Mexico's top three homebuilders, facing heavy debt burdens and holding land where Mexicans no longer want to live, will sell fewer homes this year, leaving a market wide open for smaller rivals or even private equity funds to snap up business.
Latin America's second-largest economy has a young population, high employment and a housing deficit of about 9 million houses but the biggest homebuilders misplayed that opportunity and overspent on land they are now struggling to sell.
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Sales of Geo, Homex and Urbi's low-cost homes in sprawling developments far from offices and schools have tumbled in the last year as government policy has changed to support a trend among Mexicans to buy older houses closer to city centers.
Smaller and medium-sized players such as Javer and Ara are now eyeing expansion as Geo , Homex and Urbi focus on tackling rising debt loads rather than increasing home sales.
"It's going to be a complicated year but we expect to increase sales," said Felipe Loera, the chief financial officer of Javer, which builds new houses for low-income workers.
Javer, which is in the process of buying construction company ICA's housing unit, sold 17,533 houses in 2012 and Loera sees that increasing by 8 percent this year.
Ara, which sold 13,516 homes last year, expects revenue growth of 5 to 6 percent this year helped by the expansion of its middle-income home business.
"Mexico's (real estate) market was worth about $15 billion last year and I estimate this year it should have an increase in sales of at least 10 to 15 percent," said Eugene Towle, managing partner at real estate consulting company Softec.
Mexico's housing sector is fragmented and competitive, with more than 1,000 companies, many of them regional or niche players.
Geo, Homex and Urbi, together with Consorcio Ara and Sare - two companies which annually build fewer than half the number of homes sold by the top three - have about 20 percent of the total low-income new housing market.
"While the biggest have seen stock and bond prices battered, we also have examples of small and medium-sized regional companies that have fairly solid balance sheets and a good business," said Standard & Poor's analyst Fernanda Hernandez.
Shares in Ara have climbed about 30 percent since the start of 2013 to 5.39 pesos on Friday.
Shares in Hogar, which builds homes in the center and north of Mexico, are infrequently traded but are up 8.7 percent since the start of the year. By contrast, the broader Habita Mexican homebuilders index is down 38 percent.
DEBT LOAD WORRIES
Urbi, Geo and Homex's share prices have sunk in recent months because of worries about their debt loads, which soared as they bought up land that may no longer be eligible for government programs.
Mexico's government in February announced a policy that prioritizes urban developments, including measures aimed at improving existing housing stock and building high-rise residences closer to cities.
The policy is in line with recent trends - Infonavit, the government-backed mortgage lender, has been underwriting more loans for used homes in recent years - but it will require a strategic shift from Geo, Homex and Urbi which already own large swathes of land that they bought for new suburban developments.
Smaller companies such as Ara will be able to more quickly adapt to the new policy, since they have smaller holdings of land and many already have diversified beyond low-income housing projects, analysts said.
"Ara has another advantage - its flexible balance sheet," said Francisco Suarez, analyst at HSBC, noting that unlike larger rivals Ara is not weighed down by debt. HSBC has Ara on a neutral rating with a target price of 5.50 pesos.
Ara could increase home sales by about 2 percent this year and that would mean a slight rise in its market share, said Jorge Placido, analyst at brokerage Vector Casa de Bolsa.
Ara did not respond to requests for comment.
Javer, which is 60 percent owned by three private equity funds, has taken on debt to fund its business, but the debt is long term and unlike its larger rivals Javer has focused on profits and cash generation rather than growth, Loera said.
Fitch Ratings last month revised Javer's rating to stable from negative watch, citing its successful management of its working capital at "a difficult time for an industry that was transitioning to the ... new vertical housing initiative."
In contrast, Fitch has Geo and Homex on negative watch and in March it cut Urbi's rating deep into junk territory at CCC.
Private equity funds are also showing interest in the sector, said one analyst who asked not to be named because of his bank's policy.
Javer's Loera said that smaller companies that sell 5,000 to 10,000 homes a year could be of interest to investors.
"Many of those are still family companies ... with a similar business model to Javer, focused on profitability and cash flow generation," he said.
The shift by Infonavit, which underwrites most of Mexico's mortgages, toward offering renovation loans and mortgages for existing houses could also prove a boost for companies such as Home Depot , which has 100 stores in Mexico, and cement giant Cemex's retail chain, Construrama.
The number of loans Infonavit offered for home improvement more than doubled last year to 152,771 or 26 percent of its total new loans in 2012.
Infonavit expects to make 545,000 loans this year and though the majority will be for new homes, about 145,000 will be for used houses and 90,000 are earmarked for improvement plans.
(Additional reporting by Gabriela Lopez; Editing by Phil Berlowitz)