Real Estate Investment Flourishing for Auto IndustryTue, 09/01/2015 - 09:58
Q: How did PREI enter the Mexican market and what have been its most important policies in the country?
A: Prudential Financial began operations more than 135 years ago with insurance products, and over time it evolved to include investment management services. That is how Prudential Investment Management (PIM) was created, and today we are one of the ten largest investment managers globally. PREI began investing in real estate in the US in 1970, where it was a pioneer with its open-end fund structures. As companies started to grow internationally in the 90s, it became clear that PREI needed more international exposure. With this, PREI started to expand into Europe, Asia, and eventually Latin America.
We arrived in Latin America in 2001, as one of the few institutional real estate players who came to Mexico and never left. PREI operates through a long-term strategy, and with that in mind, we started investing in Mexico. Today we are one of the largest international institutional real estate managers in the country. We have over US$4 billion in our core business of real estate assets, and we have become the largest manager of industrial property in Mexico. We have more than 3.6 million square meters of industrial property in North and Central Mexico, with a diverse portfolio across the entire country. Furthermore, we currently manage a development capital certificate (CKD) investment, and we serve as the advisor to FIBRA Terrafina, which is one of the first real estate investment trusts in Mexico.
Q: What percentage does the automotive sector represent for PREI in Mexico and in global operations?
A: About 25% of our industrial portfolio is related to the automotive sector. We are highly diversified, which means that this is probably the largest segment within our industrial assets. Part of the value we offer these companies is that, whether they are OEMs or suppliers, their capital and resources will be directed toward equipment, tools, and R&D, instead of fixed real estate assets, which is not their core business or main source of growth. We do not just lease buildings, however. We see ourselves as partners to our tenants, and it is in our best interest to help them grow. Additionally, one of our key successes has been the fact that we adhere to high standards as an international company, while remaining flexible at a grassroots level. We work with a select group of local partners who focus on the day-to-day work, allowing us to ensure we deliver the necessary results.
Q: In what ways does PREI help its partners grow?
A: A good example is one of our Tier 1 tenants. This company first asked for a basic warehouse, and three months later, it asked us to double the space due to a contract it obtained with a different OEM. After nine months, the company had already doubled its space, and now it is looking to triple its facilities. We were able to offer great flexibility to that client throughout its entire growth process and we formed a strong partnership. These companies normally compete for eight-year contracts, but they cannot commit to the space until they sign. Therefore, once they get the business, they need to find the right lot in a short period of time. Thanks to its significant land bank, PREI can help these companies, taking their requirements, relationships, and conditions into consideration.
There are tenants who want to be next door to their clients, while others prefer to be slightly isolated. Our tenants include some of the most important logistic companies in the country, as well as multinational companies in the automotive and aerospace industries, so we constantly try to detect the most active sectors and locations.
Q: When companies look for a new plant in Mexico, at what stage does PREI get involved in the process?
A: We might get involved at different stages. Sometimes a company arrives and identifies where it wants to be located. In those cases, we offer the company the solution that best fits its requirements. In other cases, we detect the region with the most activity related to the industry, we build on a speculative basis, and we generally have a tenant waiting that wants the space before we finalize construction. We analyze the entire country and we have specialized people on the ground that help us with the process. A third scenario is when companies have large pieces of land they do not need. They might need resources for their core business, so PREI takes care of the repurchasing of their property and we manage the lease-back process when needed. There are interesting opportunities in the industry and, thanks to our large presence, we are able to manage all three project types at the same time. We look for possible locations and we build new facilities all the time, but as investment managers we have to consider the risk of every operation. A big part of our decision is influenced by what is happening and where the activity is in the industry. When people found out that BMW was setting up operations in Mexico, everybody was trying to guess where, since it would create a surge in demand for Tier 1 and Tier 2 suppliers. This is the same process with every new plant in the country, and we also pay a lot of attention to road development, as well as communication and logistic channels. Access is one of the most important factors in terms of logistics, so companies also need to consider where they are going to find their talent and how these people are going to commute to the plant.
Q: How do the automotive industry’s needs differ from any other sector?
A: Automotive tenants are particularly sensitive to location with respect to their clients and their suppliers. There are companies that, instead of choosing just one location, request that we look for five different locations. In terms of space, generally we try to build facilities with high standards that can adapt to a variety of uses. Another important factor is education and the availability of a trained workforce. Considering the percentage of total graduates, Mexico is producing a larger proportion of engineers than the US. There have been significant improvements in that area, although it is still a challenge to find qualified people for the industry. Nonetheless, Mexico is extremely competitive; there are many areas where the country still needs to develop, but it is much more advanced than comparable emerging economies, especially considering its relationship with the growing US economy. Car exports to the US have increased significantly, and we have a market with similar conditions to any developed country.
Another defining factor for Mexico is that it allows US dollar-denominated contracts. Most of our portfolio is leased in dollars, which is a competitive advantage considering real estate and workforce costs. The country still needs to continue developing its infrastructure, and the Energy Reform will be essential to making Mexico a more competitive country in the long term for productivity and energy prices. Mexico is a highly export-oriented market, and there is a large population and a growing middle class that will take on the next generation of demand.