Home away from home: Constitutional amendment will ease foreign ownership in coastal areas

The real estate sector is expecting a wave of investment from overseas with the lifting of a law restricting foreign ownership of land within 50 km of the sea. A change in article 27 of the Mexican Constitution is set to ease ownership rules and attract an inflow of foreign buyers. The measure should provide encouragement for the vacation-home market, which has been negatively affected by the financial crisis in the US as well as international concerns about security. The law has been approved in the lower chamber of Congress, but needs to be passed by the Senate.

DIRECT OWNERSHIP: Under current regulations foreigners can buy land with the same legal standing as Mexican nationals through a direct property deed. However, there is an exclusion zone, which includes 50 km from the coast, and 100 km from any international borders, in which foreigners are prevented from owning property. In restricted areas, foreigner ownership has typically been done through special land trusts, in which the buyer partners with a local bank. The trust has the duration of 50 years and can be renewed. The owner can make changes to the property, or sell it to another buyer, but the bank is ultimately the owner of the deed. Despite having the deed, property bought through a land trust is not included in the bank’s assets.

The restrictions were put in place in the country’s 1917 Constitution, which had been heavily influenced by Mexico’s war with the US in the mid-19th century, as well as the loss of Texas. Because of its historical weight, the issue has garnered some opposition in Congress. But the initial approval of the law shows an understanding of the potential to develop Mexico’s coastal areas through foreign investment in real estate.

There are a few limitations to the law. Foreigners can acquire coastal land only for residential purposes, and are barred from any commercial, agricultural or industrial operation in these areas. Infringement of these rules can result in the loss of property. Direct ownership of land by foreigners has been allowed through a property bill since 1995. Yet, restrictions had remained in place for coastal and border areas. Even with the approval, limitations on foreign ownership of land will remain in the ejidos, communal agricultural lands that were established after the Mexican revolution.

NEIGHBOURING MARKETS: The regulatory change will help develop Mexico’s vacation-home market, which has received attention from neighbouring US and Canadian citizens for decades. The impossibility of directly owning a property deed in restricted areas, and worries about potential land seizures by government, which are possible under existing laws only in exceptional cases, had prevented foreigners from investing in Mexican real estate on the country’s coastlines.

A change in the law might also help revive some of Mexico’s struggling tourism developments, left unfinished or unsold after the 2008 financial crisis. In late 2013 Grupo Carso, owned by Mexican billionaire Carlos Slim, announced it had bought the Loreto Beach Resort in the state of Baja California. Estimated to cost $3bn when it was initially planned, the 6000-home developments had been started in 2004 as a partnership between Mexico’s Fonatur, the governmental agency in charge of tourism development, and the Trust for Sustainable Development.

It was hoped that the plan would attract foreigners to the area, but construction was interrupted in 2009. The project was subsequently sold to homebuilder Homex in 2010, which has faced difficulties after the failure of its rural residential developments.

Clearer ownership deeds for foreigners will also encourage the development of new coastal tourism areas. Although resort towns such as Cancún on the Gulf of Mexico or Acapulco on the Pacific side have been receiving visitors for several decades now, the opportunity to own real estate without having to go through the bureaucracy of partnering with a local bank will serve as encouragement for real estate development in less-known areas. Combined with the new legislation, it is also important to ensure that security concerns do not scare potential homeowners away from Mexico’s shores.