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Sare Holding SAB (SAREB), the builder offering $1.4 million condominiums on the Pacific coast beach of Acapulco, is struggling to sustain sales and share prices amid increasing bloodshed from Mexican drug cartels.
Revenue in Acapulco, Sare’s one-time biggest market, dried up completely in the fourth quarter, dragging full-year home sales in the city down 54 percent to 330.2 million pesos ($26 million), according to a Feb. 27 report and additional figures provided by the company. Security concerns were among the biggest obstacles to growth, with its home sales nationwide plunging 90 percent, the company said.
With the Mexican mortgage industry struggling to recover from an economic contraction three years ago, Acapulco’s gangland killings are exacerbating the slump in a city already losing its luster to resorts in the Mexican Caribbean. Violence intensified last year as cartels jockeyed for control of cocaine shipment routes to the U.S.
Consumers “have the security issue on their minds,” said Jorge Placido, the Mexico City-based head of equity analysis at Vector Casa de Bolsa SA, the brokerage that executed the most sell orders of Sare stock on the day its earnings report sparked a 7.4 percent plunge. Buyers want vacation homes “that offer peace and security,” he said.
The value of new commercial bank mortgages in Guerrero, the state whose biggest city is Acapulco, fell 16 percent to 922.5 million pesos last year from 2008, before the U.S. recession spread to its southern neighbor. The contraction in Guerrero’s market was steeper and the recovery has been slower than the rest of the country, where mortgage lending is down 2.2 percent from 2008, according to data compiled by the local unit of Banco Bilbao Vizcaya Argentaria SA. (BBVA)
Sare stock has tumbled 14.2 percent since the earnings, making it the worst performer on the country’s IRT small capitalization (IRTSMALL) index of 20 Mexican companies. It fell 1.4 percent to 1.39 pesos at 2 p.m. Mexico City time.
The company had to halt land sales from October to February and construction financing was temporarily suspended as it negotiated changes to its bank debt, it said in its quarterly report. Sare last month extended maturities on about 2.4 billion pesos of loans to an average of five years, from a range of about one to four years.
Sare posted a fourth-quarter loss of 180.2 million pesos. The full-year loss was 117.9 million pesos.
“The perception of insecurity set back our sales,” investor relations official Mauricio Suarez said in a March 5 telephone interview from Mexico City. “Units didn’t move like we were expecting.”
Homicides in Guerrero rose 44 percent to 2,158 in 2011. In August, the state’s monthly tally briefly surpassed Chihuahua to make it the most dangerous territory in Mexico, according to data compiled by the attorney general’s office. A separate measure provided by the head prosecutor, which tracks drug-war violence specifically though only counts through September, shows most of the killings were drug related.
The arrest on Aug. 30, 2010, of Edgar Valdez Villareal, who the government says was a boss for the Beltran Leyva gang, spawned battles among splinter cartels vying for the alleged kingpin’s old territory, according to police. The U.S. had a $2 million reward out for the capture of the Laredo, Texas-born former high school football star nicknamed “La Barbie,” a reference to his blonde hair and light complexion.
“They are obliged to make such statements,” Kent Schaffer, a U.S.-based attorney for Valdez Villareal, said March 9 in an e-mailed response to questions. “We deny their allegations.”
President Felipe Calderon dispatched the military and federal police on Oct. 6 to patrol the region’s streets in an operation known as Secure Guerrero. While homicides were down 19 percent in February from September, they’re still above 2010 levels. Interior Minister Alejandro Poire said Jan. 25 that the offensive has led to “significant advances” in curbing crime.
The underperformance of the local mortgage market reflects the combined effect of violence with other factors, including the sluggish U.S. recovery that’s hurting the wallets of foreign buyers, said Eduardo Torres, an economist tracking the real- estate industry for the Banco Bilbao Vizcaya Argentaria unit, known as BBVA Bancomer. Preferences among wealthy Mexicans may also be shifting regarding where they build their second homes, he said.
“There’s a combination of elements that go beyond just the violence,” Torres said in a telephone interview from Mexico City. “It’s an issue of income as well as perception.”
The U.S. economy will grow 2.2 percent in 2012, up from 1.7 percent in 2011, according to the median estimate in a Bloomberg survey of 79 economists.
At Marena, the Sare’s top-of-the-line development in the beach city, condos sell for an average of 18 million pesos and come with marble Jacuzzis on private terraces. The in-house spa offers hot-stone massages.
Across Mexico, drug-related violence has killed at least 47,500 people since December 2006, when Calderon took office. The government projected in 2010 that drug-related violence shaves 1.2 percentage points off GDP annually. The Finance Ministry declined requests to provide an updated estimate.
Economic growth will slow to 3.2 percent this year, from 3.9 percent in 2011, according to the median of 15 forecasts in a Bloomberg survey of economists.
“We haven’t seen any evidence that the violence is having any impact on the housing sector,” Ariel Cano, director of the government’s National Housing Commission, said in an interview in New York March 8. “For sure it’s not helping.”
Sare is betting that with debt talks behind it, the company is poised for a recovery. Horacio Espinosa de los Monteros, who the board named chief executive effective March 1, said revenue may climb to a range of 2.1 billion to 2.4 billion pesos in 2012, up from 1.6 billion pesos in 2011. About half will come from land sales, while the other 1.1 billion to 1.4 billion pesos will come from the company’s core business, he said.
The builder also plans to shift its focus to the low-income market, which benefits from government subsidy programs aimed at curbing a housing deficit that leaves about 8.9 million families either without homes or living in substandard dwellings.
Jorge Lagunas, who oversees about $200 million as a money manager at Mexico City-based Grupo Financiero Interacciones SA, said he’s seen some demand for Sare shares from investors looking to more than double their money.
“The company isn’t going bust,” he said in a telephone interview from Mexico City. His bank gives Sare as an option “only for the class of clients whose investment profile is very high-risk.”
The U.S. Department of State said visitors should take the Mexico City-Acapulco highway only during daylight hours and, once in the coastal city, avoid areas more than two blocks inland from the main promenade, Costera Miguel Aleman, according to a Feb. 8 travel warning.
Foreign passenger traffic to Acapulco’s airport, operated by Grupo Aeroportuario del Centro Norte SAB, fell 53 percent in February from a year earlier, the Apodaca, Mexico-based company said in a March 7 statement to the stock exchange.
Jobs registered in the state with the social security institute, which excludes informal workers such as street vendors from its count, have fallen 3.1 percent during Calderon’s administration, compared to a 9.8 percent increase across Mexico.
Sare should steer clear of Guerrero as it retools its investment strategy, said Carlos Hermosillo, an analyst at Grupo Financiero Banorte-Ixe in Mexico City. It’s already planning to sell some land purchased for its Solar Villas project in Acapulco, the investor relations officer Suarez said.
The crime escalation is “not something that will be resolved in six month or a year,” Hermosillo said in a telephone interview. “Will they eventually return -- in two years, or five, or 10? Who knows?”
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