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Emerging Markets Real Estate Issuers Stand Their Ground


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Emerging Markets Real Estate Issuers Stand Their Ground

The real estate sector has seen better days. Tighter lending conditions led to an increase in refinancing risk for real estate investment trusts (REITs), while higher mortgage rates reduced homebuilders' revenues and profits.

The U.S. and Europe are among the most affected regions, but emerging markets also grapple with declining real estate valuations. It's not all doom and gloom, though. We expect the real estate companies in our rated emerging market universe will exhibit credit rating resiliency through the end of 2023. They will benefit from idiosyncratic budgetary buffers and, in certain jurisdictions, support from governments and domestic banking sectors.

Our rated universe of real estate companies in emerging markets is geographically concentrated in Latin America, where 20 issuers are based, and comprises REITs, homebuilders, and developers. 74% of rated entities are speculative-grade (see charts 1.1-1.2).

Chart 1.1


Chart 1.2


Homebuilders And Developers


The decline in residential sales will place a strain on issuers across regions.  We expect a risk concentration in mainland China, where homebuyers' confidence could diminish further in light of higher interest rates. Mainland China's real estate sector remains in the doldrums. Although the central government has eased mortgage and property purchase rules in a bid to boost demand, the overall sentiment remains subdued. Latin American developers, on the other hand, will be more resilient, given the recently announced federal support in Brazil and idiosyncratic mitigants in Mexico, namely flexible business models, segment diversifications, and healthy balance sheets (see charts 2.1-2.2).

Chart 2.1


Chart 2.2


Liquidity peaks, leverage stabilizes, and margins will improve from 2023.  Financial metrics point to a general recovery of homebuilders' net operating income as a percentage of debt (funds from operations/debt) from 2023 onward, after the depletion in 2019-2022. Mainland China is the exception. Indonesia displays the highest median liquidity and EBITDA margins. We expect leverage will peak in 2022 for Brazilian and Mexican homebuilders and in 2023 for Chinese homebuilders, who have the highest leverage in our rated universe. We expect Mexican and Brazilian homebuilders' revenue will increase consistently in 2023, which will boost EBITDA margins. On the whole, we expect the revenues of homebuilders in our rated universe will increase by single digits in 2024 and 2025 (see charts 3.1-3.4).

Chart 3.1


Chart 3.2


Chart 3.3


Chart 3.4


Mainland China

The recent turmoil could deteriorate homebuyers' confidence and curb home sales further.  Home sales deteriorated rapidly in June and July 2023. This could be a sign that more buyers are taking a step back to wait for more policy easing measures in the real estate sector. The Chinese government has introduced easing measures in late August, but the overall sentiment remains subdued. In case of no further measures in the near future, sales may decline by 3%-5% in 2023, compared with 2022, and cloud the sales outlook for 2024. Considering the weak economic growth outlook, homebuyers' low confidence might increase the risk of a deterioration in the sector.

China's property crisis hits another low.  Although sales in higher-tier markets are returning, low-tier cities remain under pressure. This will likely depress total sales in 2023. About 40% of rated developers could experience rating pressure if sales in tier-three and tier-four cities decreased by 20% this year. Chinese property firms' risk aversion to developments in lower-tier cities will increase because of low margins, strict cash controls, and slow sales. Due to tight liquidity, property firms will offer more discounts to speed up sales, which could squeeze margins further and add to impairments.

Many developers will likely encounter liquidity problems, given the recent sales decline in June and July 2023.  This means financing cash flows will become more important, while operating cash flows will shrink. Since they have better access to the domestic market, state-owned enterprises have an advantage in that regard. A default of Country Garden, a major homebuilder in China, would spell more trouble for suppliers, who have already suffered from a string of developer defaults in the past few years.

For more insights, see "Credit FAQ: Will Country Garden’s Woes Further Hobble China’s Property Market?," published Aug. 16, 2023, and "China Property Watch: Peripheral Pain," published May 22, 2023.


Developers' cash flow diversification and supportive domestic banks support the credit quality.  Developers with higher proportions of recurring income from investment property have a better credit resiliency. Indonesian banks remain supportive in granting new loans and there has been a positive shift among domestic lenders toward developers. This should support developers' refinancing needs with offshore notes, which have higher funding costs.

Developers may face constrained offshore funding conditions and higher costs.  Residential sales will likely contract by about 5% in 2023, compared with an increase of 5% in 2022. Developers will have limited capacity to deleverage. Customer sentiment has turned cautious amid high inflation, which has eroded purchasing power. We do not expect further favorable policies to stimulate demand.

For more insights, see "Indonesia And Vietnam Developers Face Steeper Path To Growth," published June 8, 2023.


Government support will improve credit metrics.  Given Brazil's currently sluggish economic growth and high interest rates, we expect domestic homebuilders' cash burn rate will increase. Even so, the government's recent initiatives and the likely decrease in interest rates should mitigate potential short-term liquidity pressures for developers.

We expect most rated Brazilian homebuilders' operating figures, cash flows, and credit metrics will improve over the next few quarters.  In our view, margins across most rated companies will recover in the second half of 2023 because of recent changes in Brazil's federal housing program "Minha Casa, Minha Vida" and the updated calculation methodology for the construction cost index. Mid- and upper-tier developers should benefit from recent changes in the city of São Paulo's strategic master plan that increase land availability and the construction coefficient (construction area divided by the area of land where the structure is built).

For more insights, see "Recent Developments Signal Favorable Trends For Brazilian Homebuilders", published July 25, 2023.


Flexible business models, segment diversification, and healthy balance sheets support the stability of our ratings on Mexican homebuilders.  Overall, we expect rated Mexican homebuilders will deliver high single-digit revenue growth in 2023 and 2024. Operating margins should remain resilient to sticky inflation, as homebuilders pass on most inflation costs to homebuyers. Rated homebuilders will remain prudent in terms of developments, net cash flows, and debt, which should keep their leverage broadly stable in 2023. We expect refinancing risk will be limited in 2023 and 2024, due to homebuilders' ample liquidity positions. Consequently, our ratings in this sector should remain largely stable.

The absence of subsidies, lacking supply from homebuilders, and high inflation weigh on homebuyers' investment decisions.  Housing starts in Mexico have reached a historically low level, with a decline of 12.1% or 128,866 units in the 12 months ended July 2023. On the other hand, home prices continue increasing. This is explained by the absence of subsidies and the lack of supply from homebuilders in a context of still high inflation, which also weights on homebuyers' investments decisions.

The housing sector could be on the up.  Among others, unmet demand in Mexico results from the fact that a part of the population has no access to mortgages from public and private financial institutions. Yet, supportive demographics, a gradual rise in formal employments, and mortgages from well-capitalized financial institutions should support long-term demand for the formal housing sector. Nearshoring--the transfer of a company's production to countries that are closer to the final consumer--and record foreign direct investments favor the industrial real estate sector, mostly in north Mexico. This will increase growth prospects for homebuilders in this region.

The outlook on rated homebuilders remains stable.  The outlook benefits from homebuilders' flexible business models, geographic and segment diversification, and healthy balance sheets, including low leverage and solid liquidity positions. Despite hikes in Mexico's reference rate and their effect on the long-term yield curve, mortgages rates remain attractive and relatively stable, as long as inflation expectations are anchored.

Real Estate Investment Trusts (REITs)


The picture for REITs differs across regions.  In Brazil, office REITs benefit from an increased demand for high-quality offices in the major cities. In Mexico, however, they are negatively affected by the decrease in asset valuations and hybrid work models, which have led to vacancy rates that are still close to 60% higher than they were before COVID-19. Industrial REITs are better off in Mexico because of the uptick in nearshoring and e-commerce but struggle in Brazil, due to the market slowdown. Retail REITs in both countries are holding up for now (see charts 4.1-4.2).

Chart 4.1


Chart 4.2


Financials will be resilient, especially in Brazil.  REITs' leverage will continue decreasing across the board between 2023 and 2025, particularly in Brazil, where we expect debt to EBITDA will be below 4x in 2025. EBITDA interest coverage in Brazil and Mexico will increase to about 4x in 2025. Debt-to-capital ratios point to an overall decrease in credit risk for Brazilian REITs between 2023 and 2025. Over the same period, Mexican REITs will experience a gradual increase in the debt-to-capital ratio to 30% (see charts 5.1-5.3).

Chart 5.1


Chart 5.2


Chart 5.3



Industrial REITs face a market slowdown, while office REITs benefit from renewed demand.  Net absorption contracted to 255,849 square meters (sqm) in the second quarter of 2023, from 498,054 sqm in the first quarter. Brazil ended the second quarter with 249,120 sqm delivered, a reduction of about 45% compared with the previous quarter (455,576 sqm) and the lowest amount delivered since the third quarter of 2020. The vacancy rate of class A properties was 10.85% in the second quarter of 2023, only 12 basis points higher than in the previous quarter (10.73%). The average monthly asking price of class A properties was Brazilian real (BRL) 22.79 (equivalent to $4.76) per sqm in the second quarter of 2023, just 0.35% lower than in the previous quarter (BRL22.87/sqm or $4.50/sqm).

Net absorption in the office space is picking up steam, while shopping malls benefit from the recovery in consumption.  The increase in net absorption results from rising demand for high-quality offices in São Paulo and Rio de Janeiro, with vacancy rates of 22.5% in São Paulo and 27.9% in Rio de Janeiro. Between the first and second quarter of 2023, the average monthly asking price increased by 1.63% to BRL103.19 (equivalent to $21.50) per sqm in São Paulo and by 1.07% to BRL7.17 (equivalent to $1.5) per sqm in Rio de Janeiro. Vacancy rates of shopping centers remain low, especially in the case of premium assets, as consumption activity starts to resume on the back of controlled inflation and decreasing interest rates.

Rated entities Multiplan Empreendimentos Imobiliários S.A. (brAAA/Stable/--) and LOG Commercial Properties e Participações S.A. (LOG; brAA+/Stable/--) should continue benefiting from their premium properties portfolios.  Their retail and industrial portfolios benefit from a flight to quality. The positive effect of low vacancy rates and price readjustments on profitability and returns should continue. LOG will carry on recycling its portfolio and sell old properties to finance ongoing investments.


Industrial REITs are up.  Industrial REITs continue benefiting from nearshoring and e-commerce tailwinds, which is reflected in strong operating indicators across the board, double-digit leasing spreads, and high valuations. Along with high interest rates and a strong Mexican peso, this has reduced the loan-to-value ratio to 4%-10%, compared with pre-pandemic levels. While it is not part of our base-case scenario, rated players could endure valuation haircuts of up to 15%-20%, without breaching rating triggers.

Retail REITs face limited upside and tight financing conditions.  Shopping centers will continue benefiting from stable operating conditions, with occupancy rates and mall traffic near pre-pandemic levels. Yet, tenants' bargaining power has increased, which is reflected in flat rents. New developments should remain depressed in the foreseeable future.

Office REITs remain under pressure.  Driven by nearshoring and improving economic conditions, the office space shows signs of an early recovery in certain regions. This is particularly the case in Monterrey, where vacancy rates have started to decrease. Mexico City, on the other hand, grapples with vacancy rates of 20%-25%, which are close to 60% higher than they were before the pandemic. The increase results from the adoption of hybrid work models and high inventory levels. Leasing spreads shifted to negative from flat on a real basis. Yet, our rated portfolio has little exposure to office REITs (less than 2%).

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Luca Rossi, Paris +33 6 2518 9258;
Alexandre P Michel, Mexico City + 52 55 5081 4520;
Santiago Cajal, Mexico City + 52 55 5081 4521;
Wendell Sacramoni, CFA, Sao Paulo + 55 11 3039 4855;
Secondary Contacts:Jose M Perez-Gorozpe, Madrid +34 914233212;
Eunice Tan, Singapore +65-6530-6418;
Research Contributor:Yogesh Balasubramanian, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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