In Some Segments, Specialization Beats DiversificationWed, 11/01/2017 - 12:41
Property developers often believe diversification is the key to success because it allows them to guard against market instability. Not so, says Roberto Ordorica, Director General of ALIGNMEX, a Mexican real estate fund manager that specializes only in multifamily rental and industrial real estate and only in specific regions of the country.
“We like to invest in sectors we understand well so that we can forecast our CAPEX needs for the long term,” he says. “In terms of revenue, margins on industrial and multifamily developments are among the highest and least volatile.”
ALIGNMEX develops industrial parks through its Parqmex subsidiary and multifamily through SíRenta. In multifamily, ALIGNMEX saw a market opportunity because few institutional investors in Mexico focus on this segment. This means that quality family properties are hard to come by and are often old or built in units. “To attract the attention of Afores, we needed to focus on quality real estate, which was lacking in Mexico,” says Ordorica. “This means that we had to develop the property instead of simply going out and buying it.”
The fund manager raised its first CKD in May 2016, valued at MX$2 billion. It was also the first CKD in the Mexican market to specialize in for-rent properties and the company’s goal is to follow the same path with a Fibra in the next few years. “Our business plan has placed us in a position whereby we can develop 500-1,000 units annually, with the first coming online in August 2018,” says Ordorica. “After that point, we expect to have a new building coming online every three months or so. When we reach around 3,000 units, we will have the size to carry out a public listing and raise the first for-rent Fibra.”
But he stresses that these plans are not set in stone. Rather, ALIGNMEX’s policy is to do what is best for the investor. “Our number one priority as a fiduciary is to provide the best alternative and execution for our investors,” he says. If that means that ALIGNMEX reaches its goal of 3,000 housing units and attracts the attention of a large company that wants to buy the project, the company would be willing to sell instead of raising a Fibra – provided it is in the best interest of investors.
ALIGNMEX’s investor-first policy also plays a role in the sectors the company works in. Traditionally in a CKD, the fund manager decides where the money is invested but Ordorica is adamant that the Afore should have more choice in where its money goes, which is why ALIGNMEX chooses to only work within two sectors. “We believe that when a company specializes in one or two areas, it gets better at it,” he says. “One fund with a hotel in Los Cabos, a residential development in Monterrey and an industrial park in the Bajio is not going to be able to do industrial as well as we do.” This strategy helps ALIGNMEX create more value, Ordorica says.
Its local presence and global mindset is another value-add, says Ordorica. The company partners with Pritzker Realty Group, a Chicago-based real estate investment group with over 90 years of experience working all over the world. Penny Pritzker, the company’s Founder and Chairwoman and the former US Secretary of Commerce, is also a registered ALIGNMEX partner. “This is extremely important because she can provide extensive global knowledge and ALIGNMEX can apply that locally.”
But while ALIGNMEX partners with Pritzker Realty Group, Ordorica stresses that his company has made it a policy not to enter into joint ventures and instead operates as a verticallyintegrated company. “We take care of the entire chain of requirements, from sourcing land, purchasing, developing and operating the buildings,” he says. “With JVs, it is very easy to experience cost overruns. We mitigate that risk by taking 100 percent responsibility for our expenses.” ALIGNMEX does not depend on any JV partner to provide its pipeline, meaning it has much more control over operations and timelines. “This model is also beneficial for the end-user since it is in our best interests to build a quality development that will reduce maintenance costs over the building’s lifecycle,” says Ordorica.
ALIGNMEX chose to participate in the for-rent segment because it was so complementary to its other sector of choice – industrial. The fund formed subsidiary PARQMEX in May 2015 with a “strategy to focus on markets that have high barriers to entry, proximity to a large demographic base and/ or access to major distribution hubs.”
While multifamily is peso-denominated, industrial development is often dollar-denominated, meaning exchangerate fluctuations have little effect on ALIGNMEX’s business model. Moreover, both sectors are engines of economic growth, with industrial plugging into the manufacturing hubs created by the automotive and aerospace industries and multifamily focusing on consumption, labor growth and other economic drivers.
Although many believe the best way to capitalize on consumption is through the retail segment, Ordorica disagrees. “In the Amazon era of increased e-commerce, we find it more dynamic to be present in distribution,” he says. “I would rather own Liverpool’s distribution center rather than build a shopping center with Liverpool as a tenant.” As long-term investors, ALIGNMEX focuses on long-term trends and Ordorica predicts that those trends favor industrial over retail. He admits that in industrial, a company can go from 100 percent occupancy to 0 percent with the loss of just one client but he maintains that this sector is much more predictable nonetheless. This occupancy issue in industrial is diametrically opposed to the situation in multifamily forrent. Ordorica uses the example of an office building or a shopping center, where a tenant leaves and the amount of CAPEX required to compensate is significant, especially since office buildings often require a complete refurbishment when a new client moves in. “Multifamily is much more fragmented and if a tenant leaves, this equates to 120m2 or less,” he says. “The amount of CAPEX required in these other property types is much more significant and complex than that required in multifamily and even in industrial.”
Even though the multifamily sector has not yet gained traction among fund developers, Ordorica dismisses the notion that ALIGNMEX is a pioneer and stresses that the segment is already very much a reality. It simply has yet to be institutionalized. “The difference between our company and others is that we are extremely well-capitalized,” he says. “Even when we raised the CKD, we did not really require the capital but it allowed us the opportunity to grow in a faster way.” Regardless, he says that ALIGNMEX would have invested in multifamily with or without the aid of the financial tool. In fact, the company carried out its first three projects using 100 percent equity but now the use of leverage and financing allows it to see the results more quickly.
In a country where 30 percent of the population rents, Ordorica does not see multifamily decreasing in importance anytime soon. But the opportunity still remains to formalize this experience since the majority still rents from an individual. He believes the issues that often arise in these situations and the lack of complementary services will eventually drive tenants into the arms of more institutional rental agents like ALIGNMEX.
Fortunately, the government is also starting to recognize the significance of this market segment, which is largely countering the reluctance of commercial banks to finance these projects. “The banking system in Mexico has little experience in underwriting the for-rent segment so it does not have information on CAPEX, default rate, re-rent timeframe or other important variables,” says Ordorica. “The Mexican government has now recognized that forrent is something the country needs.” The Federal Mortgage Society (SHF), Infonavit and Fovissste are all now starting to provide the first financing and loan tools that allow development in the same way as in many other parts of the world. “Ultimately, we all need a place to live,” says Ordorica. “This is a basic requirement and now the government is starting to recognize the opportunities here.”