As construction activities regain momentum the real estate market has closely followed, driven primarily by a strong demand for housing and a healthy mortgage system granting access to property over a long-term period. Most indicators suggest the market is coming to a mature stage where booming numbers are not the only positive signs. Nonetheless, obstacles remain, namely surging property values and land prices in Bogotá, where nearly a quarter of the population resides. Much of the real estate market’s positive performance can be attributed to a healthy economy in general and improved security. Public policy to tackle inner city crime and militia violence in rural areas has continued through to the government of President Juan Manuel Santos, who initiated a formal peace process in 2012. These factors have raised expectations for the country’s future and attracted many from abroad, both immigrants and Colombians formerly living overseas, which will increase the demand for homes.

MORTGAGES: The mortgage system has grown steadily over the past few years, an achievement which has not come free of fiscal and social costs. The country has suffered two major financial crises in recent history, the last one in the late 1990s due mainly to very high interest rates on mortgages that people could not afford. According to Clemencia Parra, executive president of real estate appraisal company Unifianza, interest rates reached around 35%, leaving many Colombians with no option but to default on payments, which triggered a spiral of general economic decline. With such a hard-learned lesson, state mortgage policies are now strict, clear and even dynamic in some cases. By law, banks and other financial entities are allowed to finance only up to 80% of the property value for homes falling under the segment of Social Interest Housing (Vivienda de Interés Social, VIS), and up to 70% for the non-VIS segment, comprised of homes worth more than around $50,000. For Michel Correa, president of the mortgage company La Hipotecaria, these regulations help maintain a stable home financing system. “The percentage limit on loans guarantees that people make an effort to save in order to purchase their homes,” Correa told OBG. “It also provides the system with significant stability because the loan-to-value ratio will always be lower than 100%.” Furthermore, most people in the upper-middle class segment do not use the entire 70%.

STAYING HEALTHY: Another interesting point in the housing law is that the instalments of the mortgage loan cannot surpass 30% of the beneficiary’s income, a provision aimed at preventing home-buyers from falling into debt. Colombia also has a Superintendent’s Office of Financing that keeps tabs on debtors and regulates their activity so they cannot receive credit from other entities when already in debt. Figures for 2012 point to a healthy mortgage system. Total mortgage capital in 2012 displayed year-on-year (y-o-y) growth of 14%, amounting to more than COP31.02trn ($18.6bn), according to the National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadística, DANE). In terms of social segments, mortgage values for VIS housing increased 10.2% while non-VIS rose 15.6%, explained mainly by higher property values in the latter segment and middle class aspirations to climb the social ladder.

The local financing system’s annual income from one or more late fees was reduced 3.7%, ending the year with slightly more than COP1trn ($600m), indicative of a positive trend to pay off debt. Combined with a clear upward pattern in the number of mortgages, these indicators display a thriving system that should continue to drive the construction of new homes and real estate activities in the short term.

MIDDLE CLASS: As for interest rates, the market is well regulated. People have access to long-term credit with fixed rates of around 11-13%, allowing them to pay off their homes in 15 to 20 years. However, recently implemented government measures have sought to spur even more activity in the sector by helping middle class families pay off their mortgages. Under the Stimulus Plan for Production and Employment (Plan de Impulso a la Producción y el Empleo, PIPE), a new measure subsidises around 30% of the interest rates for those who have taken out mortgage credits for homes worth between COP79.5m and COP197.4m ($47,700-118,440). This means the interest rate for beneficiary families will not rise above 7%, a figure significantly lower than normal rates. According to Correa, the Colombian middle class is resilient and vital to the country’s growth. “The violence experienced in Colombia has been overcome in part by the hard-working middle class that has persevered, never ceasing to produce even under such adverse conditions,” he told OBG. Correa’s company, La Hipotecaria, targets the middle to upper-middle class segments and offers credit for home purchases of up to COP600m ($360,000) with 11% interest rates. Though most people are set on the track to pay off their homes in 15 years, Correa said some will be able achieve that goal within eight years since many want to get out of debt as soon as possible. Having entered the market in September 2011 with Panamanian capital, La Hipotecaria is counting on the potential of the middle class, which has created a very competitive scenario for financing entities.

COMPETITION: Between the local banking system, home financing entities and commercial credit providers, the market appears to have all ends covered. While Bancolombia and Banco Davivienda are the largest banks, providing a wide variety of services and options for families and developers, smaller companies like La Hipotecaria compete by specialising solely in mortgages. According to Correa, the firm can approve or deny credit within 16 hours and only approves those who are currently employed or pension beneficiaries. Correa believes these conservative methods are the most sustainable way to enter the market. One effective enticement has been to approve credit before a client finds a home, providing a six-month timeframe to search for a suitable property at the right price. Despite stiff competition, Correa believes there is room for more players to enter the market. The arrival of international banks such as Mexico’s Banco Azteca in the local market supports this view. Further, Itaú, Latin America’s largest bank, has also arrived on the scene to provide investment services, showing growth in the financial services sector overall. Retail chains are entering the market as well, such as the two Chilean heavyweights Ripley and Falabella, which also offer credit schemes to clients, although these tend to be oriented towards consumer credit as opposed to mortgages. Correa forecasts that in the long term some smaller financing entities will remain but the majority will end up absorbed by larger stockholders.

LOCAL CONDITIONS: One peculiarity of the market is that virtually all sale transactions go through direct sales, which has and will prevent some businesses from entering the market. “Colombians tend to save every peso they can and consider going through real estate agencies an unnecessary expense for services they can perform themselves. There is clearly a market, but the issue comes down to idiosyncrasy and, unfortunately, this trend is not likely to change,” Correa said, adding that even large real estate agencies would not have much business since no one would be willing to pay the commission, regardless of how low it is.

While stimulating demand has received much institutional attention, many in the sector believe the supply is lagging and requires clear policies for growth. César Llano Zambrano, the executive president of umbrella real estate association Fedelonjas, told OBG, “Property prices will continue to rise if no policies address essential issues to stimulate supply.” As a former public sector employee, Llano is familiar with state bureaucracy and the hurdles to more efficient policies.

DEFLATING RUMOURS: While some analysts have suggested Colombia could soon experience a real estate bubble, general consensus among sector specialists interviewed by OBG dismisses that possibility in the short to medium term, due mainly to a low-risk mortgage system and a real demand for housing that is absorbing idle stock. “In order for a real estate bubble to exist there needs to be a large inventory that is not being absorbed by the demand,” Parra told OBG. “And this is not the case. There is a large inventory, but it is being absorbed, even in the high-end segment, where there is slightly more available stock.”

Furthermore, developers of high-end buildings do not begin construction until they reach the break-even point (see Construction overview), which means that project financing is not only guaranteed through a group of fixed buyers but the market receives less idle stock. Although average inventory rotation for all new homes in 2012 rose to seven months, as compared to six months in the previous year, Parra remains confident that government programmes focused on generating demand among low-income segments should lower the time properties remain unused in 2013.

REAL CHALLENGES: The only unfavourable signs are in land and prices, particularly in Bogotá. Since the capital has grown tremendously and has a high-density rate, land is constantly becoming more expensive. “The impact that the cost of land has on the final property price is diminishing the attractiveness for buyers considerably, especially for those with less capital,” Parra told OBG. In real terms, land prices have increased 6% to 7%, according to Parra, who believes developers need to be cautious in this regard since there is always a point at which potential buyers will no longer be capable of affording such high prices.

In January 2013 some of the most exclusive districts of north-eastern Bogotá, such as Cedritos and Chicó, listed property values that surpass COP6.5m ($3900) per sq metre. Characterised as the higher-end residential area of the capital city, the north displays quite a large spectrum of prices per sq metre, but the vast majority hover around COP2m-4m ($1200-2400), with annual double-digit inflation rates. In the southern end of the city prices drop considerably, ranging from around COP800,000-1.5m per sq metre ($480-900) in districts such as Bosa Soacha and Ciudad Bolívar. Parra told OBG that some property prices have risen by 100% in just one year, due mainly to the fact that people want to reach the commercial value of properties.

NUMEROUS FACTORS: According to Correa, speculation of a real estate bubble on a national level has been primarily fuelled by the conditions in Bogotá. “Concerns have arisen based on the microeconomic case of Bogotá since land is scarce and territorial organisation is becoming a disaster,” he told OBG. Nonetheless, Correa believes this phenomenon is natural for large cities and is not concerned by the bubble rumours.

One adverse factor for rising values is that there is no public or private agency to regulate prices. For social housing labelled under the VIS and Priority Interest Housing segments, the Ministry of Housing, Cities and Territory is in charge of establishing maximum property values. However, this largely depends on the market and size of the city. On the other hand, the Ministry of Finance and Public Credit, which works with the Agustín Codazzi Geographic Institute and DANE, keeps tabs on property values, a process that helps establish property taxes. To keep developers and real estate investors informed, the government has opened a virtual platform called the Urban Standard and Territorial Organisational Plan Information System, which, through an interactive map of Bogotá, displays prices by area, buildings for sale, as well as regulations and restrictions.

ALTERNATIVES: One common issue affecting many cities in Colombia is the lack of municipal cooperation to make more urban land available. While each case is different, the conditions in Bogotá appear to present the most obstacles for sector development. Imminent structural changes to the city’s Territorial Organisation Plan will alter the rules of the game for many developers looking to propose new projects in the capital city.

This, combined with increasing property prices and land scarcity, are several factors behind attention shifting to real estate investments in other cities around the country, where prices are still reasonable and the political situation clearer. Colombia’s particular distribution of several large cities with more than 1m inhabitants already establishes the necessary urban infrastructure for market potential, especially in commercial properties. Medellín, Cali, Bucaramanga, Cartagena and Barranquilla have long been alternatives to the country’s capital. However, smaller, “intermediate” cities with less than 1m inhabitants, such as Pereira, Manizales, Buenaventura, Villavicencio and Neiva, are quickly becoming attractive destinations for development projects.

Of the larger cities, Medellín has an efficient public infrastructure. Buses, aerial tramways and a metro system make Medellín one of Colombia’s most attractive cities and provide a solid platform for future projects, although the business community can be very tight knit and unwelcoming, even to other Colombian firms. Barranquilla is also displaying much potential.

While most real estate sales involve housing, positive industrial outlooks combined with a burgeoning tourist industry and relatively low land prices, make Barranquilla an attractive destination for real estate prospects across the board (see analysis). “Colombia is a country of cities,” Parra told OBG. “We have many important cities that are generally regional capitals where you can find developments of all kinds.”

OFFICES: All indicators point towards the need for more office space in Bogotá, especially given the arrival of more multinational businesses and an array of free trade agreements (FTAs). In 2012 Bogotá increased its inventory by 175,000 sq metres of office space distributed throughout 20 buildings, 31,000 sq metres more than the previous year, according to Colliers International Colombia. The addition of prime offices, also known as grade A+, increased 7%, while grade A and B expanded 14% and 10%, respectively. Colliers International Colombia also reported that by the third quarter of 2012 average vacancy rates for all three classes was 2.9%, representing a 1% y-o-y decrease.

The heaviest office construction has taken place in northern Bogotá. Roberto Caceres, director general of Colliers International Colombia, told OBG, “Both residential and commercial demand is concentrated in the north of the city, and this has seen profitability increase for real estate operators.” However, with monthly office rental prices ranging between $26,000 and $85,000 per sq metre in and sales prices between $4.2m and $11.5m per sq metre, many companies are eyeing alternatives outside traditional neighbourhoods.

The influx of multinational business continues to drive the development of higher-grade facilities. Andrés Velasco, general manager of design firm Arquitectura e Interiores, told OBG, “Customers of high-end office designers are typically large multinational companies with a taste for environmental care and efficiencies.”

MEETING DEMAND: The public administration is also in need of more working space. According to Llano, the public sector alone requires some 950,000 sq metres, which he believes could easily be developed by a private contractor. He added that the state-run petroleum company Ecopetrol requires 115,000 sq metres of office space, which is currently not available. “There is a huge demand and market for offices, but one of the problems is increasing prices, which leaves a large gap between the supply and demand,” Llano told OBG.

Llano told OBG that much of the municipal plans to refurbish the historical downtown of Bogotá entails additional office space. However, he pressed the need for improved strategies to finance and rent out offices. “Just as we can buy houses in 20 years, we need to be able to buy offices in that same period. The market needs to open up to that financial possibility,” he told OBG.

If the municipality convinces the private sector of a viable plan to recuperate unused space in downtown Bogotá, the changes will take time. While part of the process would include transforming idle space into useable building land, other proposals exist to demolish old homes to construct skyscrapers in their place.

INDUSTRIAL SPACE: The industrial property market is divided between lots and warehouses, the former being larger but the latter more dynamic. Many logistics complexes, such as free zones, include properties known as flex warehouses, which can be converted into offices or serve as storage and administrative purposes simultaneously. “Since the price per sq metre of warehouses is much lower than that of offices, this option can be more economical for certain companies,” Parra told OBG. International brands such as Siemens and LG have successfully used this model in Colombia to set up operations and cut down on administrative costs. This has become an attractive trend in the real estate market, especially in the west of Bogotá, near El Dorado International Airport, and nearby municipalities.

However, not all have the most positive outlook for industrial properties, such as Isaza, who believes there is currently an oversupply of warehouses. “Warehouses saw a boom in construction years ago due to factors that ultimately did not end up happening or took years to occur, such as the FTA with the US. As such, this is not an ideal time for investors in this facet of the construction and real estate sectors, but other segments, such as residential, office and retail properties, are displaying significant potential,” Isaza told OBG.

COMMERCIAL PROPERTY: Ownership of shopping centres in Colombia is very different from the US model. While in the US one company or developer can own and manage around 2000 properties, in Colombia virtually all shopping centres have multiple owners. These owners – of which there could be 200-300 – then hire a company to manage the shopping centre. However, this model is beginning to change. For example, the new Titán Plaza, which is the largest and newest shopping centre in Bogotá, sold half of its stores to individual investors and rented out the other half.

Although the market for commercial centres is still dominated by sales, the shift towards renting has been taken up by around 10-15% of operations. Those companies that lease often save the large spaces for “anchor” department stores, such as Falabella or other big names, since they provide a footfall draw for the rest of the stores present. Profitability in commercial real estate is much higher than that of residential. Depending on the location and brand names of stores, commercial real estate investments for rentals can have monthly returns of between 9% and 13%, according to Parra.

The entry of many commercial centres has not saturated the market since most ventures have opened with great success. However, as in many segments, available space in Bogotá and other major urban areas is an issue affecting expansion. According to Marie Claire Devia, manager of RBR Realty, options of more than 5 ha are unavailable, while foreign firms require spaces between 20 ha and 30 ha. In this case, many chains are forced to buy an existing property, which involves a significant cost and partly justifies the rise in land prices, she said. In Bogotá limited space has forced many companies to purchase plots located in the southern end of the city as opposed to northern neighbourhoods, where most wish to set up shop. On a positive note, this situation has helped usher in the concept of mixed-use properties that include hotels, offices, housing and commercial centres all in one complex.

OUTLOOK: Overall, healthy prospects await the real estate market, which should continue to expand alongside the country’s GDP, forecast at 3-5% annual growth in the short term. Lessons learned from past economic crises have caused current lending policies to be strict both for home owners and contractors, a sign that the market will not explode with speculation. While housing policies have traditionally focused on generating demand among the low-income and middle class segments, attention is now shifting towards developing strategies to control rising property prices, which are largely produced by the shortage of land in major urban areas. Many opportunities still exist around the country, which does not suffer from centralisation. Industrial and commercial properties are set to take advantage of this feature to expand beyond Bogotá.