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The Wall Street Journal: “Big Investors Call: Buy Mexico”

U.S. Investors Go South, Seek Safe Place for Cash in Real Estate

Mexico City
By Joel Millman

War Anxieties abroad, sluggish returns at home and Mexico’s recent recognition as investment-grade by all three major U.S. credit-rating agencies are behind the surge of U.S. institutional cash seeking a haven in Mexican real estate. According to industry analysts in both countries, more than $1 billion has washed into Mexico from U.S. institutional investors over the past eight months, and a lot more is on the way.

The Torre Mayor, a $250 million office tower built by Canada’s Reichman clan, is about to open just west of the Polanco-Palmas district. Latin America’s tallest office building at 55 stories, about a fourth of its 850,000 square feet has already been leased to Deloitte & Touche LLC. Other top players include the leasing arm of GE Capital and top real-estate investment trust like San Francisco’s AMB Property Corp. and Denver’s Prologis, have quietly built portfolios totaling billions in loads and equity holdings. GE Mexico, with $1.3 billion in the market, is now the biggest player in local real estate. "We’re still in the early innings in Mexico," says Gary Garrabrant of Chicago-based Equity International Properties, part of the Sam Zell family of real-estate operators. The privately held Equity International Properties unit various Mexican ventures since 2001, investing $75 million with Spain’s NH Hoteles in a chain of business-oriented hotels, acquiring a $30 million stake in Desarrolladora Homex, a builder of low-cost housing, and putting another $100 million into a joint venture called Corporate Properties of the Americas with Denver-based Black Creek Capital to develop industrial parks.

1. This week, Corporate Properties of the Americans closed a sale of a $300 million equity position to the Washington State Investment Board, the first U.S. public employees fund to invest directly in Mexican real estate.

With concern that a U.S. real-estate bubble may be moving toward its bursting point, investing south of the border may seem unnecessarily risky to some. Yet developers like Black Creek Capital’s Jim Mulvihill See Mexico as a hedge against U.S. volatility. The commercial and industrial real-estate markets are so underdeveloped in Mexico, Mr. Mulvihill says, "you can still buy quality. In the U.S., all the quality deals are gone."

The kinds of deals his company is structuring are tailor made for U.S. institutional investors, the developer explains, because they’re dollar-denominated and, in the case of industrial parks, guaranteed by the prime tenant. Even during the recent slowdown, with many electronics manufacturers-decamping to lower-cost sites in Asia, rents are paid in full. "Companies take a write-down," Mr. Mulvhill says, but his revenue stream remains uninterrupted.

Something for Title Insurers

Another attraction: U.S. title insurers can now operate in Mexico, and tenants feel confident that leases and construction contracts signed south of the border are enforceable under Mexican civil law. Compared with China, where private land ownership is still a controversial concept in some circles, investing even in a cooling Mexican manufacturing sector offers a return adequately balanced with risk. U.S. institutions are earning premiums of as much as 5% over similar real-estate investments at home, developers say.

In addition to its industrial real-estate partnership with the Zell group, Black Creek Capital has a second Mexico operation, Mexico Retail Partners that develops sites for American "big box" retailers like Wal-Mart Stores Inc., Costco Wholesale Corp. and Home Depot Inc. Black Creek expects to open as many as 10 Home Depot stores a year in Mexico, as the Atlanta based retailer increases its presence south of the border.

With each new project representing a $50 million transaction, Black Creek will complete upward of $500 million in contracts in each of the next three years, the company’s chairman says, and will seek additional capital from U.S. institutions this year.

Hines, and international real-estate firm, is also raising capital to increase its activity in Mexico. Two real-estate funds launched by the Houston firm in the mid-1990s dedicated to emerging markets now have about 30% of their assets in Mexico, or about $200 million, raised mainly from insurance companies and private investment pools. A third fund, with assets of around $400 million, is being contemplated for later this year.

Last week Hines chased out on investments the company mad in 1997, selling the Torredel Angel office tower on Mexico City’s Paseo de la Reforma and two industrial parks in Queretaro and Guadalajara. The package, a total of $110 million, represented the largest commercial real-estate transaction ever completed in Mexico. The proceeds will likely be rolled into Hines’s new fund. Luis Gutierrez, G. Accionâ’s chief executive officer, says the decision last year by Standard & Poor’s to grant an investment grade rating on Mexico’s sovereign debt, two years after both Fitch and Moody’s Investors Service issued similar upgrades, freed a lot of institutions to increase their exposure to Mexico. "of course, the situation in the U.S., with its soft markets and excess liquidity, helps us, too," says Mr. Gutierrez.

The best indicator of real estate’s may be the behavior of high-worth Mexicans, who usually park their money offshore. Local capital is moving back into the market, says Sandor Valner of merchant bank Valor Consultores. His group launched two funds, totaling $100 million, last year to invest in new hotel construction and hotel sale-leasebacks, tapping Mexico City’s country-club set for investors.



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