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Homeownership on the rise thanks to effective housing schemes

Interview - August 3, 2015

The Fondo Mivivienda fund launched 17 years ago as a response to the disappearance of the mortgage market in Peru after the years of hyperinflation. Although it was created in 1998, the fund actually started functioning in the market around 2000 and 2001, creating the conditions for the re-emergence of the family mortgage market. Gerardo Freiberg Puente, General Manager of Fondo MiVivienda, discusses the fund’s effect and opportunities opening up in sectors that are just getting off the ground in Peru.  


Peru has been going through a golden decade with continuous economic growth in every sector of its economy. One of the main drivers has been the construction sector and urban development, which has generated employment in associated industries and has stimulated the financial sector to give loans to a growing middle class. Could you give us your insights regarding this economic performance, the challenges that it is currently facing, and the role that the Fondo MiVivienda fund has played?

There are several components to Peru’s growth, and one of them is the mining industry, which contributes to one-third of the country’s total growth.

Another third is linked to other activities, and the final third to the development and growth of the domestic economy. It’s in the mining sector where there has been a major negative impact lately.

There was some impact on the fishing industry, which is expected to recover.

The decline in the mining sector can be explained mainly by two reasons. One of them is the gap, the delay that existed in some important investments.

Initially it had to do with problems in the social and environmental regulation, and currently because of the political uncertainty.

Tía María is a particular example of this, which has been very badly handled by the company; I think they didn’t measure the cost of not reducing conflict at the right moment.

But in general there are cases like Toromocho, Bambas, and a series of investments that were delayed and started operating just this year. And this is the reason why there was a growth in the Peruvian economy.

There’s no magic here.

Looking at the detailed figures, we can see the starting of operation of some larger scale mining projects, and the delayed growth is due to the delay of investments, which I don’t think will happen until after the uncertainty regarding the elections goes away.

This brings up two issues. The first one is regarding October this year, when the candidates for the elections are presented. If there are no surprises about the candidates, this uncertainty is likely to disappear, and while there might be some internal political conflict, the economic policy shouldn’t undergo any changes.

But if there’s some candidate that comes out of nowhere, it’s likely that everything will have to wait until March or April, when there will be a potential president in sight, and then the investments will probably return.

Unless there’s some candidate with a marked left-wing profile that could represent a major change, any other possible candidate won’t represent a major change in the economic policy and the issue of foreign capital.

So, in that context, what we did was delaying the moment of the investment, not suspending it; it is important to bear this in mind.

In the dynamics of growth, this affects the figures and the state income. The government collects a significant percentage of its resources from the mining sector, and this would have been very bad for Peru if the country hasn’t had enough reserves to cushion this effect.

We do have the necessary reserves to hold on for a few years. If in a couple of years we don’t see a resurgence of the mining sector there could actually be a negative effect on the country’s growth, but as far as I know this won’t happen and we can already see some recovery in the sector.

On the other hand, the effect of mining on the domestic economy is very small, even when it comes to labor. Their thing is capital, not labor.

Therefore, the internal dynamics of the country hasn’t been really affected, and if you look at the rates of consumption, that there haven’t been big changes.

This is because the mining sector supports the country’s economy but not its domestic economy.

In that context, we believe that the internal dynamics of Peru shouldn’t be really affected. There are other factors that can affect us a lot more, like the problem of informality, which leads to the Mivivienda Fund.

Informality is one of the main problems that Peru is currently facing and needs to be solved one way or another. Also because without a legal status there are no loans, there are no houses, so the housing gap will continue. Please tell us about the raison d'être of the Mivivienda Fund to understand this matter.

The Mivivienda Fund was created in 1998, as a response to the disappearance of the mortgage market in Peru after the years of hyperinflation.

Although it was created in 1998 it actually started functioning in the market around 2000 and 2001, creating the conditions for the re-emergence of the family mortgage market.

At the time there was only the Corporate Fund, but it wasn’t for housing, plus it was actually very much focused on the upper-middle class.

But today, if we compare the real estate prices in Lima to other cities in the region adjusting them to the Peruvian per capita income, they’re actually below all of them except Ecuador, Venezuela and Bolivia.

Surprisingly, Colombia is among the highest ones, and Santiago de Chile is in the middle of table, because although prices are high, the per capita income there justifies these prices, so there’s no distortion.

This means that our prices are reasonable, always considering the prices and how they could affect the market.

The Fund started to work better, although always as something addressed to the buying of new houses.

Some changes were made in recent years, because we need to make the market more dynamic, so we authorized the second-hand houses.

There’s still not a liquid market for second-hand houses, and the reason is very simple: the new demand for housing generated between 2011 and 2013 was around 150,000 new houses, and we still don’t have a figure from 2014 onwards.

The economically active population that’s entering the market created this demand.

Last year we had a record housing supply of 77,000 homes, of which two-thirds were made up from the Programa Techos Propios, a highly subsidized social housing program for low-income families.

This shows a serious problem. Because the created demand is higher than the supply, a very liquid secondary market is created.

So we tend to have a huge distortion, which leads the families to buy “their only house” as their greatest need, because there’s the perception that this is the only opportunity to purchase a house.

This is a very serious problem.

In addition to that, we’ve incorporated house improvement, which has had a slow evolution, because two-thirds of the housing stock in Peru has an informal origin, thus not properly recorded and therefore it doesn’t have an improvement license.

This is starting to get better thanks to the contractors, usually small companies that are taking on the task of formalizing the properties prior to entering the improvement process.

This is very important. Slowly we’re starting to make the market more dynamic, we now expect the second housing and second-hand houses sectors to become more liquid, and this in turn improves the commercial dynamics.

The problem is that only 27% of the Peruvian population is formally employed, and that means that 73% of the population is not suitable for long-term financing.

Another characteristic that we’ve noticed was that, by giving regular finance to people who did not have any regular income, they automatically became eligible for credit, and even the financial institutions themselves encouraged this situation, creating a financial problem for themselves.

People who had no financial culture whatsoever were given credit and they just didn’t know how to manage it properly, which created an overleveraging and eventually resulted in a raise of the default rate in the country.

Because of all this, the country has been working for over two years now in a new Rent Law. This law was created based on the fact that in Peru only 7% of the housing stock is for rent, but on average is of a higher quality than the rest.

Also a 10% of the housing stock is vacant, despite the fact that one-third of the total population doesn’t even own a house. In this context it was clear that there was a need for the establishment of a precise legal framework, with standardized contracts, the same way it’s done, for example, in Uruguay.

What is the usual cause for conflict, then? The property obviously belongs to the owner, but as its retrieval is linked to a discussion over the owed payment, the issue goes into a lengthy discussion and the retrieval process usually gets delayed in court.

In this context, the new law separates the discussion over the debt from the actual possession, so the property can be retrieved quickly and put it back on the market, which reduces the costs and risks.

This is why we’re incorporating the “rent-to-buy” option, a way of financing for those three-quarters, which have no formal income, and who are not bad payers; they’re just not very punctual.

And we incorporate all the benefits given by the Peruvian government to promote housing.

This way we’re facing the unfinished house segment, generating also an attractive opportunity for corporate investment in houses just for rent, which doesn’t really exist in Peru nowadays, and generating also a source of funding for those with no access to credit. It’s a different method, which promotes the entry of financial institutions to the sector by reducing their risks.

In this context we’ve been able to grow, and we see the state subsidy as a starting point rather than a means to fully fund housing. The subsidy in Peru is around $7,000, which is quite low. This is a bit less than Colombia or Mexico, but far less than Chile, which has been very successful but it has at the same time generated a major social problem.

It also creates some stability, because the late payments won’t be as damaging as they could have. Unless the owner gets evicted, there’s no trace left of the delay in payment. It also stabilizes the market to avoid the inherent risks in real estate projects, and creates incentives for funding.

So, what do we expect in the future for the housing market?

First of all, the Mivivienda Fund since late last year has already approved the first sustainable projects, which include technology for saving energy, and especially water.

This should start paying off in the near future. Since we’re focused on basic housing, we can’t let the end user to be the one who absorbs the costs of this sustainable technology, therefore the fund has managed to get semi-concessional resources, which will turn into a bonus given in accordance to the level of environmental impact achieved.

Thus, the end user won’t have to pay the extra cost for the use of these technologies, but will have the benefit of their use now and in the future.

We’re financing that bonus, in order to attract enough energy providers to lower their current prices.

Finally, there will be two important investment opportunities. One is through the developers themselves, because it’s an interesting way to invest, in a relatively short term.

And on the other hand, the collateralized bond market, with assets coming from these transactions. The Mivivienda Fund has an active involvement, we keep developing new products.

We must go mainly into the sustainable infrastructure financing market, because the municipal resources are never sufficient, and this will surely open a range of investment in Peru.

Someone has to provide these technologies, and we’re now beginning to see some interesting initiatives from the major developers, such as Urbi and other developers who are committed to this change, which is aligned with the new environmental regulations for housing that is being promoted in Peru.

What new financial mechanisms at the international level could be enabled, in order to bring more capital to the development of this economic sector? Not only investors, but also developers as well.

One of the activities in the market is actually the promotion of investment. Many companies have not yet entered the housing sector, but many others have, such as ICA from Mexico.

There’s also investment from Spain, Colombia, and Chile. For example there is Besco, which is the subsidiary in Peru for Besalco, and also Paz Centenario, which is the Romero group in association with the Paz group from Chile.

We have very important investors, and doubling the market will bring even more interesting investment opportunities.

Still, I don’t necessarily think that these investors should come individually, because the Peruvian market is very complex.

The law grants a huge share of autonomy to the municipal governments, and that’s also something we’ve been working on.

Initially, the Fund had DOs working in the provinces, but this caused us a major problem, because we couldn’t really reach everywhere and we didn’t have the resources to do so, so we decided to change our approach.

We started focusing on the housing solutions and not only in providing a house.

To think only about the house it can lead to big mistakes like what happened in Mexico, where ghost towns were generated as a result of thinking only about houses and not in the integral solution.

Besides, we must consider the problem of the emergence of gangs throughout Latin America, the loss of values in the lower income groups.

Because of all this, we need to work in tandem with the municipalities. We now have agreements with more than 50% of the municipalities in the country, and 80% of these agreements are already materialized, financed by the municipalities but with training and monitoring by the Mivivienda Fund.

So for example, now someone who lives in the Peruvian Amazon, has no need to go all the way to the nearest office of the Mivivienda Fund, they just need to go to their own town council and ask for information about the funding options that Peru has to offer.

This is how we work, with moving teams. We take away their chair and desk so they don’t feel the temptation to get stuck in one place, and they go all over Peru to verify the quality of the service and provide consultancy, and thus, by aligning the municipalities with the population’s needs, we can also generate competitiveness to attract investment.

The State can’t do this; this has to be done by private investors, and not necessarily the big ones, and they can be small scale.

The important thing is that they invest in small towns and in villages. This is how we’ve managed to develop the Techo Propio program, which has quadrupled in the past three years, and we hope that this year will expand another 50% compared to last year.

That has allowed the development of more than 400 small construction companies focused on the lower income segment, which is not the most attractive segment for great developers.

These 400 companies provide the 65% of all new housing in the entire country, which at the same time have a flexibility that large companies don’t really have.

This is a moment of a certain uncertainty, what indicators would you show to themselves international investors, for them to come to Peru and work in the housing sector?

First of all, the banking law in Peru establishes joint and several liabilities of the shareholders of any bank, either a private person or the State, from its creditors.

Therefore, although there is no explicit endorsement from the Peruvian government, there is an implicit guarantee, in the law requires being solidarity against any improper management.

And we also need to take a look at the history of the Mivivienda Fund. It has a high capitalization ratio, 100% adjusted, and the leverage ratio is 52%.

We also have an asset quality with an NPL ratio of 1.7%. But most important is that the total default is almost zero, because the accumulated and historical losses of the fund amount to just over $26,000, having placed more than $2.8 billion in loans.

In the case of a default of the Peruvian State, the assets that the Mivivienda Fund has to respond to their creditors, are of high quality and hardly degradable.

The free trade agreement with United States has had repercussions in financing, equipment, etc. What is the relationship does the MiVivienda fund have with the United States, both directly and indirectly?

Today, our main sources of funding are international issues. We have three major bonds, one of $500 million, another of $300 million, and another of 250 million Swiss francs in the Swiss market.

Funds and investors based in the United States represent over 50% of these investors. The Swiss market is exclusively Swiss, but we’re very interested in keeping a fluid contact with these markets.

Without question, the US is a very important market for investments. We believe this new product, which will surely become a legislative decree later this month, will be a great opportunity.

This opens up a truly great opportunity, because the law will not only be focused on the Mivivienda Fund but on the overall market, and therefore it opens up an interesting opportunity for flows with high degree guarantees that do not depend so much on the quality of the institution through which they’re being channeled.

In a trust, the important thing is the quality of the assets, which will ensure an interesting source of fresh investment for funds that are used in real estate investments around the world, and especially in the US.

But in addition to that, it opens a very interesting investment opportunity for corporate rental housing. Something that doesn’t really exist in Peru, and I know that very important groups in the United States are interested in developing it.

There will be a very precise legal framework for this, with standardized contracts, full banking flows, and with an exemption from sales tax so there’s no market distortion by unfair competition from independent rental housing.

Finally, if you had to summarize it in one sentence, what would you say to the international investment funds to encourage them to work in Peru together with the Mivivienda Fund?

The truth is that we have a very big advantage. Perhaps in the first stage of international funding, that sentence would have been: Better than sovereign. But nowadays the best promoter of investments are the investors themselves, because we could finally position the name “Fund” in the market, and their main uncertainty being the decrease in growth in Peru.

In that sense, our message is that Peru is moving forward and will start growing once again, unless some unexpected factor appears later on, but there are no signs indicating that Peru will not continue to grow.

It’s important to notice that this growth in Peru is mainly a recovery, because Peru had 30 terrible years in which it decreased, and now that situation is reversing.