Industry Top Trends 2021 · 2020. 12. 10. · Alexandre Michel Mexico City +52 1 55 5081 4520 alexandre.michel @spglobal.com . Industry Top Trends 2021: Homebuilders and Developers

S&P Global Ratings 1

Industry Top Trends 2021 Homebuilders and Developers Credit Quality Improvement Continues Into 2021

What’s changed? Widespread credit improvement in the U.S. appears likely. The underpinnings of good long-term demand, pricing, cost management, and prudent capital allocation remain intact.

Weakened supply might create opportunities for stronger players. Large Mexican players might find growing opportunities from still-resilient income segments.

New tightening will rein in Chinese developers’ debt-raising ability. Chinese authorities are putting in new measures that target developers’ debt growth and refinancing amount, which we believe will lead to more polarization.

What are the key assumptions for 2021? Revenue growth looks steady for homebuilders. With demand still strong, we expect U.S., Brazilian, and Europe, Middle East, and Africa (EMEA) homebuilders to increase launches in 2021.

Property prices will drop moderately in Hong Kong and China in 2021. We believe the national average selling price (ASP) in China will drop by up to 5%.

What are the key risks around the baseline? Lower price points in the U.S. could hit margins. A mix shift to entry-level homebuyers could cause lower unit dollar margins.

Tightening of bank lending or higher interest rates in EMEA could affect demand. Lower access and a higher cost of lending would likely hamper buyers’ purchase power and developers’ financial flexibility.

Liquidity in the market and for Asia Pacific (APAC) developers is a key swing factor. In Indonesia, given poor sales amid COVID-19, developers face substantial liquidity risks.

December 10, 2020

Authors Maurice Austin, CPA New York +1 212 438 2077 maurice.austin @spglobal.com Matthew Chow Hong Kong 852 2532 8046 matthew.chow @spglobal.com Franck Delage Paris +33 1 4420 6778 franck.delage @spglobal.com Alexandre Michel Mexico City +52 1 55 5081 4520 alexandre.michel @spglobal.com

Industry Top Trends 2021: Homebuilders and Developers

S&P Global Ratings December 10, 2020 2

Ratings trends and outlook Global Homebuilders and Developers Chart 1 Chart 2

Ratings distribution Ratings distribution by region

Chart 3 Chart 4

Ratings outlooks Ratings outlooks by region

Chart 5 Chart 6

Ratings outlook net bias Ratings net outlook bias by region

Source: S&P Global Ratings. Ratings data measured at quarter end. Data for Q4 2020 is end October, 2020.

05

101520253035

AA

AA

A+ AA

AA

-A

+ A A-

BB

B+

BB

BB

BB

-B

B+

BB

BB

-B

+ B B-

CC

C+

CC

CC

CC

-C

C CS

D D

Homebuilders & Developers

05

1015202530

AA

AA

A+ AA

AA

-A

+ A A-

BB

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BB

BB

BB

-B

B+

BB

BB

-B

+ B B-

CC

C+

CC

CC

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-C

C CS

D D

North America Europe

Asia-Pacific Latin America

Negative19%

WatchNeg1%

Stable67%

WatchPos1%

Positive12%

0%

20%

40%

60%

80%

100%

APAC LatAm N.America Europe

Negative WatchNeg Stable WatchPos Positive

-20

-15

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-5

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13 14 15 16 17 18 19 20

Homebuilders & DevelopersNet Outlook Bias (%)

-50-40-30-20-10

0102030

13 14 15 16 17 18 19 20

N.America Asia-Pacific

Latin AmericaNet Outlook Bias (%)



Shape of recovery Table 1

Sector Outlook Heatmap

Sensitivities and Structural Factors Shape Of Recovery

COVID-19 Sensitivity

Impact If No Vaccine in

2021

Long-Term Impact On

Business Risk Profile

Revenue Decline – 2021

vs 2019

EBITDA Decline –

2021 vs 2019

Revenue Recovery To 2019 Levels

Credit Metric

Recovery To 2019

Levels

Homebuilders and Developers

Asia-Pacific Moderate Moderate Low >=2019 0%-10% 2020 2023

Europe Moderate Moderate Moderate 0%-10% 0%-10% 1H 2022 1H 2022

Latin America Moderate Moderate Moderate >=2019 >=2019 2021 2H 2021

North America None None Positive >=2019 >=2019 2020 2021

Source: S&P Global Ratings.

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly. This report does not constitute a ratings action.

http://www.spglobal.com/ratings



U.S. Ratings trends and outlook Our outlook for the U.S. homebuilding sector remains stable with a decidedly positive bias. We believe positive rating actions could outnumber negative ones in 2021, given our 7 to 4 positive outlook bias. Generally speaking, we incorporate solid top-line growth in 2021, with homebuilding revenue up about 9%, into most of our ratings and stable outlooks on homebuilders, thanks to higher home deliveries. We believe this view is supported by continued strong demand and a tight supply of new homes, which is buttressed by S&P Global Ratings’ economic forecast for 1.3 million U.S. housing starts in 2021.

As of Nov. 1, 2020, we rate 26 issuers in the U.S. Homebuilding and Real Estate Developer Sector. Issuers’ revenue ranges from $670 million to slightly over $22 billion.

Only 8% (2) of our ratings are investment grade (‘BBB-’ or higher) while 50% are in the speculative grade ‘B’ category or lower. Currently 15 of the ratings outlooks are stable, seven positive, and three negative, with one CreditWatch negative. A rating outlook assesses the potential direction of a long-term credit rating, typically a one in three chance, over the intermediate term (typically six months to two years) while a CreditWatch indicates a 50% chance of a ratings move within the next three months.

Main assumptions about 2021 and beyond

1. Revenue growth looks steady for U.S. homebuilders.

The product mix in the U.S. has shifted to more entry-level homes, lowering the ASP, but this has been more than offset by increased deliveries. With demand still strong and new sales orders increasing, despite the country being affected by a pandemic, we continue to expect a higher number of deliveries, resulting in revenue growth for 2021.

2. Widespread credit deterioration appears unlikely.

The trajectory to investment grade remains on track for several homebuilders, because the underpinnings of good long-term demand, pricing, cost management, and prudent capital allocation and debt leverage remain intact.

3. Positive outlook bias portends upgrades.

Since we expect higher top line growth and better margins in 2021, we also expect improved credit quality. As a result, we have seven ratings with positive outlooks, which indicates a possibility that we could see some upgrades within the next 12 months.

Home prices have been increasing due to stronger demand coupled with low supply and a change in consumer preferences to less dense suburban locations. After initially estimating a 50% decline in orders, on average, for our rated homebuilders in the second quarter of 2020, we now expect orders to grow about 8% in 2021. We expect the increase in orders will help drive delivery growth because we expect our homebuilders’ deliveries to increase about 10% in 2021. Moreover, the price increases we are seeing throughout the industry should help offset cost inflation, specifically from higher lumber prices, which have increased more than 130% from the end of March through the end of September 2020. While higher home prices have benefited some homebuilders with margin expansion, on average, we estimate gross margins will slightly improve to 21.5% in 2020 and 2021, from about 21.3% in 2019. However, with many homebuilders focusing on the entry level consumer, ASPs are declining due to product mix, despite higher home prices. We estimate the ASP for our rated universe of homebuilders will decline to about



$428,000 in 2021 from about $431,000 in 2019. We expect home revenue from our rated universe to grow about 10% in 2021. Overall, with a slight increase in margins and no near-term maturities for most of our rated universe, we expect to see better credit quality across the sector, which could lead to upgrades over the next year, as evidenced by our recent outlook revisions on a number of credits.

Credit metrics and financial policy Balance sheets are in much better shape than just a few years ago, sparking our positive credit bias for U.S. homebuilders. Overall, leverage appears to have peaked in 2016, after which leading homebuilders started taking a more conservative stance on debt usage for growth and shareholder returns. As such, homebuilders are generating solid earnings growth with less debt and less inventory at risk, steadily adding to credit cushion for a potential downturn. Homebuilders have used free cash flow in the past few years to reduce debt and return cash to shareholders while maintaining adequate access to land through lower-cost options to support single- to low-double-digit volume growth targets.

Despite our assessment of an improvement in credit quality throughout the sector, the characteristics of most homebuilders are consistent with speculative-grade ratings, particularly with respect to historical earnings volatility and debt usage. As such, we believe it would be difficult for many more homebuilders to achieve investment-grade ratings absent some substantial shifts in industry dynamics: A high degree of fragmentation and economic cyclicality contribute to high earnings volatility. However, we recently revised the outlook on three ‘BB+’ rated homebuilders to positive from stable—Lennar Corp., PulteGroup Inc., and MDC Holdings Inc.—because of continued deleveraging amid the long and steady upswing in the U.S. housing market. We believe these companies have solid profitability and cash flow this late in the housing cycle, which could enable them to preserve credit measures commensurate with an investment-grade rating even when the housing cycle inevitably turns. Our debt leverage thresholds for achieving investment-grade ratings have been consistent for most homebuilders for years: adjusted debt to EBITDA below 3x, EBITDA interest coverage of at least 6x, and debt to capital of about 40%. All three of these companies’ credit metrics support being investment grade and should be sustainable in the event of a downturn.



Key risks or opportunities around the baseline

1. Higher mortgage rates could chill sales.

Such a scenario is well outside our base case, but a bounce off record-low mortgage rates would reverse a key factor that spurred sales through early stages of the pandemic.

2. Lower price points could hit margins.

Many issuers are moving to lower price points to attract entry-level homebuyers. Such a mix shift, unsteady operations, and higher materials could cause lower unit dollar margins.

3. Deteriorating affordability causes new home volumes and prices to fall.

Home prices have been increasing due to stronger demand coupled with low supply and a change in consumer preferences to less-dense suburban locations. As price appreciation continues against a backdrop of a possible resurgence of the pandemic, it is becoming more likely that home price appreciation could possibly exceed wage and income growth, worsening affordability.

We believe higher mortgage rates will have more of an impact on homebuyers for whom affordability is an issue. As rates rise, the amount required for the monthly payment increases and constrains affordability for those on the margin of deciding to buy their first home or to continue renting. Homebuyers demonstrated acute sensitivity to higher mortgage rates in late 2018, forcing homebuilders to provide significant price incentives to preserve affordability. That was short-lived, but a protracted price decline would hit homebuilder cash margins with no cost relief likely from fundamentally constrained land and labor markets. As homebuilders more recently have focused on the entry-level buyer, an uptick in mortgage rates could reduce deliveries and eventually affect credit quality.



EMEA Ratings trends and outlook The EMEA property development industry should confirm its rebound in 2021 despite weakened economies because government measures and healthy access to mortgage loans are supporting the demand for newly built assets in most EMEA countries. Low supply and pent-up demand accumulated during the periods of lockdown should continue to drive revenue and margin upward in the first half of 2021. However, such a dynamic could slow down later in the year, notably when government initiatives progressively disappear.


1. Developers’ revenue and prices should remain resilient in 2021, but the pace of growth might slow as government support decreases.

We expect revenue in the low single digits because the effect from government measures should linger toward 2021 and progressively disappear.

2. Lower supply should play favorably on prices and margins in most EMEA markets in 2021.

A shortage of new housing, which should be more pronounced in 2021, will likely support prices and margins in most countries, except Dubai, which remains subject to an oversupply.

3. Mortgage lending availability and low interest rates are likely to fuel the demand for newly built assets.

We expect interest rates to remain accommodative for property buyers in 2021 and believe access to bank lending should remain immune in most EMEA countries.

Government supports put in place to preserve jobs and businesses have been supporting demand by preserving the creditworthiness of buyers and real estate purchasing power during the lockdown. Other strong government initiatives, such as large residential purchases (France) and subsidized mortgages (Russia), have also helped maintain a good level of order book in the second half of 2020, and we think they should positively affect 2021. A reduction of government support might inflate the pace of developers’ growth, both in prices and volume, in our view. We might see more challenges where we expect unemployment rates should fall the most, such as Spain, the U.K., and Italy.

In most EMEA markets, supply remains low and favorable to property developers. We expect the shortage of new housing to be more pronounced in 2021, given a decline in new launches during the pandemic. This should allow property developers to maintain price and margins on an upward trend in 2021, despite some additional costs, except for the Gulf Cooperation Council (GCC), which remains burdened by oversupply. In Dubai in particular, we expect an average 10% decline in prices and margins, given the pipeline of new projects, which continue to outpace demand.

Healthy access to mortgage loans and low interest rates should maintain demand. Supportive central bank actions and a growing share of mortgage loans should help property developers’ revenue, but we remain cautious about the potential tightening of lending conditions.



Credit metrics and financial policy In most EMEA markets, we foresee some improvement in debt leverage. Cash flows from higher construction deliveries in 2021 should offset some working capital requirements accumulated in 2020 because of project delays during the lockdowns. Given the resilient levels of pre-sales, dividend distributions generally remain within existing financial policies.

We expect a more gradual recovery in the GCC, where property developers see lower pre-sales, increased pressure for discounts or other incentives, and possibly slower cash collections. Softening demand from international buyers, which account for more than half of sales, is likely to contract backlog and pricing. As a result, developers are likely to focus on cost-reduction measures, capital expenditure deferrals, and completing and selling existing inventory, which will allow them to cash in large post-handover payments.


1. Ending government stimulus with a more adverse economic impact would soften developer’s revenue growth.

A more brutal end of stimulus programs could potentially affect end-buyers’ creditworthiness and ultimately property developers’ revenue.

2. Tightening of bank lending requirements or higher interest rates could weaken demand.

Lower access and a higher cost of lending would likely hamper buyers’ purchase power and property developers’ financial flexibility.

3. More stimulus from governments or central banks could boost demand.

On the other hand, expanded government help or a more accommodative central bank rate movement would likely boost buyers’ demand more than we currently anticipate.

While most EMEA governments have played a positive role in supporting the demand of newly built residential properties, we think an abrupt ending of stimulus programs could hamper property developers’ growth if it results in higher unemployment or lower economic activity than we currently anticipate. Moreover, increased taxation on real estate would likely be credit negative for property developers and homebuilders.

Tighter mortgage granting or more expensive lending conditions would also be negative for the sector because homebuilders operating in markets like France, Germany, and the U.K. rely heavily on mortgage sales. Limited access to capital by property developers could also hamper their ability to buy land.

On the other hand, more intervention from government or central banks could boost demand and property developers’ margins. This could happen by lowering interest rates or expanding help-to-buy schemes (U.K., France), subsidizing mortgage programs (Russia), maintaining large scale projects such as Expo 2021 in Dubai, or creating incentives for the construction of low carbon emissions houses (Germany).



Asia-Pacific Ratings trends and outlook We expect to see polarizing rating actions for Chinese developers in 2021, with relatively even positive and negative actions. Underpinned by a strong recovery in sales after the pandemic lockdown, new funding controls being proposed by Chinese regulators could dampen debt as well as sales growth. Developers will likely deleverage but are up against a strong declining margin trend. In Indonesia, rating trends will largely depend on how developers manage liquidity. That is still an area of risk due to the grim sales outlook as well as the narrow refinancing channels Indonesian players face.


1. Expect flattish property sales values in China in 2021.

Our expectation that property prices will decline up to 5% is based on the tighter funding measures targeting developers as well as demand being partly exhausted following the robust recovery after the pandemic. We still see demand in larger cities as solid despite some leveling off. However, sales volume should pick up with steeper price discounts, largely offsetting the drop in prices. We expect developers’ profitability to wane, but how much it will decrease is the key uncertainty.

2. Most Chinese developers should be able to withstand the refinancing curb.

Even if debt market issuance quotas are further slashed or applied across the board in the interbank, exchange, and offshore markets, we still believe the impact is manageable since most of the rated Chinese developers will only need to pay about 10% of their cash balance or less for repayment. However, lower amounts of financing would mean lower resources to deploy in land replenishment and sales growth.

3. Rising unemployment in Hong Kong will likely drag down home prices.

We expect prices to decline by about 5% in Hong Kong because the unemployment rate in the city hit a 16-year high due to comprehensive pandemic measures. We don’t see a deep downcycle for the residential segment, however, since there remains a structural supply shortage. Considering that developers have mostly pushed back their launches, primary volumes should bounce back from the low base in 2020. The secondary market’s resilience is an indication of good underlying demand, even amid the pandemic.

Our view that Chinese developers will need to lower prices more in 2021 is based on developers needing to meet the widely circulated but unofficial leverage requirements for increasing their bank borrowings. Noncompliance could lower their allowance for debt growth. In our view, Chinese developers might not have a lot of other options but to speed up their sales and cash inflow by offering heftier discounts that can most effectively help them on the alleged tests for leverage and liquidity.

We see the property sales recovery after the pandemic in China losing a bit of steam. After all, the global and regional economy is still struggling, as is consumer sentiment and home demand, as evidenced by the slowing volume and price growth in some key cities during the traditional September to October peak season.

Domestic interbank bond quotas have been slashed but, so far, the impact has been negligible since they account for only 12% of Chinese developers’ total bond maturities. However, if the quotas are cut for more channels, such as the exchange bond market and offshore U.S. dollar markets, which are used much more extensively, some mid- to low-



‘B’ and ‘CCC’ rated developers could face refinancing problems. We believe the majority of developers can absorb the potential impact.

In Hong Kong, pandemic measures are taking their toll on the economy, leading to the unemployment rate surging to 6.4% and GDP shrinking for a fifth quarter in a row. The market is still supported by a structural shortage in housing supply and low interest rates. Secondary market transactions are performing steadily, with a roughly 10% volume increase year-to-date. This should support developers’ delayed primary launches in 2021.

Credit metrics and financial policy If China’s central bank rolls out the new leverage and liquidity tests as widely expected, it will have a considerable impact on Chinese developers’ financial management and, subsequently, their credit metrics. It will become the new normal that developers need to grapple with since these tests address developers’ liability-to-asset ratio and net debt-to-equity ratio, as well as their cash to short-term debt. Since a failure to pass the tests will reduce banking access and leave less room for debt growth, we believe developers will need to adjust their strategy and financial management to meet the requirements.


1. Chinese developers’ margin erosion might be more severe than expected.

Other than land prices being generally on an uptrend, prolonged price caps in higher-tier cities and the potential price cuts ahead will squeeze Chinese developers’ profitability. While we expect continuous margin decline, the key risk remains the magnitude of decline, which might be larger than expected and could be a swing factor to developers’ leverage trends, countering any debt control.

2. Rollout of new funding policies in China might accelerate polarization.

Some lower-rated Chinese developers with tighter liquidity profiles and reliance on debt might face the impact of new financing being inaccessible, as developers face discounts on refinancing quotas and allegedly will be required to pass specific leverage and liquidity thresholds for bank loan increases. We believe stronger players that can maximize the value of existing land banks and rely less on short-term funding can overcome the hurdle more easily.

3. Liquidity management is crucial for Indonesian developers amid slow sales.

The ongoing pandemic in Indonesia will delay any meaningful sales recovery to beyond the first quarter of 2021. We expect most developers to incur negative discretionary cash flows over the next 12 months. Liquidity management will be crucial in their ability to navigate through the prolonged weakness. The pandemic has also squeezed several developers into financial distress because refinancing options were limited amid tight funding conditions. A path to recovery in 2021 will depend on the easing of the pandemic, improvement in consumer sentiment, and developers’ ability to launch affordable housing options that meet end-users demand.

We expect the Chinese developers’ average gross margin to slide to 26% in 2021—from 33% in 2018—as signaled by interim results this year (when margins slipped to a 28% weighted average). The risk might still be on the downside under the current circumstances. Several of our rated entities have recently bought land at auction at high prices, with the projects barely profitable at current property prices.



The new funding control policies might ultimately prove to be credit positive for the sector because they restrain debt growth. However, it might still be a painful process for some lower-rated developers that have relied on debt for scale expansion and have an uneven and imbalanced capital structure. Developers’ ability to overcome the hurdle hinges on existing land bank quality since they won’t be able to spend a lot more. The stronger players who do well on these fronts can emerge as strong winners.



Latin America Ratings trends and outlook The outlook and rating bias on Latin American homebuilders and developers has remained predominantly stable throughout 2020, despite challenges that have risen this year from social distancing and lockdown measures from the pandemic, in addition to the global recession. Like in the U.S., Brazilian housing has shown remarkable results, even during the second quarter of 2020, which has triggered some positive rating actions, with interest rates at historically low levels, which improves affordability for buyers and makes these assets more attractive for investors. On the other hand, Mexican housing starts have continued a declining trend for several years; nonetheless, rated issuers have adapted relatively well to the decline in volume sales through efficient inventory management and product mix shift. However, the homebuilding industry has always been cyclical, especially due to the economic and political volatility, so we remain cautious about the long-term outlook for the sector following the removal of the anticyclical initiatives and pressure on inflation rates that we expect over the next few years, which could result in increased long-term interest rates. Hence, prudent financial policies from issuers will be important to sustain credit metrics.


1. Higher launches on resilient demand in Brazil

We expect Brazilian homebuilders to increase launches in 2021 based on resilient demand caused by lower interest rates and a high housing deficit. At the same time, we expect a gradual economic recovery to support increasing industry and buyers’ confidence. While more launches will require higher working capital needs, we believe an adequate sales pace and a more efficient cost structure will offset cash consumption.

2. Rated Mexican homebuilders to continue adapting their product mix to changing demand

Mexican housing starts have declined since 2014, forcing homebuilders to adapt their operations and product portfolio to changing demand. Rated Mexican homebuilders have been able to rebalance their portfolio mix toward income segments with favorable dynamics, and in 2021 we expect them to continue to do so. However, macroeconomic risks have increased, and government support will mostly come from state-owned mortgage lenders, despite higher proposed housing subsidy increments in Mexico’s 2021 budget rising from historic lows of 2019 and 2020.

Launches will increase because of resilient demand in Brazil. The Brazilian homebuilding sector has shown resilience through the pandemic, especially due to the low interest rate environment. Mortgage interest rates are at historically low levels of about 6.5%-7.5%, which improves affordability for buyers and makes these assets more attractive for investors. In addition, we believe the sector has benefited from government anticyclical initiatives, such as providing an emergency salary due to the pandemic and the standstill agreements provided by the banks for mortgage installment payments for three to six months. Most of the rated Brazilian homebuilders raised additional cash through IPOs, follow-ons, and refinancing, so they have strong balance sheets to support growth plans during the next few years, which, coupled with higher sales and cost controls, should result in stable capital structures and leverage metrics. However, the homebuilding industry has always been cyclical, especially in Brazil, due to the economic and political volatility, so we remain cautious about the long-term outlook for the sector.



The removal of the anticyclical initiatives and rising inflation rates in the next few years could result in increased long-term interest rates.

Rated Mexican homebuilders continue adapting their product mix to changing demand. Our forecast suggests rated issuers should post mid-to high-single-digit growth relative to 2020. In our view, this will be mostly driven by an uptick in volume of sales rather than price increases, since we expect units sold to partly rebound from the sharp contraction seen in 2020. The economic environment continues to be at risk because we expect modest GDP growth of about 3.9% in 2021 against the estimated contraction of 9.3% in 2020, meaning a significant loss of economic output and a rise in unemployment, despite the estimated rebound. Nonetheless, rated issuers have quickly adapted to changes in the economic and housing landscape, absorbing the positive dynamics seen in some income segments, despite a prolonged contraction in housing starts at the country level. Hence, in 2021 we expect rated homebuilders to continue leveraging their business flexibility to raise top-line growth and improve margins with stable prices and economies of scale.

Industry forecasts

In Brazil, low-income homebuilders can now access new financing through savings accounts, given the decrease in mortgage rates, which resulted in market rates being lower than “Casa Verde e Amarela” (CVA) rates for a significant part of the program. We believe there are opportunities for low-income homebuilders focused on increasing sales growth and cash flow generation in 2021. Homebuilders focused on the mid- and high-income segments might face challenges if macroeconomic conditions become volatile, resulting in stricter credit from banks to homebuyers that would hurt sales and cash flow generation. However, this is not our base case because demand has been very resilient over the first nine months of 2020 despite the pandemic. In addition, these players have benefited from the new cancelation law, effective in early 2019, which reduced incentives for cancelations by homebuyers and reduced legal expenses that homebuilders faced with the previously unclear rules, leading to fewer cancelations and supporting more predictable long-term cash generation.

In Mexico, we estimate country-level house sales contracted by slightly more than 10% in 2020. However, for 2021, we expect some partial recovery, with likely mid- to high-single-digit growth, in line with our GDP growth estimates of 3.9%, in addition to an increase in the housing subsidy from its historic lows of 2019-2020, which represents about half of the subsidy from 2014-2015. In addition, we note that housing demand for certain income segments has remained relatively resilient despite the COVID-19 outbreak.

Industry developments

In Brazil, we expect the housing industry to benefit from an economic recovery, including GDP growth of 3.2%, average inflation of about 3.9%, and year-end interest rates of 3% in 2021. These conditions should support a better environment for industry growth after the impact of the COVID-19 pandemic. We believe the rated homebuilders have strong balance sheets with low leverage and extended weighted average maturities, which will give these companies room to implement their growth plan over the next few years.

In Mexico, homebuilders that can adapt to evolving demand can grow. We believe homebuilders that can shift their product mix will likely post mid- to high single-digit-digit growth in 2021, leveraging their solid competitive position. Moreover, we believe interest rates will remain low, which will continue to give incentive to potential buyers, coupled with recent initiatives from government-owned entities Infonavit and Fovissste to expand their housing program and customer base.



Credit metrics and financial policy The majority of Brazilian issuers have accessed capital markets over the past months through IPOs of subsidiaries, follow-ons, and debt refinancing, taking advantage of record-low interest rates and equity market demand. We expect new debt or structured product issuances to continue in 2021 if conditions remain beneficial, either to increase the amount of launches or to address future refinancing needs. Overall, Brazilian homebuilders have smooth debt maturity profiles in 2021 and, with expected stable cash flow generation for most companies, some could eventually increase dividend payouts.

Similar to Brazil, Mexican rated homebuilders have strengthened their credit profiles through continued years of top-line growth and improvement in their product mix, after the housing crisis in Mexico almost 10 years ago. We expect rated issuers will continue with prudent financial policies and remain committed to maintaining low leverage. Moreover, despite a complex available in 2021.


1. Brazilian homebuilders are better prepared to face a downturn.

We expect demand to remain stable, despite recent changes in the “Minha Casa Minha” program that affect certain income brackets. However, most rated issuers focus on different brackets and have strengthened their operations and liquidity position and maintained comfortable debt maturities. Hence, we do not estimate a major impact on our ratings.

2. We have no visibility yet on how low housing demand will go, but a weakened supply might create opportunities for stronger players.

In our view, Mexico’s 2020 recession will have a slow and prolonged recovery, meaning a permanent loss of employment for the foreseeable future, which will affect already weak housing demand, compared with previous years. Nonetheless, Mexican housing supply remains highly fragmented, and bigger players with healthier credit profiles might find growing opportunities from still-resilient income segments, in addition to the budgeted growth in subsidies.

Brazilian homebuilders are better prepared to face a downturn. The Brazilian government announced some changes to the Minha Casa Minha program, turning it into CVA, but mostly focused on the first bracket of the program, to which none of the rated Brazilian homebuilders are exposed. Therefore, the changes should not have any impact on our ratings, and actually lessen uncertainty related to potential changes, increasing visibility for low-income homebuilders’ cash flow generation. Moreover, in recent years, most of the rated homebuilders have strengthened their operations and liquidity positions, maintained comfortable debt maturity profiles, and kept relatively low leverage. We believe the risk of Brazil’s government making more modifications to the CVA housing program has been reduced for the foreseeable future due to the already announced changes and the still-huge housing deficit of almost 8 million homes.

We don’t yet know how low housing demand will go; however, a weakened supply might create opportunities for stronger players. The 2020 recession will have a prolonged effect on the Mexican housing market, similar to our macroeconomic assumption of GDP recovering beyond 2023. It is still uncertain how much housing demand will decrease due to the recession. On the other hand, several homebuilders have been affected by lockdowns from the COVID-19 outbreak, reflected in the decline of housing starts (down by almost 13% as of October), which have been contracting for several years as a result of sharp cuts in the housing subsidy. This complex scenario will likely provide some



opportunities within the sector because major players will look to expand their market share across a very fragmented industry. Nonetheless, prudent financial measures will be important to preserve credit metrics amid an expected bumpy 2021.

Related Research – COVID-19 Dampens The Prospects Of EMEA Real Estate Developers And

Homebuilders, April 22, 2020

https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=44659813&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=44659813&From=SNP_CRS



Industry forecasts Global Homebuilders and Developers Chart 7 Chart 8

Revenue growth (local currency) EBITDA margin (adjusted)

Chart 9 Chart 10

Debt / EBITDA (median, adjusted) FFO / Debt (median, adjusted)

Source: S&P Global Ratings. Revenue growth shows local currency growth weighted by prior-year common-currency revenue-share. All other figures are converted into U.S. Dollars using historic exchange rates. Forecasts are converted at the last financial year-end spot rate. FFO—Funds from operations.

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Cash, debt, and returns Global Homebuilders and Developers Chart 11 Chart 12

Cash flow and primary uses Return on capital employed

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Fixed versus variable rate exposure Long term debt term structure

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Cash and equivalents / Total assets Total debt / Total assets

Source: S&P Global Market Intelligence, S&P Global Ratings calculations. Most recent (2020) figures are using last twelve months (LTM) data.

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2007 2009 2011 2013 2015 2017 2019

$ Bn

Capex DividendsNet Acquisitions Share BuybacksOperating CF

5

0

1

2

3

4

5

6

7

2007 2009 2011 2013 2015 2017 2019

Global Homebuilders & Developers - Return OnCapital (%)

0%

20%

40%

60%

80%

100%

2007 2009 2011 2013 2015 2017 2019

Global Homebuilders & Developers - Variable Rate Debt (% ofIdentifiable Total)Global Homebuilders & Developers - Fixed Rate Debt (% ofIdentifiable Total)

0

50

100

150

200

250

300

0

200

400

600

800

1,000

2007 2009 2011 2013 2015 2017 2019

LT Debt Due 1 Yr LT Debt Due 2 YrLT Debt Due 3 Yr LT Debt Due 4 YrLT Debt Due 5 Yr LT Debt Due 5+ YrVal. Due In 1 Yr [RHS]

$ Bn

11

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2007 2009 2011 2013 2015 2017 2019

Global Homebuilders & Developers - Cash &Equivalents/Total Assets (%)

29

0

5

10

15

20

25

30

35

40

2007 2009 2011 2013 2015 2017 2019

Global Homebuilders & Developers - Total Debt /Total Assets (%)

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Industry Top Trends 2021 · 2020. 12. 10. · Alexandre Michel Mexico City +52 1 55 5081 4520 alexandre.michel @spglobal.com . Industry Top Trends 2021: Homebuilders and Developers