Bloomberg News

Mexico Housing Hits U.S. Investors as Plan Collapses

December 06, 2013

Parque San Mateo, Mexico

Hundreds of town houses in the Parque San Mateo complex outside Mexico City lie unfinished and abandoned. Photographer: Alejandro Cartagena/Bloomberg Markets

Three years into her home-ownership dream, Martha Orozco has had enough. Stuck in a government-sponsored complex called Parque San Mateo that’s two hours away from her $8,000-a-year job as a hospital secretary in Mexico City, Orozco sees only broken promises and blight all around her.

Power outages drag on for hours at a time. Neighboring townhouses lie abandoned by the hundreds, giving criminals a growing foothold in the community. The stench of overflowing sewage permeates the development. And then there’s the commute: Until Orozco started driving to work, it was a van-to-train-to-bus odyssey whose cost consumed 20 percent of her pay.

Orozco, a 52-year-old widow, is looking to leave her $18,500 house and move with her daughter and granddaughter closer to Mexico City. If she does, she’ll join an army of disenchanted homeowners who moved in the past 10 years to the sprawling new towns that have sprung up in most of Mexico’s 31 states. The buyers all signed up for a government-backed program that helped finance construction of millions of homes. The complexes ring the country’s major cities from Veracruz to Mexico City to Tijuana.

The program has been a disaster. Hundreds of thousands of homes are now derelict after buyers such as Orozco concluded they were located too far from city centers and moved out. Developers, their profits assured by government guarantees, built houses faster than municipalities could connect them to water systems and power grids.

European Lawsuits

Promised schools were never constructed. Now, the developers have halted construction on what have become rural slums. European lenders that helped finance the housing frenzy are suing the builders.

In 2013 alone, the industry’s collapse wiped out $1.69 billion in the combined market value of the three biggest developers: Desarrolladora Homex SAB, Corp. Geo SAB and Urbi Desarrollos Urbanos SAB. Geo and Urbi shares have been suspended from the Mexican stock exchange. All three builders have defaulted on their dollar-denominated bonds, many of them bought by U.S. investment firms. Total losses in stocks and the face value of dollar bonds added up to about $3.95 billion as of Dec. 4, according to data compiled by Bloomberg.

The Mexico Habita homebuilders index rose 2.9 percent at 11:10 a.m. in Mexico City, paring the 2013 drop to 78 percent.

Because the bond purchases were private, over-the-counter transactions, it isn’t known how much was lost by U.S. and European investors.

Blot on Pena Nieto

The housing crisis is a blot on what investors say has been a promising start to the six-year term of President Enrique Pena Nieto, who took office on Dec. 1, 2012.

“It’s a hair in the soup,” says Eric Conrads, who oversees $750 million in Latin American stocks at ING Investment Management in New York.

Pena Nieto, 47, has passed sweeping constitutional changes to increase competition in the telecommunications industry and is pushing for an overhaul of the constitution to open up the oil industry to foreign investors. Yet under Pena Nieto the economy is stagnating. Finance Minister Luis Videgaray has repeatedly amended his 2013 forecast for gross domestic product growth; his ministry set it at 1.3 percent on Nov. 21, down from 3.5 percent at the beginning of the year. On Sept. 11, he told lawmakers that the housing industry was contributing to slow growth.

Housing Debacle

Among the losers in the housing debacle is Pacific Investment Management Co., the world’s biggest bond fund firm. Pimco said in a June 30 investment report that its holdings in Mexican homebuilders were partly to blame for a 6.6 percent loss in the second quarter of 2013 in its $1.6 billion Pimco Emerging Markets Corporate Bond Fund. (PEMIX:US) It was the fund’s worst quarter ever.

In addition to Pimco, losers in Mexican-housing stocks, bonds, loans and derivatives contracts included London-based Barclays Plc (BARC), BlackRock Inc.’s funds, New York-based Citigroup Inc., Zurich-based Credit Suisse Group AG and Frankfurt-based Deutsche Bank AG. None of the firms will disclose the impact on their portfolios of their Mexican-housing investments.

“It went from a compelling business thesis to one that got bigger and bigger and borrowed more, and then the music just stopped,” says William Perry, a portfolio manager at Stone Harbor Investment Partners LP, which oversees $55 billion in emerging-markets debt and which finished selling its Mexican homebuilder bonds in May.

Barclays, Credit Suisse and Deutsche Bank all sued the builders in 2013, accusing them of violating derivatives or loan contracts. Barclays claims Urbi failed to pay $3 million due March 15 after the bank had to terminate a 2010 swaps agreement.

Missed Payments

Deutsche Bank says Urbi didn’t make a $3 million payment on a $55 million loan and also failed to pay $1.55 million in interest on two loans. The builders had no comment on the lawsuits.

The housing boom contributed to a 294 percent rise in Mexico’s IPC stock index in the five years through April 2007, when the Mexico Habita Index, a gauge of homebuilder stocks, hit a record. Foreign investors were lured into the sector by profit margins at the three big builders that climbed as high as 22 percent. Homex’s stock quadrupled in price from its 2004 initial public offering through the shares’ peak in May 2008.

That briefly made the family stake of Homex Chairman Eustaquio de Nicolas, 52, worth more than $1 billion. Homex shares have lost 96 percent of their value from the end of 2008 through Dec. 4.

Busted Billionaires

Cuauhtemoc Perez Roman, Urbi’s founder and chief executive officer, was also a fleeting billionaire. Urbi’s stock fell 92 percent from the beginning of 2008 to July 25, when trading was suspended.

The social failing the new developments were meant to address: the vast, tin-shack slums that extend for miles beyond the center of Mexico City -- population, 9 million -- and also ring other big Mexican cities. Many of the slum dwellers are squatting on land they don’t own and until recently had no possibility of owning.

Mortgages were scarce for the poor and lower middle class, and land availability was limited by the ejido system, a scheme promoted by President Lazaro Cardenas in the 1930s in which rural land was seized from big hacienda owners and distributed to the peasantry. The plots couldn’t be sold; they could only be passed down in families.

In 1992, President Carlos Salinas de Gortari pushed through a constitutional amendment allowing the ejidos to be bought and sold. During the next few years, developers snapped up the plots by the thousands.

They Grow Corn

The farmers “had never seen a lump-sum payment that big in their lives,” says Alejandro Nieto Enriquez, head of housing policy for the Pena Nieto government. “They are people who grow corn.”

In 2000, Vicente Fox of the National Action Party took office as president with a free-enterprise agenda. One pillar of his government was boosting lending through the then-three-decades-old National Workers’ Housing Fund Institute, or Infonavit, a government-sponsored mortgage bank that now controls about 70 percent of Mexico’s market.

Fox oversaw the issuance of 2 million Infonavit mortgages. President Felipe Calderon, his successor, issued 3 million more. A typical loan for a 50-square-meter (538-square-foot) apartment was about $20,000.

Calderon added to the house-buying frenzy with a federal subsidy called This Is Your Home, which helped 590,000 homebuyers with down payments, according to the National Housing Commission.

Video Show

Calderon also encouraged foreign investment in the Mexican housing program, appearing by video in investor presentations that Geo, Homex and Urbi staged annually in New York and London starting in 2004. During one such event at New York’s Waldorf Astoria hotel in February 2011, Calderon, speaking by video, told attendees, “There has never been a better time to invest in Mexico.”

Robert Abad, who helps oversee $53 billion at Pasadena, California-based Western Asset Management Co., attended a Mexican-housing investor day in 2010 in New York. “The theme was, this is Mexico; it’s on the verge of a comeback,” says Abad, who sold Western Asset’s Homex bonds in April. “There’s a housing deficit; these players are front and center on bringing relief to the people; they need money to make this happen. Then all of a sudden, boom -- a flaming arrow from left field straight into the homebuilder pinata.”

Residents Flee

The bubble began losing air when residents started abandoning the towns, an exodus that continues today. By 2010, the Calderon government had already begun promoting apartments in or close to cities, upending the business model of builders that specialized in developing rural land.

Homex’s 6,000-town-house Parque San Mateo project is an example of the new communities’ rapid deterioration. What were advertised by Homex as playgrounds and grassy parks are now covered in knee-high weeds. Smelly sewage pours out of a drainage ditch onto the road. Row homes have been gutted by burglars who made off with everything from stoves to toilet seats. The guard booth at the entrance is empty, its windows shattered and doors covered with graffiti.

“The company’s salespeople said we’d have this, we’d have that everything and more,” says Isabel Zarza, 39, a mother of 14- and 15-year-old daughters who has been organizing community members to lobby Homex and the local government for better services. “They made it sound like the most beautiful place in the world.”

Housing Office Burns

A group of residents at the nearby La Esmeralda Homex development got so angry in 2013 about the lack of water and electricity that they marched on the homebuilder’s local sales office and burned it to the ground, according to interviews with local residents.

Homex didn’t respond to repeated requests for comment.

Left to retool Mexico’s housing strategy is President Pena Nieto, the former governor of the state of Mexico, where the San Mateo project and dozens of developments like it were erected. When he took office a year ago, he faced record foreclosures and about 300,000 abandoned homes, according to government estimates. He issued his own housing plan in June, which demands construction in or near cities.

Back in San Mateo, Orozco says that the situation is worsening. Representatives of Homex are nowhere to be found, and the unfinished development isn’t receiving support from either the federal or local governments, she says.

“I feel like I’m alone,” Orozco says. “There’s no help coming from anywhere.”

To contact the reporters on this story: Jonathan Levin in Mexico City at jlevin20@bloomberg.net; Ben Bain in Mexico City at bbain2@bloomberg.net

To contact the editor responsible for this story: Michael Serrill at mserrill@bloomberg.net


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • PEMIX
    (PIMCO Emerging Markets Corporate Bond Fund)
    • $11.56 USD
    • -0.03
    • -0.26%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus