Research

The asset class 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. 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 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.

What makes the real estate sector in Mexico unique in comparison to the other emerging markets in which you work, namely Colombia and Peru? To the United States?

The Mexican real estate sector is unique in comparison to Colombia and Peru given the size of its economy, the maturity of its government financing programs for residential mortgages and the increasing institutionalization of the real estate sector.

Mexico’s economy is three times the size of Colombia’s and six times the size of Peru’s. Furthermore, Mexico has a more mature mortgage market, with the existing government financing programs of FOVISSSTE and INFONAVIT providing millions of people with mortgages nationwide. Lastly, Mexican institutional investors are able to invest in the ever expanding FIBRAs and CKD investment vehicles to access for-rent opportunities and infrastructure development. However, like Colombia and Peru, 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), and has a large and growing housing deficit as well as a lack of capital for for-sale greenfield development projects. 

As compared to the United States, Mexico mirrors its position 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.

How large is the real estate opportunity in Mexico?

We estimate that the size of the investment opportunity for 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.

Regarding the income-producing segment, there are currently ten Mexican FIBRAs with a total market capitalization of US$14.3 billion, compared to 223 REITs in the United States with a total market capitalization of US$939 billon, as of January 2016. According to SOFTEC, residential real estate development in Mexico has estimated annual revenues in excess of US$30 billion. We believe this volume of activity should continue to provide attractive investment opportunities.

How does the mortgage finance market operate in Mexico, and how does it impact the demand for housing?

Mortgage financing in Mexico is mostly provided by commercial banks or by the government’s financing programs of FOVISSSTE and INFONAVIT. FOVISSSTE is the savings institute for public employees, while INFONAVIT is the private sector equivalent. As of year-end 2014, FOVISSSTE and INFONAVIT held 67% of the mortgages outstanding, commercial banks held 31% and other financing institutions held the remainder. The total balance of outstanding mortgages was US$112 billion, or 10% of Mexican GDP (in local currency).

FOVISSTE and INFONAVIT are financed through government grants and public debt issuances. Mexicans in the workforce deduct a portion of their monthly paycheck to finance the program as well. In 2014, the government raised US$422 million through public debt to finance the program and then issued 450,100 new mortgages at an estimated value of US$11.3 billion, which is approximately US$25,000 per mortgage.

Individuals in the middle- to high-income residential sector are typically required to put a down payment of 20%-30% of the total purchase price, which can be deferred during the construction period. These homebuyers may use the funds saved at FOVISSSTE or INFONAVIT to pay for all, or part of, this down payment. Once the unit is delivered, the buyer will usually take a mortgage, with FOVISSSTE, INFONAVIT, a commercial bank or other financial institution, and will pay their monthly mortgage payments at a fixed or variable interest rate.

Homebuyers of affordable housing units pay 100% of the unit upon delivery at the end of the construction stage with their FOVISSSTE or INFONAVIT savings (10%-20% of the total value of the unit), plus financing from these entities or other banking institutions.

This financing structure has a substantial impact on the markets, as a significant portion of homes are financed at an annual rate currently fluctuating around 9.5% in Mexican pesos. Prevailing interest rates are, as always, the most important driver of the market.

Are there any notable trends related to the types of institutional investors that are interested in this market segment?

Local institutional investors have an important role in real estate, especially since the Development Capital Certificates, or CKDs, were introduced to the Mexican capital markets in 2009. These vehicles allow local pension funds in particular, and institutional investors more generally, to allocate capital to development assets, such as real estate, mining or energy companies, among others. More recently, local investors have been able to enter into mezzanine financing of projects, which allows for higher returns and greater diversification.

REITs are being funded through IPOs, with a significant portion of their issuances being funded from overseas, including American and European investment banks; Fibra Uno, the largest REIT in Mexico, was 75% funded by foreign investors. LPs are seeing the convergence of conditions to those in the United States, and are therefore more interested in each successive listing.

How do you see the real estate sector evolving going forward?

Going forward, we expect further convergence toward 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 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 aforementioned conditions make Mexico an attractive market and one of the most compelling environments for investment available today.