After an unsuccessful attempt to restore market confidence during the first quarter, the largest of the Mexican homebuilders, Geo, announced its intention to restructure its financial obligations. Other companies in the sector look set to follow Geo’s example. The most ostensible cause for this distress was a shift in Mexico’s national housing policy, which left builders with a large legacy debt burden for land and developments that are no longer viable, severely reducing their prospects for future cash flow generation.
This shift in government policy is surprising given Mexico faces a structural deficit in its housing supply, and addressing that deficit has been a stated priority of successive Mexican national governments. The Mexican government offers mortgage financing to purchase homes in the "affordable entry level" and "low middle income" segments through their agencies, Infonavit, Fovisste and SHF. The homebuilders -Geo, Homex, Urbi, and to a lesser extent Javer – have in the past recorded a high proportion of their sales from buyers who obtained a government mortgage and a government subsidy to purchase a home through one of these agencies. From 2005 up until late 2011, the homebuilders were very profitable and had positive free cash flow. Given the apparent imbalance between the demand for housing and the constraint in supply, combined with seemingly supportive government policy, the homebuilder bonds were extremely popular among emerging market investors.
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Recently the government then changed their preference from granting subsidies to homes that were built in developments located several miles outside of the main cities, to homes in "vertical housing" (i.e. apartment buildings). This was a significant change in policy, and left the homebuilders with a new set of challenges. Most ominously, adapting to these changes put an enormous strain on the free cash flow of the developers.
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