"Buy land, AJ, ’cause God ain’t making any more of it." So said TVs fictional mobster Anthony Soprano. This article considers the wisdom of this advice in relation to Mexican real estate.
The Latin American real estate market has been an area of keen focus for institutional investors for over 20 years. As the market in the United States grew to a level of maturity that caused yields to suffer and cap rates to grow, real estate investment managers and real estate investment trusts from the United States and Europe, primarily, started to look south of the Rio Grande. Mexico was the first destination.
The phrase "a man with land and a dream" was the most common description used in relation to Mexican opportunities in the mid- and late 1990s. Mexican families and one or two "lost" Americans, sat on massive landholdings, strategically located within the country, with little or no capital to develop them.
At that time, institutional investors from the United States, riding the wave of industrial expansion into Mexico due to the North American Free Trade Agreement (NAFTA), began to look closely at this "dream" and saw that leasing industrial facilities in Mexico to AAA rated US based companies, at cap rates better than those in the United States were safe and smart investments.
Navigating the Mexican legal and tax systems for the first time, especially for US tax-exempted funds (ie pension funds, generally) was critical for these investments to succeed financially. Having the ability to finance these projects also proved to be a challenge, given Mexico’s then archaic collateral security mechanisms and the perceived unreliability of the local courts system.
However, not only were these challenges overcome and the ancillary issues addressed, but real estate development in Mexico has skyrocketed in the last 20 years. From multibillion dollar investment platforms in commercial and industrial real estate, to some of the world’s most exclusive and beautiful resort developments, the Mexican market has proven to be a bonanza for institutional investors all over the world.
FIBRAs and CKDs
The question is, "What’s next?" The answer surely is more investment and more development, because the Mexican market is not yet mature and, whilst no more land is being made, most of Mexico is still growing and plenty of "people with a dream" are still out there.
The current environment in the market is primarily focused in the nascent Mexican real estate capital markets. Real estate investment trusts, locally known as "FIBRAs" and public securities known as "CKDs" have injected the most recent lease of life into the market.
Launched in 2012, the Mexican FIBRA market has seen foreign investors choose these vehicles as a way to raise capital from the general public by issuing certificates in the Mexican stock exchange, as well as some foreign markets. CKDs, on a smaller scale, have provided experienced Mexican developers with the opportunity to grow their business and accumulate portfolio holdings.
The FIBRA market is diverse in focus and size. The large FIBRAs, like FIBRAUno, TerraFina and FIBRA Macquarie have accumulated large diversified portfolios encompassing commercial, retail and industrial properties. However, some targeted FIBRAs have focused on particular types of assets.
One example of the latter is FIBRA Shop, which is focused exclusively on retail properties, acquiring assets across the Mexican secondary city markets (ie those outside Mexico City and Guadalajara). Their target asset class is shopping malls anchored by large retail outlets (such as Wal-Mart, Chedraui, Soriana, etc), while avoiding larger properties such as typical American mega shopping malls.
FIBRA Inn was Mexico’s first hotel FIBRA. By claiming that hotel room rentals qualify under the real estate rental category, the promoters of FIBRA Inn were able to avail themselves of the beneficial FIBRA securities and tax regimes. Their target asset class is business class hotels around Mexico’s industrial corridor, thus avoiding the volatility of the tourist destinations.
Finally, some promoters and developers are starting to investigate the Mexican multi-family housing market. Concerns around Mexico’s mostly pro-tenant legislation have meant this market has been slower to move. Recently, however, large US based investors have started to delve into that market. The scope of projects that have been developed include mixed-used properties, covering retail, multi-family housing and hospitality catering to the young professional population in Mexico City and Monterrey, which lies between the capital and the border with Texas. It will be interesting to see if any of these platforms grow to the size where a FIBRA can be launched in this asset class or if a current diversified FIBRA expands to include them.
While Tony Soprano’s sage advice to his son is true in nature, Mexican real estate opportunities abound. Over the last 20 years, foreign institutional investors have developed sufficient knowledge and experience of the marketplace and its legal system to allow these investments to flourish and, under the right circumstances, to provide a healthy return for their principals.