REITs: how to replicate the Mexican success in other countries?
The consolidated American model for investments in the real estate industry by means of Real Estate Investment Trusts (REITs) arrived in Latin America just over ten years ago, tropicalized in the so-called Fundos de Investimento Imobiliário (FIIs) in Brazil, and in the Fideicomisos de Inversión en Bienes Raíces (Fibras) in other countries of the region.
The reality, however, is still disparate among Latin Americans. Although the model first appeared on the Brazilian market, where it is mainly individuals who invest in these funds, Mexico took the lead with a more consolidated instrument that is more attractive to institutional investors.
The Mexican success
Supported by the 1932 Ley General de Títulos y Operaciones de Crédito act, the Fibras only went on to be listed on the Mexican Stock Exchange in 2011. This late arrival, however, did not keep them from moving forward.
Similar to the American model and launched in 2014, the MTY Fibra was the first medium with 100% internal management. "We did not invent anything new, we only incorporated the best practices adopted in countries that have already developed themselves on this market, like the United States,” explains CEO Jorge Ávalos.
"From that issuing on, all the later ones had the same structure, which enables Mexico to turn into a more corporate market, attractive to segments that have resources to invest – which is the case of pension funds in many countries – that require this type of alignment, transparency, and corporate governance,” says the executive.
Ávalos says that such standardized structuring, and with an internal staff as well, affords investors more profitability, since they are not charged any type of commission related to operating the business.
In fact, the Monterrey trust recently achieved historic results. On February 20, it reported a 14.4% increase in Net Operating Income (NOI) during the last quarter of 2018 when compared to the same period of the previous year, closing at 225.3 million Mexican pesos, up from 197 million Mexican pesos. The trust’s portfolio ended the year with 55 properties and a 97% occupancy rate.
“The year 2018 was outstanding. We completed the most relevant purchase of our portfolio, both in location and tenant quality [Whirlpool], with a ten-year lease,” recalls Ávalos. He also believes that “this is an important milestone for the Fibra MTY and for Mexico. By having such a renowned international company signing a ten-year contract, as is the case, Whirlpool signals that it is determined to invest in the country.”
Progress and institutionalization in the region
Asked about the Latin American market’s potential and about how to replicate the Mexican success in other nations, the executive believes significant progress has been made in the region, especially the associations dedicated specifically to this market, with an educational role for investors.
“These associations are carrying out more and more coordinated actions with public administrations and regulatory agencies, they monitor the financial allocation themes, they explain to investors what our product is, see the homologation of reporting the financial information from the real estate point of view, and pursue the best practices in terms of corporate governance structure and transparency. Many countries, such as Mexico, Argentina and Brazil, are slowly copying the best REIT practices,” says Ávalos.
In this scenario, he acknowledges that investments in Mexico are still minor compared to the issuing volume in the United States. “As we adopt such practices in Mexico itself or in other Latin American nations, this market is expected to grow much faster,” he says, mentioning that public participation in the US only increased in the 1990s.
“Today, REITs have a capitalization value of $1 trillion, in other words, the GDP of Mexico. That represents about 5% of the US GDP,” he points out.
Progress in Brazil and other countries
The pursuit of progress in Brazil is one of the focuses of the FII industry. Despite the fact that Brazilian regulations date back to 1993 (Act No. 8668), this type of contribution only gained momentum from the 2000s. The development and consolidation of this market has gained a prominent place in the GRI Club Real Estate agenda, and it has structured a special committee to address the evolution of the FIIs and, since last year, has events dedicated to increasing knowledge on the theme in its annual calendar.
Based on the meetings held in 2018, the club produced a white paper with recommendations for the evolution of the sector. The document was prepared in partnership with the Veirano Advogados law firm and features a series of recommendations for the evolution of the segment.
“We realize that there is great potential for this market. Mexico and Brazil are already ahead, seeking to consolidate and expand their stakes in attracting corporate investors. We have also noticed developments in smaller economies, such as Peru, which structured its first Fibras last year. In our contacts with the main real estate industry players, the scenario and prospects for the year are interesting,” says Leonardo Di Mauro, head of GRI Club Real Estate for Latin America.
Countries such as Argentina, Chile, Colombia, and Peru have recently joined this market, since capital market regulations were approved. In Chile, for example, the first Fibra was approved last September for an amount of $500 million.
2019 Latin America GRI
On March 27 and 28, Jorge Ávalos and other important players working out of this market will meet to analyze the progress that needs to be made in the region, the challenges, and the opportunities for investing in real estate funds.
The GRI Latin America 2019 will take place at the Roosevelt Hotel New York and will be attended by about 400 Latin American leaders who already invest or intend to invest in countries of the region.