Developer Issues First CerPlTue, 11/01/2016 - 13:45
Q: What segments have Mira identified as growing the fastest?
A: Our main opportunities lie in developments for Tier 1 cities and selective Tier 2 cities. One constraint in our business is that our projects are funded with global institutional money. We raised two funds from 2008 to the present and now we are raising a third fund through a CerPI. The first two were for US$500 million and US$200 million respectively. One of our key differentiators is that we create environments with true human scale but to develop scale, large developments are needed. We typically seek projects that have close to US$100 million in equity, which means we can only build vertical communities in cities. For these reasons, we need to carry out large projects and midtier cities cannot absorb the number of units at the prices we must charge to make the projects feasible. This is why we are focused on Tier 1 and 2 cities that have shown a tendency toward vertical building. San Luis Potosi, for example, is a horizontal city so it does not make sense for us to enter with a large-scale vertical urban community. There also is a lot of competition in horizontal developments and a great deal of ground is still being developed for middle to upper class homes that compete with condominiums. Given Mexico’s growing middle class, the demand for new households across the country will increase by 400,000-600,000 houses in the next year, which is promising for the residential segment, particularly in urban areas.
Q: What opportunities do foreign retirement communities represent?
A: Our main focus is urban but we are using one of the funds to develop a community marketed toward retirees and second-home owners in Todos Santos, Baja California Sur. The signs point toward significant retirement migration from the US. At the moment, there are only around 40,000 homes owned by US citizens in Mexico, which is a drop in the ocean. To put this into perspective, in Mexico City 20,000 homes are absorbed each year while 500,000 homes are bought and sold annually across the entire country. Specific locations like San Miguel de Allende in Guanajuato, Ajijic and Chapala in Jalisco and certain areas on the Baja California peninsula are most popular. This is an opportunity but it is highly speculative at the moment. We have one community right now and we are not planning on increasing our portfolio in this area unless we see promising returns. That can take five to 20 years.
Q: As the first player in the market to issue a CerPI, what are the challenges involved in the process?
A: We build retail, office and residential. The fiscal structure of the Fibra is designed to develop and acquire commercial assets that produce rents but we sell a great number of our developments so this tool is incompatible with our needs. The CerPI is an evolution of CKDs because it is designed to attract the same institutional pension fund investors. The difference is that the evolution of the CerPI makes it similar to global private equity funds. Pension funds can delegate more responsibility and risk to the manager. One requirement of a CerPI is that a foreign institutional investor must co-invest alongside the pension funds. This requirement can only be met with sophisticated managers, further reducing risk for AFORES. We hope to close our funding by the end of September 2016. Our goal is to provide investors a 16-21 percent return on investment before tax. The challenge is that this is the first time the certificate will be listed so lawyers are not entirely familiar with the framework. We are dealing with issues on how to co-invest Canadian and Mexican funding.
Q: How have Mexican pension funds received these vehicles?
A: In our case, the reception has been favorable. I believe our book will be oversubscribed but over time it should become increasingly harder for new managers to tap into money from Mexican pension funds. The funds are becoming more cautious regarding the experience of the fund managers they deal with. Mexican pension funds will consolidate their private equity investments with a smaller number of managers. Pension fund teams are small and they do not have the resources to communicate with dozens of fund managers. We want to tap into Mexican pension fund money now and become one of the few managers that prevail when the market inevitably consolidates.