Economy
Colombia's economy expanded 1.1% y/y in the first quarter of 2021 against market expectations of a 1.0% contraction. On a quarterly basis, the GDP grew 2.9%, following a revised 6.1% gain in the Q4-2020. In Q1-2021 the economy nearly closed its gap versus pre-pandemic levels. The results were a strong positive surprise since in January and at end-March, Colombia’s major cities implemented strict lockdowns.
In March, while many developed countries’ economies began to recover following their vaccine rollouts, Colombia, whose vaccine rollout was delayed when vaccine doses were distributed to developed countries first, entered a third wave of COVID. Not only did this prolong constraints on the economy it prolonged expensive government support programs that were stretching government deficits and debt levels.
Colombia moved faster than many developing-nation peers to get its financial house in order, announcing a new tax reform bill on April 15. Even though the tax increases would have hit the wealthiest hardest, 80% of the population opposed the bill. The blowback was fast and fierce: nationwide protests and the country’s finance minister out of a job.
Following the withdrawal of the proposed tax reform, both S&P and Fitch downgraded Colombia’s credit rating to BB+. Consequently, 10-year bond spreads widened 220 bps and the COP/CAD depreciated 10.2%. The rating agencies now expect a watered-down tax reform that will not fully address Colombia’s deficit or debt.
Due to the very strong Q1, the consensus 2021 GDP forecast increased to 6.2% (previous 5.5%) while 2022 GDP remained at 3.5% and 2023 GDP remained at 3.4%. Consensus for 2021 inflation increased to 3.7% (previous 3.3%) while 2022 inflation increased to 3.2%.
Latam currency exchange rates have been hit hard by the global market sell-off on the back of the coronavirus pandemic. The surge to the USD given its perceived safe-haven status has driven several Latam currencies to record lows against the USD. YTD 2021, the COP devalued 9.0% vs USD and 10.2% vs CAD (CAD appreciated 2.8% vs USD).
The COP has been substantially impacted by recent fiscal and social uncertainty. However, it is still expected to finish 2021 at CAD/COP 2,760 US/COP 3,450 and 2022 at CAD/COP 2,650 US/COP 3,400 up from CAD/COP 3,030 US/COP 3,740 today.
Residential market:
For 2020, national residential sales hit a record 176,000 units, up 8% from 2019; the remarkable industry wide success is attributed to an increase in government subsidies (# of VIS subsidies plus introduction on new No-VIS subsidies), lower mortgage rates and higher demand. That said, 2020 completions were 101,000, down from 158,000 anticipated at the start of the year due to the COVID-related construction delays, implementation delays for subsidy programs and some pushback from mortgage lenders.
For 2021, sales are forecasted to increase a further 6.5% to 187,000 units while completions are expected to increase 67% to 170,000 units. YTD sales are up 63% (admittedly from a low baseline in 2020). However, due to fixed 36-month installment payment periods, accelerated sales have not resulted in accelerated deliveries and the
resultant payment of development fees and profits.
The 2020 completion shortfall (sales of 176,000 less completions of 101,000) will take several years to correct itself. When allocating its limited resources, the government considered aid to the residential sector a foundational tool to stimulate the economy because of the industry’s particularly high multiplier effect on employment. Sales should remain high as long as the government maintains its subsidy programs though too much of a good thing may create conditions of pull-forward demand that would
impact sales in 2022 and 2023.
Prices of VIS (low income) housing increases annually with minimum wage (approximately CPI + 1.5%). Non-VIS prices have been increasing at a slighltly higher rate. Profitability is expected to stay constant as higher development costs, due to higher steel and materials costs, are offset by a 200bps reduction in interest rates and shorter construction loan durations.
Retail market:
For 2020, national retail sales experienced a sharp rebound starting in September when
mobility restrictions were loosened. National retail sales growth was 9.3% in Q4 2020 versus the previous quarter. However, overall national retail sales contracted 7.8% in 2020. As a result of mandatory lockdowns and mobility restrictions, vacancy rates increased 5% to 10% while market rental rates decreased around 10%. Landlords have been providing rental rate discounts to maintain occupancy. There have not been any major national retail bankruptcies although there is concern about some international brands.
For 2021, Colombia's retail sales advanced 75% y/y in April of 2021, following a 20% gain in the prior month. Nearly all stores, restaurants, theatres, gyms and amenities have reopened. There is evidence of a strong pipeline of brands waiting to re-enter the market once mall traffic returns to normal. Consequently, rental rates and vacancies should recover quickly in the best malls while some older malls may become obsolete.
Most retail tenants have long-term leases with contractual annual rent escalations (>CPI).
Contrary to North America where shopping centers serve an essentially utilitarian function, modern Colombian retail malls have in fact become part of the social fabric that serves a community function much like the old town squares used to decades ago. Expect resiliency from this asset class.
Office market:
For 2020, nearly 100% of office tenants paid their contractual rent whether or not they were using the space with the exception of some street front retail and coworking space. The Bogota vacancy rate has increased from 10% at the start of the year to 14% in December 2020. Renewals, usually 90-100% are now 80%-90% and for shorter terms; market rates have declined 3%. All tenants are asking for shorter leases (2-3 years) or additional concessions for signing longer leases (5 years). Fortunately, the production of new space for delivery in 2020-2023 was already at historic lows before COVID.
For 2021, vacancy is projected to increase to 19% and rental rates are forecast to fall 8%.
Vacancy is expected to peak in 2022 before returning to equilibrium in 2024. While tenants are contemplating shedding space to accommodate Work-From-Home, in practice most tenants are simply delaying major leasing decisions.
Most office tenants have long-term leases with contractual annual rent escalations (>CPI).
We expect some existing tenants to shed space on renewals and/or negotiate lower rents. Consequently, rental revenue may flatten over the next couple of years before recovering by 2024. Right now, lease-up of new space has been slower than in the past, with shorter lease terms and/or lower rents.
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