Jaime Lara
Managing Director
Macquarie Infrastructure and Real Assets (MIRA)

Good News Does Not Make a Bubble

Tue, 11/01/2016 - 13:50

In the wake of the 2013 housing crash, good news in the real estate segment is often accompanied by fear of a bubble forming. “Personally, I am not concerned about any kind of real estate bubble," says Jaime Lara, Managing Director of Real Estate at Macquarie Infrastructure and Real Assets (MIRA). "In general, the industry has a good perspective of the next developments because developers keep track of the relationship between supply and demand." Having such control allows the industry to avoid the significant risk of generating an oversupply or creating pricing bubbles.

According to CBRE, in 2Q16 at least 13 new office buildings were built covering a total of 190,000m2 in Mexico City alone. The Association of Real Estate Developers (ADI) expects its members to invest US$21 million by 2018, up from US$18 million 2015. MIRA believes there is equilibrium in the market and although the Fibra sector has significantly grown in the past year, that is mostly due to the acquisition of existing properties. “As the economy continues to grow, there will be additional demand for real estate,” says Lara. Numerous cities have old buildings that need to be modernized or redeveloped, creating more opportunities for investors and developers alike, he say financing the projects,” he explains. “The government also sees the benefits these developments can bring the city in areas that have decent urbanization, infrastructure and services.” Ballesteros believes that financial instruments like Fibras and CKDs have made an impact in the market even though Fibras only participate in the commercial and industrial real estate industry. Numerous CKDs also are beginning to invest in residential projects, giving impetus to growth in the segment.

Sustainability is another key part of the development narrative, and an integral aspect of Grupo Copri’s strategy. “We have a clear commitment to build more sustainable and environmentally friendly projects,” Ballesteros says. “The buildings in our new 800-unit development in Mexico City near the Parque Toreo Shopping center are designed so that each apartment has plenty of natural sunlight and its own solar panel to heat the water tank.”

Another property the group and partner Arquitectoma developed was an underground mall. Ballesteros says it won praise from both local authorities and neighbors because it provided parking and commercial services below, with a well-maintained and secure park above. It uses solar electricity, natural ventilation and recycles rain water.

Of the many challenges the industry is facing, such as a depreciating peso, Lara would like to see the Mexican economy growing at a much faster pace, especially given its potential. Some investors are wary of the impact of the recent increase of interest rates, especially since some sectors within the industry are based on peso lease agreements. “It is crucial that investors look at the dynamics and growth of the sector and although interest rates are important, there are other elements in the equation that should be considered before beginning a new project,” says Lara. “These include occupancy rates that can be achieved over time, rental rate increases the property can achieve in excess of inflation and the property’s appreciation.”

There always are risks when investing in the sector but there are also many positive factors creating new opportunities for investment. “There is a young population with increasingly higher levels of education and there are a number of multinational companies that are investing in Mexico with a long-term view of the economy’s potential,” says Lara. “Given that we are at a specific point in the economic cycle, when the external factors start to improve, growth in the real estate sector should accelerate.” Lara says it is hard to compare Mexico’s advantages over other

“Green areas are important for large developers, especially in areas like Santa Fe,” Ballesteros says, referring to the area on the western outskirts of Mexico City. “This is visible in our landmark high-income housing project Cumbres de Santa Fe, the largest residential market masterplan in the area.” The development has a park at its center and is surrounded by protected natural areas. It is scheduled to have a total 1,800 units of houses and apartments, of which 1,400 have been built. “We are proud of this project as it reflects our desire to provide green areas in our developments,” he says. “It has also been successful for first-home buyers, whose properties are now worth seven times what they paid eight years ago. They purchased at around US$300/m2 and the properties are now worth around US$2,000/m2.”

Ballesteros recognizes that the road to a healthier housing market has some bumps. Urban and environmental impact studies show that investments in larger water infrastructure and improved access are needed to serve new developments. Ballesteros says the government receives special taxes for this purpose that are being redirected to other priorities. “Improvement either takes a long time to materialize or it never happens,” he laments. “One of our challenges is making sure this money reaches the community it is supposed to be impacting.” countries but its young population - more than half the population is under 27 years old, according to INEGI - will drive the need for additional structures. The country continues to open its doors to international trade and there will be an opportunity to develop commercial ties with Asian and other Latin American countries.

There are plenty of examples of cities, such as Puebla and Queretaro, that are undergoing transformations, creating demand for additional retail, residential and commercial space, Lara says. Healthcare and education related to real estate are areas that interest Mira but before plunging into unknown territory investors must understand what drives value and how developers will have to work to mitigate the risks, he says. The private sector in Mexico is participating in these sectors but the operators of schools, universities and hospitals are the owners of the real estate.

If the economy continues to grow and demands additional education and healthcare services, many of these quality operators will need further capital and support to fund their growth plans. “One way to do that is to monetize some of their existing real estate assets," says Lara. "We are open to partnering up with existing high-quality universities, schools and medical groups."