to repeat such successful projects. An ambitious development complex of apartment buildings, malls, offices and a convention centre is slated for the former San Martín barracks in Miraflores, with construction already under way.

A related programme introduced in 2012, Generating Urban Land is oriented towards the facilitation of access to unused state plots – not just former military barracks. Part of the idea is to ensure that land prices for housing projects do not rise indiscriminately, a major problem for the sector, especially in Lima. This programme is so new that projects have yet to be created. Therefore, the MVCS is undertaking studies to determine the distribution of available lands, which includes measuring potential for services.

While Peru’s public land offers an enormous amount of unused plots, not all of these provide the right conditions to install drinking water, according to Lock, limiting the number of plots that will actually be transformed into housing projects. “If the state does not provide cheap land – almost free – for social housing development, we will not be able to close the deficit,” Tagle of the MVCS added.


In the past year many analysts have warned of a possible bubble about to burst in the Peruvian real estate market, based on the sharp rise in property values. However, the general consensus among industry specialists interviewed by OBG discards this possible outcome, given that demand is not based on speculation. CAPECO’s Loayza said very few Peruvians bought a second home for leisure purposes, one indication that the housing demand is real. Rey de Castro said he had confidence in the local banking system and in any case, he told OBG, since interest rates on mortgages are low, people tend to pay off their debt. According to Carlos Cornejo, president of CV Project, a local engineering consultancy firm, “There does not appear to be a market bubble, as banks are regulating the mortgages well. A simple willingness to buy is driving prices up. However, this demand has its limits and I expect prices to level off in the next two years,” he told OBG.

Sales & Prices

Nearly 22,000 homes were sold in Lima in 2012, the highest number in 17 years, according to CAPECO. In Lima and Callao the total number of housing sales went up 21.9% y-o-y from January-March 2013, according to the latest report from the Central Reserve Bank (Banco Central de Reserva del Perú, BCRP). This growth is taking place across all socioeconomic levels within the capital. Sales of B (middle-class) units reached 2683 in the first quarter of the year, representing an increase of 28.1% y-o-y and also 56.4% of total sales of all kinds of housing. In addition, sales of A (upper class), AB (upper-middle class) and C (lower class) housing increased from 388, 589 and 751 units respectively in the first quarter of 2012 to 517, 695 and 865 units in the same period of 2013, the BCRP reported. This market performance is despite quickly rising property values, which in Lima as of the first quarter of 2013 averaged $1494 per sq metre for apartments, according to the BCRP. However, prices vary widely depending on the district. In San Isidro, a sq metre costs on average $1999, the same as in Miraflores, where a sq metre averaged $1166 as recently as 2009. Even in lower-profile districts such as Santiago de Surco, where some of the most significant real estate development is currently under way, apartment prices had risen to $1591 per sq metre in the first quarter of 2013, compared to $960 per sq metre in 2009. Rental prices have also gone up significantly. The biggest gains in the first quarter of 2013 were in A-level housing, which rose by $9.60 per sq metre, up 37.4% y-o-y. In the past two years, average annual rental costs per sq metre in Miraflores rose by $20, reaching $120, according to the BCRP. San Isidro followed similar patterns, ending 2012 with an average of some $110 per sq metre.

When these figures are compared to the typical size of homes in these districts, where small flats begin from roughly 75 sq metres and extremely large apartments can reach up to 425 sq metres, these prices are still relatively low on a purchase/rental ratio. However, the rates at which they are rising merit attention. B-level housing rents gained $8 per sq metre, up 26.1% y-o-y. In first-quarter 2013, flat prices in Lima reached an average of 15.3 years of rental income, up from 14.8 in first-quarter 2011.

Government Initiatives

As more homes are built, rented and sold, the Ministry of the Environment (Ministerio del Ambiente, MINAM), in collaboration with other government agencies such as the MVCS, has developed a comprehensive series of Nationally Appropriate Mitigation Action (NAMA) plans based on the standards of the UN Framework Convention on Climate Change (UNFCCC). NAMA aims to mitigate the environmental impact of the country’s growth and to shape national policies and government initiatives in the construction sector.

Senior officials from MINAM and the MVCS view Peru as especially vulnerable to the negative consequences of climate change, citing the country’s high scores on multiple rubrics used to identify climate change risk factors. This includes high levels of poverty and the diversity of the country’s natural environment, which ranges from desert to tropical forest.

In 2010, the MVCS commissioned a study of the country’s geography and climate. It used the findings to divide the country into nine climate zones and to issue recommendations on climate-specific designs for new buildings. The recommendations, which are in line with UNFCCC guidelines, focus on bioclimatic building techniques. These include, for example, the increased use of solar and wind energy for heating and ventilation to reduce the energy costs of artificial climate control systems. The MVCS’s recommendations are also meant to address the problem of architects taking design cues from foreign buildings and transposing them to projects in Peru where they may be inappropriate for the climate. The government’s interest in environmental construction initiatives is not only ecological. The MVCS, as well as other state agencies, has taken the view that “greening” certain sectors and sub-sectors of the economy will make them more competitive. At a March 2013 conference on Peru’s NAMA guidelines, MINAM reported that they expected benefits to accrue to both the environment and the economy by implementing NAMA proposals for the cement, brick and steel industries. In the cement industry, for example, the NAMA proposal would entail replacing half of Peru’s conventional cement production with pozzolanic cement by 2017. It is less harmful to the environment than conventional cement and can be less expensive to produce, lowering construction costs. The proposed NAMAs also aim to reduce greenhouse gas emissions in the brick and cement sectors by 20% and 10%, respectively, by 2020.

The bio-climatic construction recommendations as well as the proposals emanating from NAMA have added impetus to an emerging “green code” for construction. The MVCS has already developed several new, efficiency-minded regulations on topics ranging from the installation of wind energy systems to design and construction using bamboo. All of these efforts — including building recommendations, NAMA proposals and new regulations — have been directed towards the MVCS’s long-term goal of promoting a robust, green real estate market in Peru.

Energy-Efficient Buildings

In 2012 the Green Building Council (GBC) – which administers the Leadership in Energy and Environmental Design (LEED) certifications – opened an affiliate office in Lima. The presence of the GBC in Peru, in addition to the government’s focus on sustainable construction, has contributed to a surge in interest in the development of energy-efficient office buildings, hotels and shopping malls. In 2010, Roche Perú’s offices in the Alto Caral building became the first Peruvian property to earn LEED certification.

Since then, almost 60 buildings or properties have registered for LEED, including 40 in 2012 and 2013. However, at the time of publication, only four properties had achieved certification. These include, in addition to the Roche Perú offices, the Platinum Plaza buildings, the Johnson Controls offices and the Saga Falabella flagship store in Lima and the Tambo del Inka Hotel in Cusco. The discrepancy between interest in green buildings and the small number of properties that have actually achieved LEED certification may indicate that Peru’s market for green real estate is underserved.

Green Housing

Green building imperatives have not yet widely affected the residential construction sector. However, MINAM and the MVCS view the extension of energy-efficient design to housing as one of the next steps toward the goal of mitigating the environmental impact of the construction sector. Some of the bio-climatic design elements the MVCS has recommended for large urban buildings can be adapted to small-scale projects. For example, a MINAM report prepared for the UNFCCC recommended the use of Trombe walls to capture solar heat in new residential buildings in Peru. The MVCS and MINAM have also circulated proposals to extend green building initiatives to the MVCS’s MiVivienda and Techo Propio programmes. In the case of subsidised housing, the concerns are mostly related to reducing energy expenses and improving health through proper thermo-regulation and air quality maintenance. The MVCS has already issued regulations on stove designs for rural housing meant to reduce the environmental and health impact of biomass-based cooking. Building materials are another matter. The MVCS has identified problems with the selection of materials for low-income housing, such as the use of heat-radiating metal roofs in hot climates. Using green building materials may provide an opportunity to address both thermo-regulation and environmental issues. Isabel Roncal, investor services consultant at ProInversión, told OBG that developers had contacted the agency with proposals that involved building with recycled materials. The government has indicated that it will continue to prioritise and support green building initiatives. Additionally, early signs suggest that demand may be emerging for energy-efficient buildings in the prime office and public housing segments.


In an environment of flourishing business, office space has become a key focal point, especially in the high-end segment, where vacancy rates are very low (see analysis). While the traditional financial districts of San Isidro and Miraflores will continue developing high-end offices, south-eastern Surco is also emerging as another attractive destination for business operations. Other high-end office projects are planned for north-eastern Lima, in districts such as La Molina and Surco.

For Gonzalo Sarmiento, general manager of local real estate developer Centenario (the majority shareholder of Paz Centenario), these areas are the new horizon for office development – but not without a cost. Sarmiento noted that the main problem of the city is transportation. “Deciding on a location can encounter limitations because we need to place offices near major roads that are more efficient and offer faster access,” he told OBG. “And the farther out you extend, the more difficult that becomes.”

With this expansion, some companies have applied the concept of “back office”, which entails using two headquarters – one for presentation and another for behind-the-scenes operations, where rental prices are lower. However, Colliers’ Rey de Castro told OBG this is more of a trend than a necessity, since rental prices in all districts are affordable. For Rey de Castro, alternatives rest more in the construction of mixed spaces, which combine offices and homes, a trend popular in other countries but only recently appearing in Peru. “Mixed spaces are a great solution for avoiding high prices and expanding to distant locations,” he told OBG. “In the next couple of years, as the value of property continues to rise, this kind of solution is going to be necessary,” he added.


Sustained economic growth in recent years and major improvements in local credit systems are allowing Peruvians greater access to goods and properties that only a few years ago did not exist or were not fully developed. Combined with the large unsatisfied housing demand, this means real estate activity will continue to provide investment opportunities in the near term. State housing policies have greatly assisted this process, creating a significant and reliable clientele for social projects.

Despite warnings to the contrary, a real estate bubble does not appear to be a major threat to the country. However, obstacles concerning land value and water management do still need to be confronted. The government authorities are aware of these issues and urbanisation reform may soon pass to enhance public policies. If this does indeed occur in the near future, prospects should improve further, and so aid private activities, which already receive ample support and confidence from public officials.

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The Report: Peru 2014

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