Alejandro Rodríguez
Investment Director at Credit Suisse Asset Management

Mortgage Rate to Transform Real Estate

Thu, 11/01/2018 - 15:42

Fibras and CKDs have boosted real estate development across Mexico and have institutionalized the market. But it is time to make way for a new type of vehicle that until now has only existed in more sophisticated markets: the Mortgage REIT or Fibra Hipotecaria. Credit Suisse issued the first CKD on the BMV and is now looking to make history once again by issuing the first Mortgage REIT.
“The current real estate vehicles on the BMV are dedicated to funding equity,” says Alejandro Rodríguez, Director of Investment at Credit Suisse Asset Management. “Our intention is to convert our real estate financing CKDs into a Mortgage REIT in the next three years. The main benefit is that instead of having a CKD with a three-year investment period and a 10-year lifetime, we will create a permanent capital vehicle.” Credit Suisse launched its first debt CKD in the market in 2012 and then the second in 2015: both high-yield general credits that were not specifically for real estate.
In the last few years, Fibras have raised and invested a significant amount of money in the country, as one of the preferred asset classes for local and foreign investors. What differentiates a traditional Fibra and mortgage Fibra is the way returns are distributed. “The main difference between a Fibra and a mortgage Fibra is that Fibras own the properties and then distribute the product of the rent to investors,” explains Rodríguez. “A mortgage Fibra, on the other hand, lends the income-generating assets and then distributes the product of the interest on the mortgage itself.”
To convert into a mortgage Fibra, the manager must first originate the loans needed to distribute the corresponding interest. “We began by issuing our CKDs, allowing us to make the capital calls necessary to construct a portfolio of loans in an orderly fashion,” says Rodríguez. To continue with its plans to issue the first mortgage Fibra, Credit Suisse has been developing its portfolios to match the requirements of its future yields. “In our third CKD, we created an adjacent strategy to both CKDs that made us the largest credit fund manager in Mexico,” he says. “Both CKDs managed to raise approximately US$1.25 billion. With the RE CKD we raised close to MX$6.5 billion.”
The first institutional investor that entered the Mexican market was GE Capital, which was the top player for many years. It was not until the 2000s that the country became investment grade and more funds began pouring their resources into real estate. “Many began developing in Mexico through global funds,” Rodríguez says. “Funds such as Prudential, Blackcreek and Walton entered the market and began developing institutional-class assets and once the banks regained strength after the crisis, they also began lending once again.”
When the 2008 crisis hit Mexico’s markets, global funds were stuck with illiquid assets and quickly began pulling out their investments in Mexico. This is when the local market jumped in and issued the first CKD in 2009. “This CKD was not destined for real estate but it was used to pull resources from Afores that remained healthy after the crisis,” says Rodríguez. Because CKDs are closed-ended funds with finite lifespans, the market began exploring new vehicles that fulfilled the permanent capital needs of real estate.
This need led to changes in the country’s regulatory framework that gave life to Fibras. These instruments allowed public investment through the BMV and were a huge milestone for the real estate sector. Yet most of the funds that were being injected into the sector were in the form of equity. Rodríguez explains that the leverage in the sector in comparison to international standards was rather low and that the penetration of debt into the asset class was modest. “In Mexico, the total debt in commercial real estate is around US$25 billion while in the US it exceeds US$3 trillion,” he says. “The way Mexico finances its real estate developments is still in a premature stage and must continue to incorporate banks, life companies, capital markets, specialized funds and Mortgage REITs to reach its full potential. Credit Suisse RE’s debt fund is a new step in a natural evolution toward a developed market.”