International Private Equity Investments in Mexico Innovative Housing Scheme

Mexico’s Urbi Teams Up With Aureos On Rent-To-Buy Home Sales” serves up some excitement for innovative impact investments in housing in developing countries. Urbi Desarrollos Urbanos is one of Mexico’s top three homebuilders with a special niche in the low cost housing market. Aureos Capital was established as an impact investor in 2001 with a mandate from CDC and Norfund, both European government-owned institutions aimed at private equity investments for sustainable economic development.

This particular scheme appears to be a breakthrough for several reasons:

  • New vehicle for private equity investors getting involved in the low-cost housing market. In general, up to now, direct investors would invest in a percentage of a development project on the ground, take an equity stake in the developer or, on far rarer occasion, underwrite a loan. As an investor, your exposure would be concentrated in the effective execution of a single project or it would be diffused into the corporate operation of the developer.
  • Revolving investment pool. An investor that has a piece of a project likewise has the risk of the entire project. If it goes bad, your whole equity could be wiped out. No less the case here that Aureos’ equity could get wiped out, but the risk appears to be mitigated in that the trust set up by Aureos appears to own the deeds to the houses themselves until the buyers obtain their mortgages. So, it’s like Aureos is providing bridge financing over a relatively short term. If the financing goes bad, they get the equity in the homes themselves. If all goes well, Aureos would earn profits on each sale, while the asset pool will turn over regularly. Depending on the structure, this could, for instance, allow Aureos to diversify its exposure geographically across developments.
  • Rent-to-buy financing for non-salaried workers. Formal sector workers in Mexico can secure a mortgage via government-sponsored mortgage programs that make financing available through specialized mortgage companies. However, non-salaried workers have a harder time – everywhere – in obtaining housing finance. In developing countries, where large proportions of the labor force are in the informal sector, this is a particular problem. Lease-to-own strategies are starting to pop up in developing countries as a means of transitioning low-middle income families to ownership by letting them illustrate their capacity to save and make regular payments on a loan. Often lower income families are ready to sink a substantial savings pool into a down payment on a house at purchase, but without formal proof of income, they have a difficult time showing their creditworthiness. This helps get around that issue by requiring home buyers to show financial capacity over a period of time.

This is just the beginning of the wave of financial innovation that’s going to happen in affordable housing in emerging markets. Smart investors will see the benefit of identifying business models to address the needs of these massive, underserved markets while making a positive social and environmental impact.

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