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REAL ESTATE & CONSTRUCTION

Construction projects worth $7bn planned for 2015, as sector grows by 8%

Article - January 23, 2016

The government, with input from private investors is embarking on several mega-projects worth an estimated $7 billion this year. The wave of new activity is expected to stimulate job growth and invigorate the real estate and banking sectors, as government initiatives help more Peruvians with home purchases

AN ARTISTS IMPRESSION OF ONE OF THE CONSTRUCTION PROJECTS LAUNCHED BY INGROUP

One of the main drivers of Peru’s economy has been the construction sector, making up 5% of GDP and coming in second as the most important source of job growth next to manufacturing. While growth is down this year from a high of more than 18% in 2013, the sector continues to reflect tremendous potential.

Construction is projected to grow by more than 8% this year, according to the state-owned Andina news agency.  The government, with input from private investors plans to embark on several mega-projects worth an estimated $7 billion this year. The wave of new activity is expected to stimulate job growth and invigorate the real estate and banking sectors, as government initiatives help more Peruvians with home purchases.

 “In the last 10 years we have experienced a real estate boom in our country, predominantly in Lima but in other provinces as well,” said Jésus Blanco Gordon, Corporate General Manager of Ingroup, one of the country’s most prominent real estate developers. “All this growth that we have achieved in the last few years has to do with the fact that many Peruvian families have access to a mortgage credit.”

Peru uses a common demographic classification system, to identify the socio-economic classes of its population. The segments range from A to E, with the middle class represented by strata C and D.  The percentage of Peruvians considered middle-class doubled to 70% of the population between 2005 and 2011, according to the Inter-American Development Bank (IADB).

Ingroup has adopted a strategy to help address the country’s changing demographic landscape.

“Our main strength is having a mix of products for the different socio-economic segments in the country,” said Mr. Blanco Gordon. “We manage three brands; Immobiliari, directed 100% at A and B, a mix of residential and commercial in this class, Recrea directed at C, and Vibien directed at D. Thanks to this distribution we’re able to maintain ourselves throughout different real estate
market downturns.”

The residential market was impacted by changes last year to mortgage protocols, which required clients to prove credit worthiness over 12 months instead of four. The change had a significant impact on the C class, made up of mainly small businesses where revenue volatility make it difficult for banks to assess credit worthiness.

“As a consequence the cash flows for real estate companies with many projects aimed at segment C changed,” said Mr. Blanco Gordon.  The difference of eight months, created a gap between sales related incomes and construction related outcomes. “As a consequence your project’s financial expenses grow or the increase of investment on capital does not generate the expected return.”

The setback is offset by Ingroup’s diverse portfolio and Mr. Blanco Gordon believes the housing market still represents tremendous opportunity and as an indication of its confidence Ingroup continues to build when others are scaling back.
“This year we’ve launched big projects and we have more left to launch,” he said. “We’re taking chances. We believe in Peru’s real estate sector and we know that it still has great potential.”

Mr. Blanco points to the low penetration rate in mortgages as a sign of the market’s untapped potential.  

“Our financial system has 250,000 mortgage loans, in a country of 30 million inhabitants, while a country like Chile has 1.7 million, for 20 million inhabitants, and Columbia has 1.9 million loans with 40 million people. That gives us an idea of how much space for growth we have here in Peru.”

The government could help spur growth with mega projects that may encourage more Peruvians to invest in longer-term housing. It announced plans for more than 22 projects worth $7 billion aimed at improving the quality of life for Peru’s residents. An estimated $3 billion will go to improving the infrastructure of hospitals and schools, transport fixtures and roads will get a facelift, work is under way on Lima’s second metro, and a plan is in the works to build a third line.

“We’ve tried to make improvements more visible,” said Milton von Hesse, Minister of Housing, Construction and Sanitation. “We think that there’s an opportunity to devise public policy that contributes to the population’s access to services and improves the quality of life.”

The housing minister points to the Gasoducto Sur Peruano gas pipeline as a good example. Once completed the $4 billion public-private partnership (PPP) project linking the Camisea gas wells to Lima will cover a distance of more than 450 miles and distribute clean cheap energy to millions.

The government is also making headway in its program to bring water and sanitation to all of its citizens.

“The water access indicator had been stuck in the same place for almost a decade,” said Mr. von Hesse. “With the investments we’ve made the indicator has risen ten percentage points and we’ve already provided access to more than 87% of the country, and in rural areas which were traditionally the poorest sector of the population, we’ve doubled access to water.”

All public building has not gone unnoticed. International banker Credit Suisse gave a positive outlook for Peru, projecting economic growth to be a healthy 5.6% in 2016.

There are other reasons to be optimistic according to Gonzalo Prialé, President of AFIN, Peru’s Association for the promotion of National Infrastructure.  The country’s debt to reserve ratio is 3.5%, low compared to other countries in the region.

“It is said that in an emerging country, indebtedness, approximately 40% debt-product is manageable, and here we are 3%, there is lots of leeway,” said Mr. Prialé, who advocates a five year public-private partnership (PPP) infrastructure investment plan to promote continuity and attract more investment.

“PPP projects generate growth, in the long run the debt-GDP ratio tends to decline. It goes up at first, but then it lowers because the benefits of the project outweigh the cost of borrowing,” said Mr. Priale. “A five-year plan would overcome the uncertainty of a new administration and implies a commitment from the next government.”

But attracting foreign and private investment could be all the more challenging when public support is lacking such as when it comes to something as vital as water supply. Private funds could help support projects that would provide clean water and sanitation to areas where the only option is to purchase it by the barrel. The suggestion that privatizing water would make it more expensive is a myth that is slowing progress, says Mr. Prialé.

“The people in Lima who pay 13 times more, when they finally have water at home, they will be the happiest customers in the world,” said Mr. Prialé. “There are many big projects for Peru’s many challenges. We must not be afraid of mega projects, they may sometimes be controversial, but at the end of the day, the balance is so favorable that the people will be happy, which is what usually happens.”

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