Trusting the market: Real estate investment trusts continue to attract investment to non-residential segments

Mexico’s real estate sector has been witnessing the growth and impact of real estate investment trusts (REITs), known locally as Fideicomiso de Infraestructura y Bienes Raíces (FIBRAs). These are vehicles for real estate portfolio management which rely on the issuing of real estate certificates to investors. As of early 2015, nine different REITs were active in the Mexican market, investing in and managing property portfolios in office, retail and industrial real estate, as well as hotel units. Because they can use their financing mechanisms to both fund the construction of new projects and buy existing property portfolios, REITs are bringing new dynamism, efficiency and a fresh wave of welcome investment into the Mexican real estate market.

Changing The Rules

REITs benefitted from a change in the country’s financial regulations which enabled a strengthening of sources of financing. In 2009 the government authorised Mexican pension funds to invest in a larger variety of investment vehicles, including real estate trusts. This represented a significant shift for the real estate sector, which had traditionally been under-financed, but has since then been able to attract strong financial commitments from a number of institutional investors. “REITs and public real estate corporations have led to the creation of a secondary market where modern real estate properties are being developed or acquired; they have created an institutionalised real estate market,” Rodolfo Balmaceda, business director at Dessarolladora Vesta, told OBG.

A growing number of REITs have been able to attract investment from both domestic and international sources. Institutional investors from Europe and the US have been drawn by the consistent performance of various REITs on the stock exchange. In 2014 the five REITs products to debut on the Mexican Stock Exchange were able to get financing of MXN60.4bn ($4.06bn), a 15.3% increase on the six REIT products which were offered in the market in 2013 and obtained MXN53.2bn ($3.58bn) in funds. Fibra Uno, which targets commercial and industrial real estate, was the first REIT to join the Mexican Stock Exchange in 2011. Since then, other trusts specialising in different segments have followed. Fibra Inn and Fibra Hotel both focus on hospitality properties. Fibra Shop, on the other hand, has recently joined the market and primarily targets retail properties. In April 2015 the trust announced its acquisition of the City Center Bosque Esmeralda shopping mall for over MXN404.5m ($27.22m).

Good Returns

A recent report by Crédit Suisse bank underlined the strengths of REITs as investment products, based on their ability to generate good income flows. The report also stated that dividends distributed by Mexican REITs would range from 4% to 7% in 2015. Steady income and, consequently, good dividends for investors have been maintained by the REITs’ ability to focus on properties with high occupancy rates. Industrial areas in the northern part of the country have proved a successful bet for some of the REITs, as the expansion of Mexico’s industrial base is galvanised by a rebound of the US economy. On top of the success of the current model, Mexican REITs have shown a willingness to diversify into new products. Fibra Uno recently announced the launch of a new investment vehicle that will concentrate investment capital into the building of large-scale developments, from construction to management. The REITs expect to raise MXN15bn ($1.01bn) for this first alternative product.

Governance Precautions

Despite the beneficial amount of liquidity that REITs have brought to the market, their quick expansion has generated calls for caution. This is especially relevant because REITs are not subject to banking regulation, which has recently prompted authorities to implement prudential regulation in order to improve governance rules. As a result of this regulation, REITs are now required to limit debt to 50% of their assets and minimise the debts they hold. In 2014 the Bank of Mexico expressed concern over several REITs’ plans to back some of their operations with mortgage-based products, which banking authorities fear might lead to increased systemic risks.