MEXICAN HOUSING INDUSTRY PRIMER...

PRIMER PRESENTATION

MEXICAN HOUSING INDUSTRY

June 2012, Mexico City

CORPORACIÓN GEO

Outline

Mexican Housing Fundamentals: Demand Mexican Housing Fundamentals: Supply Population Demographics What is INFONAVIT? What is FOVISSSTE? How the titling of houses work Sociedad Hipotecaria Federal (SHF) Comisión Nacional de Vivienda (CONAVI) Commercial Banks and SOFOLs Mexican VS. The World

2

Mexican Housing Fundamentals: Demand

Demand for houses as of 2011 is 16.9 million houses In 2011, there is a housing deficit of approximately 9.0 million houses + 600k incremental per year More than 50% of the population that is contemplated in the deficit earns no more than 5.5 times the monthly

minimum wage (5.5 x $147 = USD 808)2

The increasing housing deficit ensures there will be enough market for the Mexican housing industry in the years to come

3

Housing deficit + Demographics for the next 20 years will represent a market of 20 mn more homes An opportunity for long-term growth

Source: CONAVI, SHF, 2012

2 Exchange rate FIX as of December 31st 2011, $12.8093

16,949,697

8,023,097

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

2006 2007 2008 2009 2010 2011

Hous

ing

Uni

ts

Housing DeficitAverage Cumulative Housing needs Average Cumulative Mortgages + Subsidies

2011

HousingDeficit

8,926,600

Demographics:Today’s youth: Tomorrow’s homeowner

In the last population census there was 112 million people, of which 40% was between 10-34 years. This gives way to a considerable demand of housing for the next 20 years Source: INEGI

(Population Statistics Institution)

4

Assuming that homebuyers are generally between 25 and 50 years old and that, on average, there are 4.5 people per house, by the year 2030 the domestic need for a house would amount to about 11 million homes Source: GEO, SOFTEC

Source: CONAPO, GEO

85 & above80-8475-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-14

5-90-4

% of total population

Age

Rang

e

Demographic Pyramid 2010

Men

Women

6 5 4 3 2 1 0 1 2 3 4 5 6

40%

Source: INEGI

Mexican Housing Fundamentals: Supply

An opportunity for large homebuilders to gain market share given the decreasing supply of houses

5

As of 2012, there is an estimate of 28 million houses inMexico

Highly fragmented industry: more than 70% of the market share among small and medium homebuilders

Homebuilders can be divided into two groups: Large: Those who build more than 500 houses in a year

1. Have access to market funding2. Strong brand recognition3. Geographical diversification4. Economies of scale

Small & Medium (S&Med): Those who build no morethan 500 houses1. Limited access to funding2. Small marketing campaign, if any3. Lack of technological advantages4. No economies of scale

Housing starts in 2012 have decreased significantlycompared to 2010 and 2009. See graph on the right

The housing industry is highly fragmented due to geographically scattered developments in Mexico

Source: INFONAVIT

Source: CONAVI, 2012

Source: CONAVI

-50,000

100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Num

ber o

f hou

ses

star

ted

Housing Starts 2012 vs. 2011 vs. 20102010 Acum 2011 Acum 2012 Acum

- 16% - 2012 vs. 2011- 31% - 2012 vs. 2010

70%

16%

11%4%

INFONAVIT

Banks & Sofols

FOVISSSTE

Others

0

100,000

200,000

300,000

400,000

500,000

600,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

What is INFONAVIT?

Autonomous, efficient institution where the Federal Government, the employers and the private workers are equally represented. It focuses on providing affordable entry level mortgages to low-income families

Among the largest mortgage institutions in the Americas (in terms of number of loans originated) In 2011, it granted 70% of the 786k mortgages given in Mexico

Eligible mortgage applicants are determined by a scoring system (116 points) and have the opportunity to choose the house they want to buy according to their purchasing power and personal preference

6

Institution with USD 51 billion Assets Under Management 3

Mexican Mortgage Market-share in 2011

The National Housing Mortgage Institute for Private Workers

3 As of June 30, 2012 using the exchange rate FIX of the same date, 13.4084


No. of INFONAVIT Mortgages 1994 - 2011

INFONAVIT’s breakdown of affiliates…

As of June 2012, it has a total of 17.0million affiliates and are composed inthe following manner: Only 3.3 million have made use of

their loan 5.1 million have not used their loan

but are eligible to acquire one 8.6 million private workers do not

currently qualify for a loan withINFONAVIT

INFONAVIT’s 2012 goal is to provide490,000 mortgages (without MBS).The ratio of eligible affiliates tomortgages offered is 5.1 mn / 0.480mn ≈ 11 affiliates

7

In 2011, for every mortgage INFONAVIT grants there are 11 affiliates who are waiting in line to acquire a loan but remain unattended

Source: INFONAVIT, 2012

INFONAVIT’s clients are affiliated to the institution and must fulfill a sum of 116 points to be able to qualify for a mortgage. These points add up based on age and salary, amount in each workers’

individual account at INFONAVIT and time of continuous quotation as a private worker

3.3

5.1

8.6

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Junio 2012

Mill

ion

of a

ffilia

tes

Affiliates INFONAVIT

Affiliates who do not qualify yet

Eligible affiliates

Workers with a mortgage

Total affiliates: 17.0 million

Potential market

niche

244,000

136,000

60,000

50,000

-

96,000

192,000

288,000

384,000

480,000

1

"Apoyo Infonavit" Program

More than 11 TMW

From 4 to 11 TMW

Less than 4 TMW

INFONAVIT 2012E Mortgage Granting per Segment

…its sources of funding and its execution

The sources of funding are unique to the Mexican housing industry:1. Contributions: Employers have the legal obligation to pay and

deposit 5% of the monthly salary of private workers in the worker’sindividual account at INFONAVIT

2. Mortgage payments: Collection done by monthly payroll discountsmeaning minimum default risk

3. Market financing: Mortgage-Backed Securities (MBS)1. Total issued since 2004-2011: USD 6.2 billion according to INFONAVIT4

2. As of June 2012 INFONAVIT has issued USD 746 million4

3. Rated mxAAA/AAA(mex)/Aaa.mx by Standard and Poor’s, Fitch and Moody’s

8

Reliable, low-risk institution with solid fundamentals

Inflation-adjusted mortgages targeted for low-income privateworkers Rates between 4% - 9% depending on themortgage type

Non performing loans (NPLs): 5.4% of the total portfolio as ofJune 2012 according to INFONAVIT

4 Exchange rate FIX as of June 30, 2012. 13.40845 This goal excludes the mortgages provided by the MBS resources

2012 Goal: Provide 490,000 mortgages5

As of July 2012, it has achieved 67.9% of its goalSource: CONAVI, 2012

Source: INFONAVIT, 2012 Segments in times minimum wage

35%

54%

7%

4%

Sources of Funding 2012E

Contributions

Mortgage payments

Market funding

Other

Total financing: USD 10 billion4


What about INFONAVIT’s long term plans?

This shows the potential growth of mortgages granted by INFONAVIT in the lower income segment of the population in the following 5 years, backed up by internal (contributions and mortgage

payments) and external funding (market)

Goal 2012-2016: Grant approximately 2.7 million mortgages in the following 5 years

9

2012-2016 Goal by Segment


Market funding (USD million)$781 $781 $781 $781 $781

440,000 460,000 470,000 480,000 490,000

50,000 60,000 70,000 80,000 90,000

-

100,000

200,000

300,000

400,000

500,000

600,000

2012 2013 2014 2015 2016

Mor

tgag

es

2012-2016 Supply of LoansInternally-funded Market-funded

57.8%29.3%

12.9%

Below 4.00

above 4.00, Infonavit Total and Cofinavit below 11.00

Cofinavit AG, Infonavit Total AG

What is FOVISSSTE?

10

Born in 1972, it is a government-controlled fund that provides accessible housing credits to the workers employedby the government

Only in the period 2006-2012, FOVISSSTE will provide the equivalent of 70% the number of loans granted during thelast 34 years.

In 2011, for every mortgage FOVISSSTE grants there are 15 affiliates who are waiting in line to acquire a loan but remain unattended

Source: FOVISSSTE

Housing Fund for the Security and Social Services Institute of Government Workers

-

5,000

10,000

15,000

20,000

25,000

30,000

-

200

400

600

800

1,000

1,200

1,400

1,600

72-76 76-82 82-88 88-94 94-00 00-06 2007 2008 2009 2010 2011 2012e

USD

mill

ion

Thou

sand

Loa

ns G

rant

ed

Loans Granted and their AmountAccumulated Loans Accumulated USD

Aggr

esiv

e gr

antin

g be

gins

34 years 6 years

800

2,000

-

500

1,000

1,500

2,000

2,500

3,000

Thou

sand

of a

ffilia

tes

Affiliates FOVISSSTE

Affiliates not attended yet

Government workers with a mortgage

Total: 2,800 thousand

Potential market

niche

1,000

45,000

3,000

20,000

1,000

-

9,500

19,000

28,500

38,000

47,500

57,000

66,500

76,000

Mor

tgag

es

FOVISSSTE 2012E Mortgage Granting per Segment

Pensiona2 (retired affiliates)

Alia2 Plus y Respalda2 above 6.00

Partner/spouse 4.00 - 5.99

Traditional 2.00 - 3.99

With subsidies Up to 1.99

FOVISSSTE’s 2012 Outlook

11

FOVISSSTE specializes in granting mortgages to the affordable segments

The mechanisms used to collect contributions and mortgagepayments are similar to those of INFONAVIT’s :1. FOVISSSTE receives the contributions paid by the Government

employer 5% of workers’ base salary2. Collects mortgage payments by retaining a fixed 30% of the

worker’s base salary directly from payroll3. Additional funding through Mortgage-Backed Securities

(MBS)

2012 Goal: Provide 70,000 mortgages

As of July 2012, it has achieved 53.9% of its goal

FOVISSSTE’s main goals for 2012: Consolidate and improve each and every operational process with a clear

strategic plan that links regional demand and supply Tap the financial markets through MBS to enhance the supply of

mortgages to the Mexican public workers Improve the business relationships with additional participants of the

financial markets


Source: FOVISSSTE, 2012

Source: FOVISSSTE, 2012 Segments in times min. wage

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

-

20,000

40,000

60,000

80,000

100,000

120,000

2000-2006 2007 2008 2009 2010 2011 2012E

USD

mill

ion

Num

ber o

f loa

ns

2000-2012E OperationsLoans USD effect

General overview of how the process works

12

Sensitive to: 1. Inflation2. Employment3. Government support

Resilient to: 1. Interest rates2. Bank competition

A INFONAVIT: Client must accumulate 116 pointsFOVISSSTE: Determined by a raffle

B Housing institutions are cash-neutralC Homebuilders are paid on a first-come first-serve basis

Homebuilder registers the house

Housing inst. values the house and

approves it

Enrolls the consumer into

the system

Authorizes the financial

resources

Issues retention waiver so that the

employer can begin discounting the

mortgage payments

Titling of the house

Pays the total value of the house to the

homebuilder C

Housing Institution Housing Institution Housing Institution

Homebuilder & Housing Institution &

Consumer Housing Institution B

Demands a house

Homebuilder offers various products

and prices

Housing institution assesses the

creditworthiness of the consumer A

Reports the purchasing power of the consumer

Consumer Consumer & HomebuilderHomebuilder & Housing

Institution Housing Institution

Source: GEO, INFONAVIT and Scotia Capital

At the same time, the process detailed below takes place:

SHF supports the industry with financing…

Sociedad Hipotecaria Federal (SHF), Mexico’s Federal Housing Bank

Second-tier bank that provides funds andguarantees to financial intermediaries (i.e.SOFOL’s)

In pursuit of its goal to develop the primaryand secondary housing markets SHF, 1)Focuses on the bottom of the pyramid, byfunding low-income housing production, 2)supports the MBS market, by acting as themarket maker and taking positions in theprimary issues and 3) Provides liquidity to themarket, particularly to SOFOL’s andSOFOM’s, when needed

Recently, SHF created “Crediferente”, newscheme to provide a housing solution tothose families unafilliated to INFONAVIT orFOVISSSTE. The 2012 estimated demand forCrediferente is 20k loans.

13

SHF is clearly focused on attending the lower-segments’ housing needs through accessible funding

Source: SHF, 2012

Financial Intermediaries

Homebuilders People who request a mortgage

Financial resourcesMortgages

Mortgage paymentsPayment

Funds and guarantees

Payment of funds and guarantees

…while CONAVI acts as the supervisor

Comisión Nacional de Vivienda (CONAVI), the National Housing Commission

Created in 2001, it supervises the correct andeffective implementation of Mexico’s housing goalsin pursuit of sustainable developments

Intermediary between the public, social and privatesectors of the economy regarding housing andfunding mechanisms

Provide subsidies through “Esta es tu Casa” (this isyour house) program to the lower income families(2.6 times the minimum wage)

14

Through the granting of subsidies and the active role as institutional intermediary, CONAVI is a vital player in the Mexican housing industry

2012 Goal: Provide 181,000 subsidies


10 Exchange rate FIX as of July 31 2012, 13.2833


492 128

0 620

USD effect

USD million10

161,820 19,180

0 181,000

Subsidies

Number of Subsidies

2012 Goals

What's left

Progress as of July 2012

What's left

Progress as of July 2012

Commercial Banks and Non-Bank Lenders (SOFOL’s) are Facing Tough Times

15

The aftermath of the credit crisis has produced more cautious consumers. Likewise, Banks and SOFOL’s have lowered their exposure to the market by providing less funds to the S & Med

homebuilders

Non-Bank Lenders or SOFOL’s are commonly used in Mexico to provide consumer, housing and automotive loans to consumers.They also fund mostly Small & Medium homebuilders for the construction of houses through bridge loans The main attributes that characterize these financial institutions regarding mortgage lending are: Average interest rate on mortgage: 12-18% fixed rates Target middle and high-income segments Banks and SOFOLs account for 14% of the mortgage market share as of December 2011 according to CONAVI

2012 Goal for Banks & SOFOL’s: Provide 138,235 mortgages

What happened with these institutions?

SOFOLs have retracted in providing bridge loans to the Small & Medium homebuilders

Consumers are not acquiring mortgages


Source: Banxico Source: CONAVI, 2012

0%2%4%6%8%10%12%14%16%18%20%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

ene

09

mar

09

may

09

jul 0

9

sep

09

nov

09

ene

10

mar

10

may

10

jul 1

0

sep

10

nov

10

ene

11

mar

11

may

11

jul 1

1

sep

11

nov

11

ene

12

mar

12

may

12

jul 1

2

USD

Thou

sand

s11

Month and Year

SOFOLs Banks NPL (SFLs) NPL (Banks)

The Mexican Housing Industry is the Safest Place to Invest

16

The Housing Industry in Mexico benefits from unique fundamentals, solid housing institutions and prudent government policies that differentiate it from the rest of the world

Mexico offers a safer environment for the development of the housing market as well as attractive fundamentals that will enhance the participation of the industry in the overall progress of the country

13 The LTV ratio is for housing that cost more than MXN 1 million or USD 75,282 using an exchange rate FIX as of July 31st 2012, of 13.2833

Source: GEO, 2012

Mexico Countries with housing crises (i.e. USA, UK, Spain)Interest rates Fixed Variable

Loan to Value Ratio (%) Pre-crisis 90% USA (90-100%)Post-crisis 70% USA (80%)

Secondary market for mortgages No Yes

Housing prices Subject to inflation (no bubbles)

Subject to interest rates and speculation

Mortgage origination standards Strict LenientMortgage penetration (% of GDP) 6% USA (60%)

Potential risks High unemployment Low interest ratesDown payment 20% USA (5-20%)Average NPL's 6% USA (10%)Mortgages Non toxic Sub-prime

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