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Investing in Mexican Real Estate: An Investors’ Perspective

4 MIN READSeptember 04, 2020
Is it a good moment to invest in the Mexican real estate market? This question has become more intricate to answer as the country fights to balance the COVID pandemic in one hand and the economy in the other. 
 
GRI Club Mexico members gathered to discuss the good, bad and ugly about investing in Mexican real estate at the moment and what are the main opportunities and challenges that lie ahead for the industry. For most investors, both national and international, Mexico’s economic and political risks are impacting investor trust the most. 
 
Although there are challenges, investors believe Mexico continues to be a country of opportunities and that the industry must come together as one to beat this crisis. International investors want to continue investing in the real estate industry, nevertheless the asset classes will change a bit with the pandemic. Real estate is a long term business, it is a question of waiting it out and following the changes. 

Investors’ Main Concern: Mexico’s Political Risk

Before the pandemic, Mexico’s economy began slowing down with a -0.1% GDP growth in 2019. Once the crisis hit, the economy continued to plummet each quarter and there is no clear answer as to how much it will fall this year. There are some projections from government entities that are at around -6% while others like IMF estimate Mexico to end 2020 with a -10.5% GDP growth. Combined with the evergoing uncertainty regarding how long the quarantine and pandemic will last, inverters have grown more cautious. GRI members believe that COVID-19 has hindered even more Mexico’s economic growth and at the same time accelerated many trends, reducing investor confidence all together. Banxico has been lowering rates to 5%  in the last years, but what is lacking is fiscal support from government entities. Mexico needs help for SMEs and a stronger coordination between government entities. 
 
Investors are worried that these factors, coupled with insecurity issues make it even more difficult to have a medium and long-term vision. With the COVID-19 crisis, there is some knowledge of its causes, ways to stop propagation and where the situation is headed, while the country’s political risk is something that is constantly changing and that one has to work with on a daily basis. Members have seen a lack of coordination among the municipal, state and federal governments in tackling the COVID-19 crisis. 
 
Another concern investors have are the changing consumer trends and understanding which are here to say and which are not. It is key that the industry monitor how consumer behavior is shifting throughout each asset class and that some changes are not permanent. For instance, hotels are still receiving travelers while buffets and spas continue to be used. For the most part, industry leaders expected far more drastic changes in consumer behavior than what is actually happening. 

Is Mexico Starting to See the Light at the End of the Tunnel? 

For most of the members, Mexico has yet to hit the bottom of this crisis and there is still some more stress to come. The real distress will be visible in the 1Q21 when assets are running low on funds to continue operations. 
 
Retail and hospitality are the sectors that face the most challenges head. 
For retail, It is difficult to pinpoint which tenants are the one that will be able to ride out the storm and survive the crisis. For the most part, shopping centers that have grocery and essential goods have performed much better than others. 
 
Hospitality has different motivators and factors that are impacting its ability to overcome the crisis. The first travelers have returned to resorts and luxury hotels, and revenge travel will help the sector recover a bit but depending on how much risk the tourist is willing to take. Hotels will be under great pressure not because of the lack of tourism but because they are operating at low capacities and it is possible many will not reach breakeven points by the end of the year. These assets will require more support from financial institutions as their financial structures have suffered greatly and the restructuring conversations will be quite difficult. In the next few months, investors believe there will be many good opportunities to invest in hospitality assets.

Industrial: Mexico’s Diamond in the Rough

Industrial has proven to be the winner among assets and the most resilient, not only in Mexico but worldwide. Particularly those close to essential products and activities. The industrial asset class has differentiated itself at a valuation and operational level, whetting the appetite of more investors. Industrial assets will continue being attractive and have proven to be a good bet in the medium term. There will be an increase in capital flow into the sector and may even return to what it was before Trump or NAFTA risks. 
 
Nearshoring and TMEC will generate good opportunities to continue expanding this sector in the near future. More and more asian companies are looking to establish operations in Mexico, particularly in the northern border. But investors give a word of caution on choosing the right markets. Mexico’s northern markets, for instance Tijuana, have been thriving, while the internal markets in the Bajio have been greatly affected by insecurity issues. 

Despite the Challenges, Mexican Real Estate Remains Attractive to Investors

Mexico’s balancing act has been hard on the economy, and although it may take some time to recover, investors are still optimistic about Mexico’s real estate market. Members shared that Mexico has always been a country that generates riches and opportunities, but it has always been important to differentiate between the sectors and markets. There is capital in the market and enough dry powder, but the challenge being patience to better understand valuations and the factors that have changed.  
Mixed use is the asset class of the future and it has proven to be resilient against adversity, just like multifamily. Comparing the sector to other sectors such as infrastructure, real estate has always been and will continue to be investors’ safe haven.

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This article is a summary of the last GRI Club Mexico eMeeting: Perspectiva de los inversionistas: ¿Es un buen tiempo para invertir en México? , which took place on August 18. Some of the members that participated in this meeting were: Raul Gallegos (Credit Suisse), Federico Martín del Campo (Walton Street Capital), Jorge Margain (Ivanhoe Cambridge), Juan Gonzalez (7 Bridges), Ricardo Zuñiga (Vertex Real Estate), Enrique Lavin (PGIM), Sergio Arguelles (Finsa) and Luis Gutierrez (Prologis)
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