Interview with Gregorio Schneider, Managing Partner at TC Latin America Partners, USA
Why does TC Latin America Partners believe that Mexican real estate presents an attractive investment opportunity?
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.
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 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.