Developer Positioning for Afore Investment

Q: As a multifamily property developer and manager, what market characteristics do you look for when deciding where to develop?

A: The ideal characteristics we look for are comparable around the world: we focus on large cities with rapid employment growth, a young population and a demographic shift. Many cities are growing quickly and the infrastructure is falling behind, which creates a great number of challenges from an urban standpoint. This results in challenges to quality of life. We are interested in at least 12 major cities in Mexico that are highly concentrated in the services industry, which tends to attract the younger demographic and millennials.

At the same time, we see a complex infrastructure situation. Take for example Santa Fe, where almost 200,000 people work every day but there are less than 15,000 residential units. Between 100,000-150,000 people come and go to Santa Fe through two points of access. This opens an opportunity for our market to provide really high-quality residential developments with many amenities and a high level of services for a demographic with a real housing need and a lifestyle problem.In a pattern similar to the US in the last five years, we are seeing a new preference in Mexico for renting rather than owning. There is a much greater drive toward lifestyle and the 24- hour city wherein people want to be closer to work and have more convenience. The population is more mobile and less willing to commit, there are more single-person households, people delaying marriage and parenting and similar trends. As a result, for the same population, now there is a requirement for 40-60 percent more houses because people are living alone or with roommates rather than in large family units.

Q: What are the challenges in Mexico City’s regulatory framework for developers?

A: For the first time, the new Federal Housing Law includes rental properties as part of its scope. Previously, the focus of public policy was on the volume of people who could be placed in housing rather than on the quality of that housing. There are large regions on the outskirts of Mexico City that resemble ghost cities because it makes no sense for anyone to live there given the working demographics and geography.

One of the most encouraging signs as developers and operators is SHF’s strong program for providing financing for multifamily developments. Commercial banks are still trying to understand the product in Mexico, whereas it is well-established in countries like the US. Every institutional investor has massive exposure to multifamily development, which are the second-biggest asset class owned by REITs after retail developments. From a local government perspective, there have been several changes introduced by Mexico City’s new Constitution. We are concerned about the repercussions from the constitutional changes that make Mexico City a state rather than a special district. Traditionally, we have witnessed that decentralization is not very conducive to transparency or accountability. As an institutional investor that has been present in Mexico for five years, we are committed to the market and we want to participate as much as possible in the dialogue.

Q: Why did Greystar choose a CKD over other financing instruments like CerPis?

A: As an experienced asset manager, we are raising and deploying funds from various global investors, including insurance companies, pension funds, sovereigns, endowments, institutions and family offices. When we first came to Mexico, we started by investing a dedicated account from a Canadian pension fund and we were successful in deploying that capital into some landmark projects in Guadalajara and the Mexico City areas of Periferico Sur and Bosque de las Lomas.

When looking at the asset class, it makes sense to have the returns denominated in the same currency as the investment. The rents in Mexico are and always will be in pesos because people are paid in this currency. When we grow in a new country, we always try to find a balance of new investors, and these tends to be local investors because they have a presence and know the market. For us, strategic partners like Afores are the right move in the Mexican market.

We chose CKDs over other types of instruments because we knew Afores had never had access to these asset classes because they had never been formally developed in Mexico. We thought a CKD would bring in different kinds of investors so they could familiarize themselves with the asset classes and understand how we carry out our business as investor manager, developer, and operator of core buildings. We also believe that CKDs are relatively simple instruments for both investors and managers. Our plan going forward is that once we are successful in deploying the capital from the CKD we want to pursue other opportunities related to these instruments so we have a long-term commitment to the market.

Q: How do you mitigate risks associated with a potential housing market slowdown?

A: In Mexico, our business plan is to build 10,000 units in the next five years. Right now, we are in the process of building 1,500 units and we want to speed that up considerably. To achieve this, one of the most important questions is funding. We believe the Afores have the opportunity through our CKD to gain access to an asset class they do not have to date. Traditionally, the risk spectrum of the multifamily product has been significantly lower than that of other asset classes in the real estate world because housing is a basic need that is less prone to the macroeconomic environment.

From a market perspective, the last expense people will cut out when the economy slows is rent, since a living space is a basic need. When examining occupancy rates of our portfolio of 350,000 units during the crisis in 2008-2009, office and residential were operating at a 96 percent rate. In the depths of the crisis, our occupancy rates fell to 93 percent, while office portfolios dropped to around 80 percent due to the different risk profiles.

Q: What are the main challenges you encounter in attracting investors?

A: We have had a lot of interest but the queries are more about the asset class rather than about us as a manager. There is a preconception associated with renting that links it to instability, to the extent that in 80 percent of our meetings we are asked about this. The difference comes in the sheer size and scale in which we are working because many of these ideas are related to informal apartment owners who have all of their patrimony invested in the apartment and do not have the resources to screen those renting the property or respond when the tenant is not paying.

When operating 500 apartments, each individual unit is a tiny part of the overall cash flow, meaning that if one tenant is unable to pay or throws up legal issues, it will not affect our return. One of the most important things we do is to screen those who will rent in our building and to do so, we examine several different factors. We gauge the risk profile and, based on the outcome, we personalize the level of requirements, including security deposit, insurance policy, co-signee or letter of recommendation from the employer. In addition, since we control the operation of the asset with technology and a team in the building, we have protocols to address all the potential operational challenges that come up. This is the real value add of an experienced and institutional operator.