Canadian Equity Fund Acts as Bridge in Mexican Market

Q: What is your role within the Mexican real estate industry?

A: Barnhart is a private equity fund manager focused on allocating global institutional capital across the Mexican real estate market. Developers in Mexico are highly fragmented and localized and as a consequence, lack the exposure to the foreign institutional capital we can offer. Thus, our role is to act as a bridge to help institutionalize the domestic market, all the while creating value for our investors and ultimately benefiting all parties involved. Our focus at the moment is on the retail segment. However we are in the process of forging strategic alliances with residential and industrial developers alike as we look to widen our investment scope and diversify our portfolio across the numerous real estate asset classes in Mexico that are poised for growth.

Q: What are the primary differences you have found between working in Mexico and working in Canada?

A: First and foremost, the real estate and capital markets in Canada are significantly more mature in comparison to Mexico’s. Canadian pension plans are considered the most sophisticated in the world and continue to be a significant source of funding for real estate developments across Canada. Mexico, on the other hand, has just begun to allocate institutional capital to real estate via the creation of CKDs, which first made their appearance in 2009. Real estate in Mexico is still primarily held in the hands of private wealth, however the tide is beginning to turn and the market is poised to become more institutionalized. Herein lies the opportunity. Nimble investors able to identify and partner with institutional-grade local developers will not only be better positioned to attract domestic institutional capital but will also be frontrunners in sourcing foreign capital eager to tap into the Mexican market. The reality is that Canadian institutional investors are all enticed by the opportunities presented by the emerging middle class in Mexico. Their concern, however, remains in mitigating the risks associated with investing in a developing economy.

Q: How can Mexico’s investment vehicles such as Fibras, CKDs and CerPis be developed and improved?

A: The Mexican financial market has made significant strides in the past 10 years. Being a developing market, there are numerous areas that can be improved on the legislative and regulatory front. The introduction of CKDs in 2009 gave pension funds the opportunity to invest in areas which previously were not permitted. In my view, it is a matter of experience. When considering regulation from the outset, the role of the pension plans within the CKD committees has changed a great deal. In the future, there should be a little more regulation and specialization in the market. Some CKDs are multisectorial and I believe the trend will be to specialize more in one area because the different sectors within real estate require different expertise and capabilities. Few CKD managers have this full spectrum internally.

The same thing is happening with Fibras. The first to be issued had no regulation that specified how to avoid conflict of interest between the development arm of a given group and a Fibra. The assets were therefore being sold internally. The market and regulators have now realized that this is an issue and action has been taken to remedy these aspects. Nevertheless, Fibras are an attractive vehicle for investors and will promote the country’s growth. Fibras are now making the market more competitive and all that is left is for the market to become more specialized and more tightly regulated.

Q: What subsectors do you think are most attractive right now for foreign investors in the Mexican real estate industry?

A: Our investment thesis when analyzing the various real estate subsectors strongly hinges on macroeconomic factors. Right now, the prominent trend in Mexico is the emerging middle class. As of 2010, 42 million individuals comprised the middle class, forming the largest in Latin America. This number will grow by between 50-55 percent in the next 20 years. This growth will translate into an increase in consumer spending and household formation directly benefiting the retail, residential and industrial segments of the market.

In the retail market, there is a great deal of space to grow in terms of GLA per capita, to introduce better products, more connectivity, and more specialization. We are also seeing a huge opportunity in the residential sector due to these demographic trends, so as a result this is our second priority. Between 700,000 and 1 million new homes are being created each year and, especially because of the difficulties the sector has experienced, there is still a lot of opportunity for capital deployment there. The other sector we are looking at is the industrial sector due to the country’s potential for growth in manufacturing and distribution centers, despite speculation over NAFTA renegotiations, which have taken a more dovish turn since Trump’s inauguration. In the future, I also see some opportunities in the rental residential sector especially in secondary cities across Mexico.

Q: How are you entering the residential real estate market and what are the main considerations?

A: Barnhart is a young company, starting in 2013 in Mexico with the view to work in Latin America. Everything that we have done so far has been exclusively in the retail sector. Our retail portfolio has grown due to the range of opportunities in the sector. In the last 18 months, we have begun looking for residential and industrial JV partners. In residential, we look for regional players within the fastest growing cities in Mexico working in high-rise or singlehome units. It is important to note that the largest 16 cities in Mexico will represent 50 percent of the growth created by the emergence of the middle class. These cities will double their combined GDP by 2025. It is my view that metro migration will continue to shape the Mexican residential market and its demand for housing. Finally, an important prerequisite we have as well when selecting a potential JV partner is seeking a group that has a strong local presence and some institutional background.