Mexican Housing Crunch
Mexico is Not Building Enough Homes
The above chart from Mexico’s housing registry, RUV, is quite telling. Mexico has been producing fewer and fewer homes every year and is on track to produce a remarkable 50% fewer homes than was produced in 2013.
The average age in Mexico is 29. The combination of the nearshoring of manufacturing and being the US’ largest trading partner has led the Mexican economy to grow at nearly 4% this year.
As we have learned from the past ten years of the US housing market, when supply collapses, pricing surges until producers have enough incentives to go out and really increase supply. That incentive is normally profits and specifically very high margins.
Mexico should be building more homes and the current production is not sustainable. This has led quite predictably to record home price appreciation.
And one of my largest investments, Consorcio Ara (Mexico:ARA), is starting to benefit. Despite building 5.3% fewer homes this year, Q2 sales increased 4.9% thanks to average prices rising nearly 11%.
Mexico needs homebuilders to make more money and for their margins to expand to build more housing. Unlike in the US, there aren’t many pure land developers who commit capital and get land developed for homebuilders to build on. That means that homebuilders have to be in a capital position and be truly motivated to develop lots of land.
And after the disastrous ten years from 2011-2021, few are in such a position. It is for this reason, that I expect the coming Mexican housing bull market to last for much longer than investors could imagine. We need Mexican homebuilders to be raking in the cash, so they develop and build much more housing than is currently being supplied to the market.
In 2021, I wrote a deep dive research report on it calling Ara: The Most Undervalued Stock in North America . I followed up with a post last year:
Since my original report, I have been paid about 14% in dividends and thanks to strength in the Mexican peso, my investment has increased by about 20%. A 34% gain in two and half years doesn’t set the world on fire, but it is better than a stick in the eye, and a whole lot better than the US markets have done since then.
But now the Mexican housing crunch is reaching a crisis point and Ara is shifting in response. Consorcio Ara is now guiding to 20% revenue growth in the second half of the year as multiple projects come online.
On August 9th, investors will receive a 5% dividend. I’m expecting Ara’s dividend to jump by at least 50% next year based on conversations with management and that the company is starting to receive interest about some of the excess beachfront property it owns. Nothing is firm yet, but Mexican brokerage GBM estimates these properties may represent 25% of the company’s market cap. Ara management has told me that in the event of a sale, the company would consider special dividends and buybacks.
It’s been pretty boring for Ara shareholders, but now that growth is accelerating, capital returns to shareholders should accelerate as well. And at our backs is the undeniable fact that Mexico needs more homes, a tailwind that is only growing in force. And that is why Consorcio Ara is now the second largest position in the Mindset Value Fund.