Market Grows Despite Difficult Times

Q: What has been the investment impact of the dollar- peso rate and the presence of Fibras?

A: The strong dollar is a relatively new phenomenon that has been accentuated in the past six months. The growth of the Mexican pension fund market, on the other hand, has had a major impact. Twenty years ago pension funds did not exist in Mexico, since most of the funding for infrastructure came from corporations, local investors, foreign capital and even families. A few years ago, the pension funds were allowed to invest a portion of their assets into real estate securities that traded on the Mexican Stock Exchange (BMV). Suddenly, Mexico had a capital pool denominated in pesos, unaffected by the foreign exchange rate, and that capital created a US$10 billion Fibra market. Contributing assets to a Fibra also has tax advantages for property owners. Payment of income tax is postponed until the shares are sold, while capital appreciation takes place from the day the assets are transferred to the Fibra to the moment they are sold, creating liquidity. The marginal tax rate that applies is about 10 percent. Another benefit is the facilitated inheritance of assets.

Foreigners also are keeping interest high. German investors, for example, purchased many of Mexico City’s premium office buildings, which at the time were attractively priced. The ensuing significant appreciation, cash flows and cap rate compression have all contributed to an attractive return on investment (ROI) for the German funds. As such, foreign investors want to continue investing in Mexico, especially after the scrapping of the Single Rate Business Tax (IETU) and the subsequent increase in market liquidity.

Q: What will drive demand for office space in Mexico City?

A: There is a strong appetite for office space in strategic locations. Twenty years ago, financing could demand 15 percent, whereas today there are loans for 4 percent, which has had a huge impact on the ability to deliver lower rents when leveraging a property. Developers no longer seek high returns since the competition for land and capital influx is too large, leaving land prices as the only variable. Mexico City still has land prices that are well below other major international cities but it is one of the world’s largest, most dynamic and complex urban centers. The projection is that land prices and the value of real estate will continue to rise at a higher rate than inflation. In 20-30 years, the number of high-rise buildings will inevitably increase and the number of detached homes will decrease to become more like Manhattan or Hong Kong.

Q: What are your priorities for the short and medium term?

A: The depreciation of the Mexican peso means both trouble for certain areas and significant opportunities. There are certain properties in Mexico that are dollarized, which are faring much better than those denominated in pesos. If a Mexico City office building is leased in dollars and an attractive shopping center is leased in pesos, the former would be worth about 30 percent more.

Q: What trends have influenced the growing demand for office space in Mexico?

A: The market for Mexican offices constitutes about 5 million square meters, of which almost all was built in the past 20 years with approximately 1.5 million square meters under construction. The office space is concentrated in Monterrey, Mexico City and Guadalajara. The expansion of several sectors, the fact that many older office spaces have become obsolete and population growth have contributed to demand in recent years. Mexico has seen steady growth in certain industries, particularly those involved in exports such as the automotive industry. Exports have been rising at a rate of around 10 percent a year for a number of years and therefore have increased the demand for office and industrial space. We at JLL expect this growth to continue.