It was the best of times, it was the worst of times, which more or less describes the housing market in Mexico. Homes of “social interest” – small houses for families with fewer resources – are about to sell like hotcakes thanks to a government initiative that offers subsidy packages to those families. On the other hand, the United States, the Big Daddy of the Mexican economy, has a hangover from its own real estate binge, and fewer Americans are likely to be spending lavishly on second homes south of the border.
Mexican housing developer PromoCasa is likely to get the best and the worst since the company has divisions that serve both markets. Fortunately, however, the company’s principle income comes from a substantial middle ground. For the first time in practically the history of the country, a middle class is emerging with steady wages and a buying power that makes it quite an attractive target market.
With more than 25,000 houses constructed, PromoCasa has the experience to confront both the challenges and the benefits of developing homes in Baja California. With the competition beginning to come on strong, PromoCasa will concentrate on adding value to its beach homes, innovating on its middle class properties, and arranging creative financing options for those interested in buying the low-end houses.
THE FIRST ONES
When PromoCasa was founded in 1992 by Jorge Mario Arreola, the company was all alone in its market. That was partly due to Mexican law. Up until the 1990s, building houses wasn’t a good business in Mexico because developers were required by law to hire through the state unions. At the same time, interest rates remained high. But as interest rates came down, laws changed to make hiring easier.
So Arreola opened his offices, and a few years later added two partners – Alberto Coppel and Julio Chiang – to increase the company’s portfolio of properties. The company to this day concentrates its developments in three cities located in Baja California: Tijuana, Mexicali, and Rosarito.
The company hit a rough spot along with the rest of the country when the financial crisis of 1995 arrived. Arreola said there were no home loans available anywhere for nine solid months. Since then, however, the company has carried on and prospered, expanding its portfolio of property offerings and delving into new markets and new challenges.
To date, PromoCasa has built more than 25,000 houses. The company began originally by concentrating on middle class housing, and that segment of the market remains the company’s bread and butter income. Its approach has been to construct attractive housing developments with units selling at between $13,000 and $300,000.
The developments – about half a dozen in progress at the moment – feature cute houses located in subdivisions in the prettiest parts of town. Barcelona Residences, for example, is a project with two parts, one located in Tijuana and the other in Mexicali. The development has three different styles of home to choose from. All are block houses with stucco walls and tile roofs, small but cozy and with room to park two cars.
The target customers are middle class Mexican professionals who are young, have families, and are looking to invest their newfound prosperity in a secure place.
Another segment of the market – one that PromoCasa entered relatively recently – is the second home or vacation home market. The principle customer here is the foreigner with disposable income looking to buy an ocean view or beach front home or a retirement home abroad. At a cost of between $185,000 and $300,000, PromoCasa has built 211 homes and sold a total of 140 in Rosarito and coming soon a new project in San Felipe.
“It’s a good option for people who want to invest in Mexico on the beach,” Arreola said.
The fastest growing market segment for PromoCasa is the so-called “social-interest housing,” which is basically low-cost housing for the lower class in Mexico. These dwellings sell for between $15,000 and $20,000. It’s an exciting niche because the government of President Felipe Calderon recently launched a plan to offer subsidies of between $2,300 and $5,000 to Mexicans of a certain income level interested in buying their own roof and four walls.
Though they provide relatively low returns, the low cost, high volume product will likely sell fast, Arreola said. Right now PromoCasa is building about 3,500 houses per year, total, of which about 1,000 are social interest. But with the new social interest housing construction that is sure to come, Arreola said he expects the total number of houses under construction by PromoCasa to jump by 20 percent.
Social interest housing provides PromoCasa with about 30 percent of its revenue, while middle class housing – still the company’s mainstay – provides 60 percent. The rest is provided by vacation home construction. In 2005, sales came close to $73 million, according to the company’s online financial statements.
Each of the three divisions (Touristic Division, Middle and Residential Division and Social Interest or Economic Development division) that PromoCasa maintains will confront its own challenges in the next few years, Arreola said. The Touristic Division (with ocean view and beach front homes), for example, faces one of the most visible and systemic setbacks of all: The U.S. economy is facing a serious slump, lead by the housing market. That means U.S. consumers who were used to relying on the paper value of their homes as collateral to fuel their spending habits will now have to cut back, and the first thing to go might be that new vacation home.
“We’re expecting that the Mexican market is going to be a little slow next year,” Arreola said.
The plan, therefore, is to find a way to hook those reluctant buyers anyway by offering irresistible extras: concierge services, for example, or club house with fitness centers.
“(The crisis) is out of our control,” Arreola said. “What is in our control is to offer facilities and amenities with a higher lifestyle.”
The middle class housing market isn’t facing any such downturn. On the contrary, it’s somewhat booming, but that brings along its own problems. Namely, PromoCasa is facing a lot of competition. At the same time, it is selling a product to a consumer that is educated and will do comparison shopping.
“We have to be great innovators to bring them a product they will like,” Arreola said.
With social interest housing, on the other hand, the problem is just the opposite. There is a need to bring more customers to the product. In this segment of the market, many of the customers work on the informal market. This means that not only are they somewhat suspicious of traditional financing methods, but many banks simply don’t feel like lending to people who make their living in cash and have a hard time making payments through traditional structures.
“They need to design new financial products,” Arreola said, “products that are more adequate to reality.”
To make that happen, Arreola said PromoCasa will be making alliances with financial institutions to see what kind of new tools can be worked out.
With a potentially difficult year coming up on the vacation home front, and a stressful one on the social interest front, PromoCasa is setting up some new management tools to make construction more efficient and increase volume. The company has certified debt bonds on Mexico’s stock exchange, and is planning to make another offering in 2008. Whatever happens, PromoCasa is certain to keep building as Mexicans take advantage of the country’s new stable economy.