Opportunity Knocks in the Corporate Office RealmTue, 11/01/2016 - 13:31
Q: What is the makeup of Fibra Mty’s portfolio and what challenges are inherent in the deals the company makes?
A: Fibra Mty focuses on corporate real estate rather than commercial real estate. The Mexican portfolios of institutional investors consist of industrial properties that have been developed and stabilized, which is why we have seen a lot of acquisitions through vehicles like Fibras, CKDs and private equity funds. Our portfolio is comprised of mostly corporate offices, primarily located in the biggest markets in Mexico, which are Mexico City, Guadalajara and Monterrey. One of the main drivers and challenges in these types of transactions is the fiscal impact each will have. Institutional investors, especially pension funds, are inclined to invest in industrial portfolios with international tenants, long-term lease contracts and triple net-leasing structures.
Q: Why are companies more inclined to invest in industrial instead of office portfolios in Mexico?
A: Given their tax exemption status, they are eager to sell their stabilized assets to recycle capital through new developments. Most of the office buildings in Mexico are privately owned, they are more than seven years old and have high depreciation rates so there are greater fiscal gains in the event of a possible transaction. This would allow private owners to incur large capital gains for tax purposes, which complicates a Fibra’s ability to attract many sellers. Nevertheless, the Fibra regulation has certain fiscal benefits whereby if a portfolio is paid out with Real Estate Stock Trust Certificates (CBFIs), the private investors can defer their tax gains until they sell their CBFIs. Few players specialize in corporate offices, which is why we see this as an attractive opportunity. Managing a multitenant building has its complexities but we had many years of experience before going public. Tenants not only search for Class A buildings but also for experienced institutional asset and property managers like Fibra Mty.
Q: What edge does Fibra Mty have that interests investors?
A: We are a dividend play vehicle, which requires predictable cash flows. Development projects are well suited to CKDs and when the assets are stabilized, Fibras can step in and buy these assets. Fibra Mty was the first internally managed vehicle in Mexico with no controlling party and a no-fee structure. Our corporate governance is transparent and the management company is owned by our trust, giving us a completely aligned vehicle between managers and stock holders. For Fibra Mty it is important to be a profitable and predictable asset company. Institutional investors are looking for predictable cash flows and alignment of interest. We do not charge any fees when buying an asset, whereas most Fibras charge for acquisition and asset management, so this means their interests in providing benefits to shareholders are not completely aligned.
Q: Why is Monterrey attractive and what are the main opportunities in the city?
A: Monterrey is a small market compared to Mexico City, with only 1.2 million m2 of office space, compared to the 5-6 million m2 in Mexico City. Vacancy rates in Monterrey are around 20 percent, in Guadalajara they are around 4 percent and in Mexico City around 14 percent. Absorption is a big issue in every market and the rate in Monterrey is around 70,000-80,000m2 per year so by 2019 vacancies will be between 6-8 percent. There are mainly service and manufacturing companies coming to Monterrey and in the last 10 years the city has attracted several banks and major law firms as regional corporate offices demand between 3,000-6,000m2. There has been a lot of office space development for companies with manufacturing capabilities like KIA, which has recently built a sizeable facility near the airport. The NAFTA corridor and Bajio are our core business growth markets. Prime cities such as Mexico City, Monterrey and Guadalajara will see sizeable Class A activity in office space but we also have begun to see some activity in secondary markets such as Leon, Tijuana, Queretaro and San Luis Potosi, although with smaller space demands. We have a strong growth forecast for the northern region, supported by intensive investments from the automotive, aerospace and technology industries. The southeast region is not our core market as it is more geared toward retail rather than corporate real estate.
Q: What innovations or concepts are permeating corporate real estate properties?
A: Mixed-use spaces are in high demand in Mexico and we have seen an increase in these development concepts. Communities that integrate services the way campuses do have not caught on in Mexico as much as we would like to see. However, in Monterrey, three office corridors have emerged – Santa Maria, Campestre and Valle Poniente. Local developers are coordinating to measure how their developments can co-exist as a community. Some of these corridors are linked by paths that contain facilities like hospitals, vertical and horizontal housing, retail facilities and schools and this has been done through coordination and planning to become urban centers. These kinds of developments can be carried out in secondary cities that have interesting growth forecasts, such as Queretaro, Leon, San Luis Potosi, Chihuahua and Saltillo, and that still have a lot of available space for sustainable urban development in the long run.
Q: What opportunities exist in residential developments?
A: This is probably the biggest asset class in the REIT market in the US and there are opportunities in Mexico for the multifamily rent business. There are still several challenges to overcome here regarding legal issues that give tenants imbalanced protection compared to that of the landlord. On the other hand we have seen tremendous activity in the development of apartments, a market where many new institutional players are entering with the clear intention of developing and immediately selling those portfolios, rather than using them as a vehicle to gather rent.
Q: What role do you want to play in the market in the longer term?
A: We want to become a benchmark in the Fibra market in terms of transparency, alignment of interests between managers and stockholders and delivery. We believe there should be more than 10 Fibras in the market. There is space for twice the size of our actual industry market cap of US$20 billion but we need a willingness from new sponsors and managers to adapt to international standards. These standards will encourage local and international institutional investors to invest their excess cash in these types of investment vehicles. We foresee Fibra Mty being the most predictable cash-flow investment vehicle with a world-class corporate governance structure.