Antonio Ruiz
CEO and Chairman
Grupo IGS
View from the Top

Fund Manager Banks on CKDs

Wed, 11/01/2017 - 12:33

Q: How has Grupo IGS worked with Mexican pension funds to construct social housing in Mexico?

A: We have introduced three CKDs to the market so far, all in the industrial and residential real-estate sectors. They used to be exclusively for investing in social-interest housing but since INFONAVIT and FOVISSSTE started raising credit limits and financing properties of higher value, this has changed. The ability of these institutions to finance costlier residences is attractive because it has enabled PPPs. Now, these public- housing finance institutions and private financial institutions like COFINAVIT can jointly finance the same asset.

Launching a CKD requires a solid and complete business plan along with the demonstration of the company’s ability to invest and generate an adequate return. These instruments are difficult to launch because they are new, having been introduced in 2009, and the first CKD cycles remain incomplete. They require five years to invest and another five to disinvest so many organizations that raised CKDs do not yet know whether they will return the expected yield. Grupo IGS has been able to offer Afores the promised yields of around 16 to 20 percent annually through investing the resources rapidly and divesting, selling off the industrial portfolios and the houses.

Q: What is Grupo IGS’ role in terms of fund management and the building of these developments?

A: We do not build directly because it would entail a huge conflict of interest. We offer developments through tenders in which construction companies can participate. Depending on the type of development, different strategies are put in place. If the development is industrial, Grupo IGS rents it to companies through long- term leasing contracts and sells the portfolio after it has stabilized. If it is residential, the units will be sold by the developer. When the houses are sold, Grupo IGS retains a portion of the paid price, the financing institution retains another percentage to repay the bridge credit and the developer keeps the rest. This is a good business for committed developers but those who fail to deliver end up losing everything because in such cases Grupo IGS retains the rights to the land to ensure the investment.

Q: What risks does Grupo IGS take on when acquiring new assets?

A: Grupo IGS makes acquisitions only after proper analysis. We then place the asset in escrow and come to an agreement with the developer. The developer can start building the residential development with the money received as a bridge loan from financial institutions. When the house is sold, the financing is obtained by the homeowner through INFONAVIT or FOVISSSTE. Risk is distributed over time and to different players. We assume the land risk, the developer the risk related to the bridge credit and INFONAVIT and FOVISSTE the house acquisition financing.

Q: What are the main factors that have impacted the residential sector’s growth in Mexico?

A: The residential sector is doing well. As a result of the FDI and jobs generated by NAFTA, there is now a residential deficit of between 6-8 million homes in Mexico. A market with so much demand for housing prevents the creation of a residential bubble because there are enough resources to finance projects and enough developers to build homes. The sector is healthy because it demands highly transparent practices and great discipline in resource management as the resource for financing homes comes from both employer and employee. This is also the case with bridge credit financing; this money belongs to the people that deposited their savings with the financial institutions that provide bridge loans.