Water Shortage and Property Investing in Mexico City, Case Study Example

Caranza Property Fund is based  in Mexico City. In the fall of 2009 they have to decide whether to increase the portfolio, decrease or holdin  steady state the rate of investment,  appropriate to real estate in the capital. In completing their due diligence, the investment company,  had a major concern appropriate to the water supply to the capital. This fear was compounded by a local Internet news portal stating that the capital should be declared as a disaster zone. If the reservoirs were not replenished Mexico City would face economic, social and political problems and the real estate market would plummet.

There is always considered some form of crisis that exists in the Capital, as it sits on the lake bed and is vulnerable to earthquakes. Carranza has a diverse pool folio of investmentbut  the real estate market makes up a significant proportion of it. In Mexico City the fund was heavily invested into commercial property  projects. The recent financial crisis and recession had  also indicated that there  might be water rationing and as such the  situation might further deteriorate. Carranza properties were already under significant stress in the capital.

Mexico is inhabited by 106.7 million people and in excess of 19 million people live in the capital Mexico City. The capital was originally built by the Aztecs in  1325 and  it remained the seat of the Aztec Empire until it was  conquered by the Spanish. The City now contains 16 Burroughsand  60 municipalities with  recent growth resulting  in air and water pollution. The World Bank has indicated that more than 1.1 billion people lack access to safe water with 2.6 billion lacking access to safe sanitation. This scarce commodity is impacting the social and economic well-being of many countries. Such bad experiences being around the world in places like  India, Africa, Asia and the USA.

Mexico City has been forced to confront these water shortages and has entered into many private commercial partnerships in order to find resolutions to these problems. In Mexico City underground aquifer provide 70% of the main source of water to the city. The Catzemala and Lerma reservoirs providing the remaining 30%. The mismatch between withdrawal and return of water has greatly contributed  to the sinking of the city which is built on a lake bed. The Wall Street Journal stated that the cutzemala reservoir is merely half empty and continuing to fall. Daman Agure (City Engineer) stated that if they cannot get control  of the situation then Mexico City is going to run out of water. The impact of climate change is compounding the situation. Mexico City is not alone in this crisis and other cities like Los Angeles, Beijing and Singapore are also facing similar problems. Property investors in Mexico City originally assumed that the drought was temporary and no one speculated the situation would deteriorate even further.

Most of the water metres  in Mexico City had fallen into a state of disrepair and nobody has bothered to maintain or replace them. As such there are no statistics or information on who are  the main consumers of waterin  the city. Most of the bills for water to consumers are based upon estimates and a large  number do not get paid. On average residents use around 300 litres  of water per day, contrasted 150 litres  per day in New York City.The government believes that the  future resides in successful private company partnerships and has cited success stories in Bogota  and Santiago Chile. On the surface there  seems to be an unusual situation  in Mexico City. Generally,  there is no problem with the resource supply of water, as there is adequate  annual rainfall and the area experiences flooding. Much of the rainwater is not captured into the reservoirs and instead it is allowed to drain away down the city storm sewer system. The water services in Mexico City are being compared to that of West Africa;  for country as rich as Mexico this should not be the case. There is thereforea  significant question as to the  capability the management of the water services and the  engineering system that supports it. The government  is also to blame for the inability to appoint a  federal regulator overseeing both public and private sector operations. As such the City has no control over quality systems,  planning and completion deadlines. The situationin  Mexico City is  extremely complex as it does not have any strategic planning in order to deal with the long term management of water services in the city. The vision  and business models are simply not there. Mexico contains some 2000+ municipalities and these seem to have been  controlling the water services  forever. Very few of them have the resources or skills to accomplish this  missionand equally do not have the money to support financing of the operation.

The water situation is also highly influenced by the three main political parties  PRI, PAN and PRD. As opposed to these parties working together they oppose one another and this does not bode well for finding suitable solutions for the problem. With regard to the real estate issue, if water became a significant problem it would manifest itself in the following ways:

1. Cost of water – commercial properties zone increases from 0 to 200%;
2. Vacancy Costs – tenants would move out of wrenched accommodation to avoid potential 30% think reason water cost
3. Capital costs – then maybe capital costs applied to each building to equip them for on-site storage facilities. In addition, if this included sprinkler systems or fire suppression costs could reach as high as Mexican dollar 15 million.

Mexico had enjoyed microeconomic stability up until the end of the 1990s. In 2008 the Christian mystic product [GDP] was $1088.1 billion. This was the second largest in Latin America and the 14th largest in the world. Despite this Mexico is considered a country of contrasts with only 20% of the population accounting for 3.9% of total income. 40% of Mexico’s population being in poverty conditions and  18% living in extreme poverty. The geography of Mexico City is such that it is located 2240 m above sea level and surrounded by mountains with summits in excess of 5000 metres. The city core is home to 8.8 million people but the broader suburban mass of Mexico City swells the population to 19 million.  Much of the stress on Mexico City was due to the amount of people who moved from the countryside into the city. With this increasing pressure the government of Mexico City was forced to confront the issue of water shortages and the associated costs in order to remediate the  problem. Moving water from the two main reservoir systems required  ahundred pumping stations, 17 tunnels  and 7.5 km of canals which made the system extremely expensive to operate. This system of operating and managing the water supply by the Mexico City water system (SACM),  a unit of the government, was not properly metered and as such consumers were charged a fixed fee. Since this time (1992), the operation of the system was passed into the management of a privatized company. This has seen considerable improvements made, including that of meters being installed in about 50% of the homes and thus consumers being billed in accordance with their  consumption of water. The water distribution to the people in Mexico City is distributed by primary and secondary pipes. The engineering department states that they are  not sure how much is lost to leakage  but current estimates are around 40%. Another significant issue concerning the loss of water is that a large amount is lost to pilferage and unauthorized tapping into the supply. It has been estimated that about 60% of the water is actually consumed. The reality is that the water services have no real idea as to who is actually consuming the water and what volumes are  being consumed. There is also an element of corruption with people selling water supplies  from trucks in order to fill large household tanks. In the more affluent neighbourhoods Mexico City 10 m³ water tank can cost as much as 3000 Mexican dollars to fill.

Conclusions

The outlook for Mexico City water supply looks extremely weak in light of the current economic session. The infrastructure needs a large amount of capital investment in order to modernize an already crumbling infrastructure. There are significant government political hurdles to overcome with the bureaucracy leadership skills in order to address the magnitude of this problem. Despite an abundant supply of water there needs to be a vision and strategic plan in order to capture this valuable resource, other than simply let it  drain away into  the city storm sewers. At the moment the complete abdication of leadership, government responsibility and decaying infrastructure makes Mexico City a poor  investment for commercial property development. If you factor in potential hazards like floods, seismic activity and volcanoes, then you have an extremely high risk investment profile. It remains to be seen whether  the government can introduce and manage successful private sector partnerships in order to reconcile the many problems. Mexico is a fairly affluent nation but the wealth is not evenly distributed and it is questionable whether the Government will invest the  time and money in order to improve the  water supply of Mexico City.

In order for the investment company to reach its final decision it would be to consider the following factors:

• Will the collective authorities decide a course of action to keep the water and sewer sanitation from a debilitating crisis in Mexico City?
• How big a problem will the sanitation system become for the investment companies commercial properties?
• Author alternative countries where we might invest that does not have the same water disruption problems
• watch all the lessons learned from this particular situation and how might they help in future investment decisions