Domestic pension funds and REITs are helping to develop the Mexican market, says Javier Kutz Clever
Over the last few years Mexico, like other markets, has been affected by global financial challenges as well as domestic affairs that have, to some extent, had an influence on its commercial real estate markets. However, the country began its recovery from the global financial crisis with a 5.4% GDP growth in 2010, a 4% growth in 2011 and an anticipated 3.5% growth this year.
So far, 2012 is being characterised by the growing maturity of the Mexican real estate market due to two reasons. First, a wave of new domestic players is entering the market. Before May 1996, the Mexican social security system did not include any type of third-party pension fund. All savings generated by the Mexican labour force were held and administrated by the Mexican Social Security Institute.
In 1996, social security legislation was amended to allow for the establishment of pension fund management companies, known locally as Afores. However, it was not until October 2009, with the introduction of development capital certificates (CKDs), that the Afores were entitled to invest in private equity, infrastructure and real estate.
The total amount of money saved by the Mexican labour force over the past 15 years exceeded $10bn (€7.98bn). Between the introduction of CKDs in 2009 and the end of Q1 2012, $3.5bn was invested in these three sectors through 18 CKDs, including almost $1.2bn towards real estate investments.
It is important to highlight that these CKDs involve major international players such as Pramerica, Black Creek, Prologis and Area Properties, through their Mexican affiliates.
The second factor contributing to the growing maturity of the Mexican real estate market is the flotation on the Mexican stock market of Fibra Uno, the first Mexican real estate investment trust (REIT) formed for the purpose of acquiring, developing and operating a broad range of commercial real estate assets in Mexico. The fund was launched in March 2011 and one year later it had successfully carried out its second primary offering of more than $700m.
Without doubt the most dynamic sector within the Mexican real estate market is that which relates to Mexican consumers. Retail continues to expand with developments backed largely by local and particularly international investors. For an example of growth in this sector, one just needs to take a look at Walmart Mexico's expansion figures. In 2011 the global retailer opened one shop per day in Mexico in its various retail formats, 62 of which were in new locations for the retailer, and it now has a presence in all 32 Mexican states.
Equally, the construction of shopping centres continues to thrive. For example, Mexico Retail Properties has a pipeline of nearly 95,000sqm; Grupo Integral de Desarollo Inmobiliario is constructing in excess of 145,000sqm. High-end shopping streets, such as Avenida Presidente Masaryk, have low vacancy rates (under 5%) with current rents exceeding $100/sqm/month.
The Mexican industrial market experienced a rise in vacancy rates and a decrease in rents in 2009, a trend that continued into 2010. Today, however, the market offers a completely different scene in which vacancy rates and demand have risen to levels similar to those existing prior to the financial crisis. For logistics facilities in the greater Mexico City area, rents continue to increase and now stand on average at $4-4.50/sqm/month and the average vacancy rate is now just under 10%. In terms of new developments, the main developers are focusing on built-to-suit projects, rather than speculative schemes which can entail more risk.
International financial difficulties, combined with the effects of a swine flu outbreak in April 2009, had a significant effect on Mexico's hotel sector, but average occupancy levels and room rates have now returned to pre-crisis levels.
In contrast to Mexico's hotel, retail and industrial sectors, the office market is principally based in Mexico City. As would be expected over the past few years, landlords have been focusing their efforts on retaining good tenants and maintaining rental levels. The first of these is being achieved through sub-letting previously occupied space as larger tenants seek to reduce overheads by temporarily decreasing the amount of leased space. Rents are remaining steady due to a lack of new office supply combined with a surge of demand from smaller tenants looking for space. Today, rents are gently rising in Mexico City's sub-markets such as Las Lomas, Polanco and Reforma, ranging between $25 and $30/sqm/month.
In terms of new projects, the development market is picking up again after coming to an almost complete standstill across real estate sectors in 2010, with a small number of exceptions such as social housing. The slowdown in construction started during the last quarter of 2009, but by the beginning of 2012 the majority of previously halted projects were under way again. An example is the Avenida Paseo de la Reforma in Mexico City, where there are currently seven ongoing mixed-use projects, including 304,000sqm of lettable office space. Six further development schemes are due to begin construction in 2012-13, such as Punto Chapultepec, Sky Tower and Torre Hidrosina.
The Mexican real estate market finds itself at the next juncture with an election campaign. Opinion polls are predicting a return to government of the Partido Revolucionario Institucional and there is a continuing campaign to boost the country's international image. The question is: do we expect to see a sustained pick-up in Mexican real estate markets over the coming months?
We believe the answer is yes, although the process will be slow. We expect the market in Mexico to pick up gradually throughout the rest of 2012 and, while it is difficult to predict year-end transaction volumes at this time, we expect to see a significant boost to volumes due to future Fibra Uno acquisitions, which will, in turn, strengthen market dynamics as more deals are pushed through.
Javier Kutz Clever is managing director at Savills Mexico