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Roundtable

What Best Practices Can Projects Use to Reduce Financial Risks?

Wed, 11/01/2017 - 10:47

One of the biggest challenges all developers and construction companies face is turning in projects on time and on budget. Companies need to prove project viability to investors, funds and banks as well as their ability to complete deadline goals. As Mexico continues to attract more international companies, competition in the market will become more challenging. To rise above competitors, companies in the sector need to incorporate international best practices into their financial models to prove their added value. Mexico Infrastructure & Sustainability Review asked a wide range of experts what they are doing to hold projects to high standards when making investment decisions.

Enrique Villanueva

Development Director
Pulso Inmobiliario

Obtaining a loan for office spaces is difficult because there is no guarantee that it will work. It is not like a hotel where there is an operations contract or a shopping center where it has anchor stores to guarantee returns. Banks prefer to provide loans when the developer is about to finish or has already finished construction, assuming less risk. For the New York Life building, we first secured a lease contract with New York Life to provide Santander the guarantee it needed to give us the loan. Our latest projects are now funded through three to four partners, which are family businesses that have been investing with us for years, while 40-60 percent of the investment comes through bank loans. We have developed a strong relationship with all commercial banks in Mexico, making it a lot easier to obtain loans. We use two to three syndicate loans for each project.

María Ariza

María Ariza

Director General
AMEXCAP

Internal Rates of Return (IRR) make infrastructure projects particularly time sensitive, which underlines the need to develop projects that are planned well enough to receive funding. The private equity market prioritizes projects that can deploy capital quickly. Projects need to advance at a faster rate and with the support of the government to better take advantage of the assets that are being developed. Financial tools are important because they allow private capital institutions and investors to diversify their portfolios. Mexico has around 71 CKDs that are worth US$19 billion, of which 18 are focused on infrastructure and have a capital commitment of US$6.6 billion. Other new tools like CerPIs are public vehicles that follow high standards and international best practices, such as allowing project managers to be part of the decision-making process.

Juan Manuel Valle

Juan Manuel Valle

Director General
Afore XXI Banorte

Infrastructure projects are the perfect match for pension funds. It is natural that Afores want to participate more in these types of projects. Afore XXI Banorte has put together one of the strongest investment teams in the country that focuses on alternative investments with sound corporate governance and processes. We have been putting together a benchmark portfolio that reflects our strengths. Managers have been more prompt to invest in real estate than infrastructure in general, possibly because real estate projects are completed much more quickly. In infrastructure, there are projects with a longer “J” curve, where we have yet to see results, whereas in real estate, we are already receiving flows. As an example, we are a significant investor in Red Compartida, a project that will provide Mexico with over 90 percent of coverage in mobile and data service at speeds of 700MHz.

Marcelo Rodríguez

Marcelo Rodríguez

Director General
Grupo Proyecta

We have developed closer relationships with banking institutions to analyze various sales structures, such as trusts, to offer new solutions to our clients. We now have a partnership with BBVA Bancomer whereby the bank will provide our clients a preferential rate called Tasa Lomas. Having this preferential rate could highly increase sales at our developments and helps the company finance its future projects through presales. We are also developing a product for new graduates above the age of 22. This product will have lower monthly fees and provide a stepping stone to owning their first real-estate asset. The products we develop are all sold during the presale period of the project and that income is reinvested in new developments. To this day, none of our developments have required bridge loans and no partner has had to invest further for the development of supporting infrastructure.

Francisco Martín del Campo

Francisco Martín del Campo

Founder and Director General
Arquitectoma

If the project is only a few hours away by highway, we tend to build the project ourselves. Outside of Mexico City, we use local allies to facilitate access to water and electricity, among other factors. In Puebla, Grupo Proyecta helped us quickly schedule meetings with CFE to guarantee power in our projects. It makes the process quicker and smoother. We also helped Proyecta by offering our expertise on vertical construction in Lomas de Angelopolis for its first vertical projects. It gave us a percentage of the value of the land and we found additional partners to finance the rest of the project, along with other financial tools like CKDs. We also have two JVs—one with Walton Street Capital and another with Prudential—that provide us enough capital to finance our projects. Walton Street Capital is known for not only financing projects but also developing.

Juan Leautaud

Juan Leautaud

Managing Director
BlackRock

All investors like to see predictability and that translates to contract structures that offer certainty in terms of the scope of activities to be performed and the risk allocation between the parties involved. The health sector and contracts with IMSS and ISSSTE are no exception to this. A clear division of responsibilities regarding the acquisition of land, permitting of that land all the way through to the operation of a hospital, for example, need to be defined from the outset. Today, we operate a PPP hospital in the municipality of Zumpango, State of Mexico. This is a 126-bed high-specialty hospital and we have been fortunate that our hospital performs on par with some of the best institutions in the world. That is the mark of a truly successful PPP. The government provides the staff and we provide the facilities.

Rodrigo Assam

Rodrigo Assam

Director of Financial Planning and Investor Relations
GICSA

We use a financial model that consists of our own capital, debt, partners and investors from the stock exchange that changes for every project. Some require more assistance from our investors but we strive to finance most of our projects. We have a property in Coapa that we are developing, of which we own 75 percent through a combination of capital and debt. Our limit is 40 percent of debt per project, which is quite reasonable in comparison to the rest of the industry. When it comes to the stock exchange, our projects are an attractive alternative to Fibras. We have the benefit of being a fully integrated company as we have the capacity of managing and developing our own projects. This helps us retain more profit. Being part of the stock exchange is a big achievement for us as we have a unique business model; we have already successfully raised debt twice so the market recognizes our growth and innovation.