Diversifying from Industrial to Retail

With large international retailers increasingly entering the Mexican market, the goalposts are shifting. These chains, such as H&M and Bed, Bath and Beyond, are demanding large population centers, higher quality developments and  dynamic mixture of stores within the complex, even welcoming competition in a bid to boost traffic. International companies are also now imposing punitive clauses in contracts stipulating that failure to meet certain conditions can result in penalties for the developers. But this was not always the case in Mexico.

Sánchez Devanny, a pioneering law firm, was among the first to negotiate one of these contracts for its clients. “These kinds of international demands and penalty fees previously did not exist,” says Rafael Villamar, Real Estate and Infrastructure Partner at the firm. “Slowly, the industry has begun to accept this as standard and now as more retailers are entering, the road is easier to negotiate.”

With over 20 years’ experience in the industry and offices in three of the biggest real-estate hubs in the country – Mexico City, Queretaro and Monterrey – Sánchez Devanny has adapted to the changing needs of the market as trends have emerged. With the introduction of NAFTA and the maquiladora boom in the late 1990s, for instance, the firm identified the opportunity to expand into the industrial real- estate sector. Sánchez Devanny quickly formed a specialized division and began to act as an intermediary between developers and off-takers in industrial parks. Among the most important deals the firm oversaw was a deal to sell 8.45 million ft2 of FINSA assets to GE Capital Real Estate in what FINSA itself describes as “the most significant real-estate transaction in Latin America to that date.”

Since then, Villamar says the maquiladora golden age has waned slightly, influenced by external socio-political factors and uncertainty surrounding the current US administration and possible renegotiation of NAFTA. “The Fibras in industrial sectors are getting nervous because time is passing and portfolios are failing to grow,” he says. “Of course, there are successful Fibras that specialize in industrial parks like Macquarie but others are not seeing as much movement in the sector.”

San Luis Potosi grew a great deal due to the industrial boom and it was hard hit by Ford’s 2017 announcement that it would cancel plans to build a plant in the state. Villamar says the sector’s contraction is due to doubts felt primarily within the automotive and maquiladora industries, which rely on US exports, and notes that 1Q17 was especially sluggish.

Due to this slowdown, Sánchez Devanny is trying to increase its presence among developers in the retail segment to begin working with institutional investors. This is aided by the firm’s longstanding real-estate presence and the fact it has been involved in negotiations with over 350 companies, including GICSA, Prologis and Fibra Uno, through its Parks Desarrolladora industrial park subsidiary. “Mexico is a country with a lot of potential for retailers right now,” says Villamar. “E-commerce has not yet taken off thanks to poor logistics – we do not yet have adequate regulations for our postal system and often packages do not arrive to the recipient.” Other factors influencing this trend are limited internet access and the country’s large informal economy as only 44 percent of adults have a bank account, according to the World Bank.

Geographically, Villamar sees most potential in growing hubs like Guadalajara, the Bajio region and the country’s central belt, where land value has increased by 400 percent since 2012. “Mexico, Queretaro and Guadalajara are the locations where we can see the most potential for development of mixed-use spaces,” he says. “This growth rate means international institutional funds are looking to Mexico as a stable economy where profits can be made. The opportunities for them are primarily found in mixed- use, hospital and tourist developments.”

The hospital development industry in Mexico fell flat in 2008 as a result of the financial crisis, since it was dependent on a great deal of US investment. Now with its recovery, and the relatively flat nature of the industrial sector, Villamar predicts these strategic sectors and locations will provide ample opportunities for foreign investors seeking a safe investment opportunity.