Peru’s need for new housing goes hand-in-hand with its current infrastructure development goals. Concern over a developing property bubble led to an industry-wide correction in 2015, but the numbers show that housing improved slightly in 2016, accounting for most of the growth in the construction industry. The Peruvian Chamber of Construction (CAPECO) reported that building construction grew 6.29% in the first six months of 2015, well above the 2.7% growth of new construction as a whole. Looking to the future, a growing middle class combined with an improved regulatory environment should keep demand strong and new development high in 2017 and beyond.
Industry expectations are high for the construction and development of new buildings. A CAPECO report found that 40% of building participants expected production to grow by more than 10% through the end of 2016, with another 20% expecting growth between 2.5 and 5%. Over 91% of this growth came from the Lima metropolitan area, a marker both of the centralization of the country’s significant building industry and the urgent demand for housing. Peru has one of the largest housing gaps in Latin America; a recent World Bank study estimated that the country needs 1.3 million new housing units to fully meet demand. Although the government has invested USD3.3 billion in housing programs over the past 15 years, an additional USD30 billion will be needed to fully meet this need. It is no surprise, then, that housing construction will not be abating anytime soon. The nation’s urgent need for homes will keep the sector growing in the years to come. Francisco Osores, President of CAPECO, recognizes that meeting this housing gap is the industry’s most pressing issue. “Over the next 20 years, we will need 2 million additional housing units, which creates great potential,” Osores told TBY. “We estimate that we need to construct between 140,000 and 150,000 units of housing per year for the next 20 years to make up for the current deficit.”
Home to almost 10 million, Lima is one of Latin America’s most significant metropolises. Its growing size and regional prominence over the past two decades have led to waves of migrants drawn to Lima’s economic activity. A population that doubled in 20 years and the emergence of a new middle class pushed housing prices to new highs during the commodity boom of the early 2000s; a Central Bank study showed that from 2006 to 2013 residential prices in Lima rose at a compound annual growth rate of over 20%. This growth, while impressive, led to worries of a housing bubble and impending collapse. However, recent data indicates that the market has corrected slightly and now has the foundation needed to grow at a sustainable rate. BCRP data shows that after reaching a high of USD1,780 per sqm in late 2014, the average price per sqm fell slightly to USD1,641 in the second quarter of 2015. This is a far cry from the rapid expansion that saw the cost of a sqm jump from USD521 in 2006. Interestingly, this slight decrease in prices was seen across every sector of the housing market, as both high- and medium priced districts saw average prices fall after almost a decade of staggering growth.
The Mivivienda Fund is one way the Peruvian government is making homeownership possible for the growing middle class and ensuring a future steady demand for housing. Established in August 2011, Mivivienda helps finance the acquisition and construction of homes through loans to middle-income families. One of its most effective tools is its “Good Payer Bond” system, which gives homeowners a loan to help fund the down payment of a home. This has traditionally been one of the largest obstacles to home ownership for Peru’s middle class due to high rates of informality and limited access to credit. The Mivivienda program offers larger loans to families looking for lower-cost homes as a way to ensure that the fund is most effective, with financing plans available for 10 to 20 years. Since 2013, it has issued more than 22,000 loans in Lima alone. It also hosts a number of real estate events that showcase thousands of homes in various housing projects in the metro Lima area. The success of programs like these are why Osores says that the problem comes from the supply side of the equation. “In 2015, the housing and construction market fell mostly because of internal problems rather than low demand,” he told TBY. “Demand is strong.” Moving forward, Peru’s finance minister has stated that the government’s goal is to transform Mivivienda into a guarantee agency and bank lender. By partnering with private banks, the government sees the possibility to create wider access to credit that will help Peruvians afford mortgages. Though still a project in the early planning stages, Mivivienda’s USD2.35 billion balance sheet remains one of the country’s key steps to a robust middle-class.
It is these structural issues that will need to be resolved going forward. Peru’s government has begun to take steps to make the regulatory environment more open to new construction. In late 2015, it passed the Home Rental Promotion Law, which allows for new types of rent-to-town rental contracts. By opening up new avenues for real estate companies to finance mortgages and creating a path for renters to purchase property, officials are hopeful that the rental market will receive a boost. The law also includes new regulations shortening the eviction process for delinquent tenants from two years to one month, which should increase turnover and make property owners more willing to rent. Similar to the above Mivivienda program, rent-to-own offers a path to homeownership for the millions of Limeños with non-formalized jobs; by demonstrating a record of rent payment every month they can establish a credit record and contribute to the down payment on the house.
On the retail side, Lima’s office space grew in 2016, reaching total inventory of 962,569sqm, according to Colliers. Supply is expected to reach one million sqm soon, but the increase in the vacancy rate over 2015 indicates that the market remains in an oversupply period. The bulk of Lima’s office real estate market is in the districts of San Isidro and Miraflores. The latter saw more real estate activity in 2016, with Colliers reporting that Miraflores’ net absorption (the total amount of sqm occupied) rose by 13,684 sqm in Q2 2016 while San Isidrio’s fell by over 1,000 sqm in the same time period. Citywide, rental prices for prime office space fell from USD19.19/sqm in 1Q2016 to USD19.19 in 2Q due to pressures from excess supply, but sub-prime office prices grew slightly from USD17.70/sqm to USD18.96 in the same time period. Several new buildings nearing completion should further increase the stock of available office space in the near term, but the Lima’s status as a regional economic hub and the stable Peruvian economy should let demand catch up to the available supple in due time.
Outside of Lima, the housing focus is on providing quality housing to all Peruvians. Rapid urbanization of the country’s outer provinces has led to a great number of Peruvians living in underdeveloped and informal conditions; a recent study estimated that eight out of every 10 houses built in an urban area do not comply with existing regulations. As the government moves to develop these outer provinces, programs like Mivivienda will be critical in improving population outcomes. The housing sector will also need to find ways to build increase the stock of inexpensive homes available. Currently, it is much more cost-efficient to develop high-priced housing in large part because of the difficulties in the regulatory environment. Large-scale adaptation of clear building and land management regulation is a necessary first step toward creating a development culture where low-priced housing can be provided for all who need it. The government has been vocal about its willingness to do so and has already taken steps in the right direction by passing a law that increased criminal penalties for unions found to be extorting developers. Osores is optimistic. “The government has opened up the area of infrastructure development to PPPs and concessions, which is great,” he told TBY. “This allows investors to make long-term investments in this sector.” This long-term thinking should prove fruitful for the future of the sector and the nation as a whole.