The $163 billion California Public Employees’ Retirement System has made some far-flung investments over the years. But until this spring the biggest U.S. pension fund had never put a dime into real estate in Mexico. Then in April it committed $50 million to a joint venture with Corporación Inmobiliaria Vesta, a Mexico Citybased owner and developer of industrial properties. The deal gave CalPERS a stake in an 18-building, 1.63 million-square-foot portfolio in six cities, valued at $150 million. Among the tenants: BMW Group, Georgia-Pacific Corp. and Hitachi.
Just two months later the pension fund joined a consortium buying a $300 million, 5.6 million-square-foot package of mostly industrial assets from G. Acción, Mexico’s only publicly traded commercial real estate company.
More and more foreign investors are acquiring Mexican commercial real estate, among them Samuel Zell’s Chicago operation, Equity International Properties; Aurora, Coloradobased industrial real estate investment trust ProLogis; and British Columbia Investment Management Corp., headquartered in Victoria.
Foreign investors are moving into Mexico’s residential market as well. In the summer of 2003, Parsippany, New Jerseybased Prudential Real Estate Investors entered a joint venture with Mexico City’s Corporación Geo to acquire land for future housing development. In addition to the $25 million contributed to the venture by PREI and Mexican investors, CalPERS just this August committed $150 million. So far the partners have invested in projects that will build about 40,000 apartment units and single-family homes.
“Institutional investors now have the confidence to place substantial bets in Mexico,” says Mark Cover, senior vice president in charge of Mexico for Houston-based developer Hines, which has invested in Mexican real estate since 1975. In June, Hines began developing Parque Logistico, a San Luis Potosí industrial park, with Mexican partner Grupo Valoran.
Why the rise in investor confidence? Credit first the increase in U.S.-Mexican commerce that followed the 1994 North American Free Trade Agreement, as well as the economic reforms of the administration of President Vicente Fox, which have sparked economic growth. Also, value is relatively hard to find in class-A, fully leased commercial U.S. real estate or in many overheated U.S. residential markets.
“Systemic changes have been made to make institutional investors a bit more comfortable going down to Mexico,” says CalPERS portfolio manager Jose McNeill. “But what really helped push us was the falling yields on domestic real estate.”
Significantly, too, real estate financing is becoming more accessible now that Mexico has a nascent mortgage-backed-securities market. In addition, the country enacted legislation for REIT-like structures in late 2003, and market observers expect to see the first such entities launched by mid-2005.
In Mexico’s major manufacturing and distribution centers, such as Monterrey and Mexico City, an increasing number of foreign corporate tenants in industrial buildings are signing dollar-denominated leases. That gives the market an added boost, since many large foreign lenders feel more comfortable with dollar leases and are therefore more likely to extend loans to local developers. Says Amy Erixon, director of Mexican operations for Chicago-based LaSalle Investment Management, “It has opened up for the Mexican development community debt financing that hadn’t previously been available.”
