Jorge Caballero
Head of Real Estate, KPMG in Mexico

Disruptive Financial Tools to Boost Market

Thu, 11/01/2018 - 10:56

Mexico’s real estate market, whether commercial, residential or corporate, appears to be on track to a promising future, thanks in part to disruptive financial tools that are underpinning the sector. “There is no bubble forming in Mexico, at least from the real estate perspective,” says Jorge Caballero, Head of Real Estate at KPMG in Mexico. “Funding and institutional investors continue to mature, especially with the introduction of CKDs and Fibras into the BMV. Now, more real estate assets are owned by private institutions or investors, both national and international.”
Fibras, CKDs, CerPIs and Fibra Es are encouraging Afores to diversify their investment portfolios and venture into new sectors. “Afores are playing a larger role and they want to expand their limitations of how much they can invest in properties, nationally and internationally,” says Caballero.
Since CKDs emerged in 2009, Afores have participated in 78 CKDs and one CerPI with an investment of more than MX$159.9 billion as of February 2018. With the announcement that CerPIs can be used for international investment, the participation of foreign investors is expected to increase. Caballero explains that US and Canadian pension funds that are investing in Mexico are granted tax benefits and that in the near future, Afores will be able to invest in international assets. Some funds are taking advantage of the various opportunities the market is offering, especially in real estate and infrastructure development.
“The need for investors to gain capital through Afores is huge,” he says. But Mexico must make sure that its macroeconomic conditions are favorable for investors. Interest rates have jumped from 2 percent when these instruments were released, to 7 percent in 2018. “It could get to a point where investors will question whether they should put their money in a secure instrument where they have 7 percent return, or on an attractive but risky investment.”
One wrench in the machinery is the uncertainty created by NAFTA renegotiations and the aftermath of the presidential elections in Mexico, which have made it more difficult to issue these financial instruments. “At the moment, there is a significant pipeline of CKDs that are close to IPO, but we believe the market will behave similar to the way it did during the 2016 US presidential elections. At first, there was a decrease in investment and, once the results were revealed, the projects resumed in 2Q17. The impact was temporary, companies slowed their investments and were more cautious. The market realized that there was no imminent risk and continued with their projects.”
The interest is there, primarily among US and Canadian funds, says Caballero. Changes in political administrations often bring challenges for all players throughout the infrastructure industry. For real estate developers in particular changes in legislation could pose a hurdle. “The local legislation surrounding parking lots for instance has created a grey area around mixed-use projects,” Caballero says. “Assets have a designated number of parking lots depending on whether they are housing, commercial, tourism or corporate developments; however, there is no legislation for mixed-use projects.”
Housing appears to be whetting investor appetite the most. According to Caballero, a number of investors are trying to introduce a new type of housing asset: rental housing. Developers are paying close attention to the changing generations and understand that they want to live, work and relax in the same area and are not looking for mortgages. “One asset with a lot of potential is rental housing in cities. In other markets such as the US and Singapore, people are more often choosing apartments and condos in the city over traditional housing to avoid traffic and to increase efficiency in their everyday activities,” Caballero says.
Disruption in the financial market for infrastructure development is positive for the sector but it must be complemented by disruption in related sectors to make these initiatives truly successful. “We are seeing new asset classes but there are no loans for these new assets, such as rental housing. Because the returns and structures of these types of projects are different, existing standards and products do not always apply,” he says.