Pedro Azcué
JLL Mexico and Chairman at JLL Latin America
View from the Top

The Dollar-Peso Battle in Leasing

Wed, 11/01/2017 - 15:01

Q: What major challenges are shaping the real estate industry?

A: Historically, financing has been one of the biggest challenges developers have encountered. But due to the change in the Mexican pension fund system (Afores), financing real estate projects has become easier. A huge amount of money is being channeled through new types of financial vehicles for the development of both real estate and infrastructure projects. These local funds are in most cases not dependent on what occurs in international markets, decreasing the dependency on foreign capital. There is a lack of IPOs in the BMV, which means there are limited options for Afores to invest in. This has spurred the funds to seek investment alternatives like real estate, which can provide the long-term returns they want. It is possible that these funds will start looking at investment in foreign companies if there are no new locals to which they can allocate all their funds.

Q: How will Fibras react to changing economic conditions within the Mexican market?

A: A problem we are facing is the deterioration in the value of Fibras. In some cases, their share prices have fallen significantly in peso terms. Because of this, Fibras are less likely to raise more equity because if they did, it would significantly dilute the holdings of the original investors. It is likely that Fibras may not be the most important buyers of properties in 2017 because if they need to raise more equity their shareholders will most likely want to hold off on new acquisitions until the equity market recovers. However, Fibras will invest in new projects if they can raise the money through debt as long as they do not decrease their equity. I am not convinced that in the near future we can count on Fibras to be the important providers of capital they were in the recent past.

Q: What are your clients most worried about when it comes to new investments in Mexico?

A: Some companies that are looking to lease new facilities in Mexico are worried about signing contracts in dollars and the owners of the buildings are worried about signing long- term leases in pesos. Signing long-term leases in pesos can over time lower the real value of the property, especially if the peso continues to depreciate significantly and the lease escalations do not reflect true cost of living increases. The Consumer Price Index (CPI) does not entirely reflect the reality of the cost of living increases from a developer’s point of view because the index measures a different basket of goods and services to that of a typical developer. For example, when 225 dollar-denominated materials such as steel rise, the index only increases by a few points but developers might experience a much greater cost impact than what the CPI reflects. By signing long-term leases in pesos, companies are gambling because one party will end up with a better deal over time.

Q: What is your outlook for the commercial real estate market in the next couple of years?

A: Although it falls under the real estate sector, one cannot generalize outcomes because this sector varies significantly depending on the region and product type, whether it is office, industrial or retail. For instance, the country is experiencing a boom in the tourism sector, where there are many new hotels being built in Los Cabos and in the Riviera Maya while at the same time areas impacted by security issues and concerns are far less dynamic. In real estate, the quality of projects also matters greatly. There are many buildings in Mexico that have taken years to be leased, while others that are not even finished construction fill up rapidly. Residential continues to do rather well and this demand will continue to increase. In cities, such as Mexico City, it is always difficult to find attractive land and when water, energy and sewage problems are added, it makes it even more challenging to develop viable projects. The industrial market might depend greatly on changes to NAFTA and US policies. Some projects will continue with construction because they cater to internal demand but others will hold off until there is less uncertainty in the political environment. Renegotiating NAFTA is a risk but it might also prove to be a great opportunity if the US decides to further look at North America as a competitive block.