Multifamily potential in Latin America
A promising asset class
At its core, the multifamily market in Latin America is a story of changing demographics. As millennials and Gen Z age into their 20s to 40s, the demand for multifamily units located in dense urban areas has grown. There are challenges in many countries throughout the region, but multifamily properties in particular represent a newly developing market and an attractive investment opportunity.
U.S. multifamily market performance
To understand how demographic changes will affect the Latin American market, it can be helpful to frame the discussion with the state of the market in the U.S. The American market has continued to grow for 10 years and probably would have continued its growth in 2020 if not for COVID-19.
According to RealPage®, occupancy rates in the U.S. were at 96.3% in 2019, and rent growth exceeded 3% thanks to consistent and rising demand. Yardi Matrix data shows that as many as 320,000 multifamily units were accommodated in 2019. This makes 2019 the sixth year in a row when unit absorption exceeded 250,000 units.
Millennials and Gen Z have higher debt levels and love being mobile and flexible. They are delaying standard life transitions like getting married, having kids, and buying homes. Furthermore, single-family homeownership has become out of reach due to high prices, particularly in metropolitan areas, and these generations prefer to live in the urban center. These factors have boosted the market: The average asking rate for multifamily units rose nearly 5% in 2018.
Latin American demographics
It is safe to say that the Latin American real estate market will see similar trends.
For example, according to an article in IPE Real Assets, in Brazil, around four million people enter into the middle class every year, creating the demand for 1.5 million new housing units annually. This is compared with a supply of only 300,000 to 500,000 new housing units. Overall, the Latin American market consists of roughly 500 million people and is expected to run into a deficit of four to seven million units.
What sort of housing are they looking for? A recent survey of Mexican millennials revealed that 44% of them want to buy their own apartment, 21% wish to rent on their own, and 16% wish to rent with a roommate to share expenses.
The survey also suggests that buying a home may still be out of reach for many. It shows 34% plan to pay between $150 and $300 per month. Only 9% plan to spend $450 or more per month. To put this in context, a monthly payment of $800 per month would be more realistic to purchase a home. All of these figures provide solid ground for the growth of multifamily assets in Mexico.
Until recently, multifamily housing as an investment was a concept alien to Mexico. Eviction laws strongly favored the tenant; in some cases, it could take years to evict. There is also a large shadow market of condos that have been converted into rentals. Combine this with a lack of institutional knowledge and an underdeveloped secondary market, and the multifamily segment was not an ideal investing environment.
But this has now started to change with the government relaxing rent control regulations as well as eviction laws, thus favoring the landlords.
The state of management companies in Latin America
Gauging the mood of the market, many institutional players have been staking their ground in the market. I can speak from my experience working with Orange Investments’ multifamily platform. We have a range of experience managing multifamily assets in the region.
We are expecting others to join us in the coming years. Some names that are expected to create ripples in Mexico and Latin America include Greystar, Gran Ciudad (owned by Black Creek Group from the U.S.), CCLA (a joint venture between CIM Group and Compass Group), Canadian company Ivanhoe Cambridge, and the Public Sector Pension Investment Board, known as PSP Investments.
The interest is partly due to the low cap rate of the market. In short, this means investors are willing to pay more for each dollar of income that they generate as they see this asset class as a diversified and safer real estate investment that tends to perform well even in downcycles.
The wrap-up
The future looks bright for the multifamily sector, but there are a few associated downsides. Management intensity is one strong limitation. A multifamily property requires dealing with various individual leases. You need to handle maintenance and repair requests from different tenants, and a lack of institutional management experience persists in the region.
Depending on the area, multifamily properties can be capital-intensive and time-consuming. A new project for an apartment building in Mexico City, for example, could take more than two years to begin construction thanks to onerous regulations, and getting the right financing terms can be challenging.
All of these factors call for some strong reforms in the industry. Property management and improvements in operations are some measures that must be considered. Regulations and banking finance should catch up with the strong demand. A secondary market for project sales should be developed; as of now, no multifamily REIT exists for Mexican properties.
Although multifamily rentals are highly popular in the U.S. and are not adequately present in Mexico as of now, the future looks hopeful. Consider the shifting demographics, growing middle class, and absence of institutional-quality housing. Further, rental housing poses a lower risk when compared to other asset classes. This provides a solid foundation for investors to experiment with entering the market. All in all, the multifamily asset class is a rapidly emerging sector that could provide a high return on capital, considering the growing demand.
Cash flow
Multifamily properties generate a predictable cash flow each month. If your property is located in highly sought area, it is easy to turn over your units and enjoy a stable cash flow year in and year out.
Valuation potential
Casting aside a few dark events, a multifamily real estate property generally appreciates over time and is more resistant to economic downturns.
Product type diversity
While multifamily is often referred to as a single type of real estate asset class, the sector offers investors a range of product types to invest in. From small duplexes and triplexes to newly renovated properties and apartment buildings, there are various options for investors to explore.
Scalability
Multifamily helps diversify an asset portfolio. An investor can invest in two properties at a time. This is not possible when you are interested in properties with higher barriers to entry, like malls and hotels.
Growing popularity
The multifamily asset class is in full swing in the U.S. and Latin America. This trend is, to a large extent, influenced by urban demand.
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