MEXICO

26 | SPECIAL REPORT: PRIVATE EQUITY IN MEXICO
MEXICO’S REAL ESTATE SECTOR: AN ATTRACTIVE
INVESTMENT OPPORTUNITY
BY GREGORIO SCHNEIDER, MANAGING PARTNER & CHIEF INVESTMENT OFFICER,
TC LATIN AMERICA PARTNERS
The real estate asset class in
Mexico has evolved over the
past decade and we have seen
an increase in the number of institutional
players in the market,
fostering a more liquid investment
environment. Furthermore,
Mexican real estate markets now
have a deeper connection with
capital markets. Since FIBRAs (the
Mexican equivalent of the U.S.
REIT) started in 2011, ten FIBRAs
have raised funds in the capital
markets with a total market capitalization of US$14.3 billion.
INFONAVIT and FOVISSSTE, Mexico’s largest mortgage lending
institutions, have also reached a new level of maturity, while
commercial banks, most of them currently held by international
firms, have aggressively increased their mortgage portfolios. In
addition, we believe the asset class remains underpenetrated.
Collectively, this offers an attractive risk / reward investment opportunity
with downside protection supported by the value of
land—a situation unique to real estate investment.
We currently believe that mixed-use projects are particularly
appealing. As urban populations increase and traffic worsens,
proximity to local services will be advantageous. We also believe
the industrial and logistics sectors in Mexico will offer compelling
investment opportunities, as exports of manufactured goods to
the United States are expected to increase due to a decline in the
Chinese economy and better terms of trade for non-oil exporting
sectors given the low energy prices and a weak currency situation,
which we expect to continue.
We see an opportunity in the residential segment notwithstanding
the challenge of finding suitable land and developers with the
adequate financial and operational structure to develop profitable
projects. According to SOFTEC, a real estate consultant, and the
Sociedad Hipotecaria Federal, there are close to ten million Mexican
families living with inadequate housing or otherwise in a housing
deficit condition. Despite government efforts, this deficit is currently
growing at a pace of 750,000 additional homes annually,
given insufficient new annual supply vis-à-vis incremental demand.
Finally, we continue to see opportunities in for-sale greenfield
projects as there is less competition from institutional capital,
which is focused on income-producing assets. For-sale greenfield
investment also offers the ability to execute successful exit strategies
by selling to a FIBRA, capitalizing on both situations. We
estimate that the size of the investment opportunity for all greenfield
development projects in Mexico ranges from US$3 billion
to US$6 billion annually, based on construction loans granted in
2014 of approximately US$18 billion. The investment opportunity
for greenfield development in Mexico could reach up to US$25
billion across all real estate sectors (i.e., residential, industrial and
commercial) if we include debt in addition to equity investments.
Mexico mirrors the United States in the late 1940s in terms of
size, population and education levels. As stated by SOFTEC, most
countries that reach Mexico’s current level of GDP per capita
double their income in 20 years, as evidenced by Austria, Belgium
and South Korea, among others, which, like Mexico, expanded
their economies based on manufactured exports and witnessed
the rise of a robust middle class. Going forward, we expect a
convergence to the state of affairs in the United States, with specialized
players and new, more sophisticated instruments arising.
Mortgage securitization (RMBS and CMBS) is yet to become a
reality and, if well managed, will bring additional liquidity to the
real estate sector.
The key factors that will drive continued growth of real estate in
Mexico include the underinvestment in this segment, the broad
housing deficit, demographic pressures, expansion of the middle
class, increased liquidity in the markets and recent reforms to the
energy and telecommunications sectors, which are expected to
boost the growth of the economy. The country’s real estate sector
is still underdeveloped relative to developed economies, with
mortgages outstanding close to 10% of GDP (versus 50-80% in
developed markets). The aforementioned conditions make Mexico
an attractive market and one of the most compelling environments
for investment available today.