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Edgar Maldonado, CFO Acosta Verde - Building on Real Estate Growth

Mexico’s Real Estate Sector is on the rise. Edgar Rene Maldonado de los Reyes, Chief Financial Officer at Acosta Verde discusses what factors have enabled the sector’s growth and which external factors could cause clouds to form on the horizon.

Sep 8, 2016 // 4:41PM

How does the growth potential look for the real estate sector in both the short and long term?

The real estate sector looks strong for 2016. For 2017 onwards the outlook for the sector is less certain, especially following Brexit. There is still a lot of uncertainty surrounding what will happen in Europe after the vote, the eventual outcome of which could impact the Mexican economy.

Brexit aside however, the forecast is looking good. Department and grocery stores have reported extraordinary growth over the last 24 months, and this growth in consumption across Mexico has been very positive for the commercial real estate sector.

Growth, especially within same store sales, has made commercial businesses more eager to open an increasing number of stores across the country.

The sector has a lot of potential. The outlook of developers and to a certain degree banks and institutional lenders has remained relatively positive across the sector and as a result, commercial real estate companies are still able to acquire funding.

However, commercial gross leasable areas (GLAs) in Mexico are still low compared to the US or to other Latin American countries such as Brazil. Lease prices per square metre for commercial centres are still relatively low despite the size of the Mexican economy.

What factors would cause an increase or slowdown in the sector?

It is important to understand that even though the Mexican economy has a low rate of growth, at less than 3%, this growth is not spread evenly across the whole country. The country is divided into different areas with different growth rates.

The south of the country faces low growth of less than 1% or 2%, and certain areas are even experiencing negative growth in some instances.

However, in the major cities and in the north of the country growth is nearing double digits. This is where a large amount of real estate development is focussed.

Growth in the sector could slow if uncertainties in the global markets, caused by events such as Brexit or the effects of a Chinese economic slowdown persist. As a result, the level of financing in the industry could slow down, slowing the sector’s growth.

Internal factors are not expected to impact the growth prospects of the real estate sector. Although there are domestic tensions, especially in the southern states, they are unlikely to impact the wider economy. The impact of external factors on the country’s economy, which could cause a slowdown in the real estate sector are our main concern at this point.

How has construction growth affected the real estate sector in Mexico?

The construction sector is growing hand in hand with the real estate sector. Although infrastructure growth is slowing slightly, and has seen plans cancelled or deferred, the real estate sector has been unaffected.

The decline in oil prices is mainly to blame for this slowdown, as although oil is not as vital to the Mexican economy as it has been in the past, it is still an important driver.

What factors could make it difficult to acquire financing for real estate projects in the future?

Fears in the global economy could lead to a decline in funding for the sector. Both local and international lenders could decrease their risk portfolios, which would cause a slowdown in the financing market. 

Pension funds, or afores, in Mexico are relatively young compared with developed countries. They have only been active since the late 1990s, and their criteria for investing in the economy are still evolving, however they are more open to investing than other lenders.

Many funds from the afores are highly liquid, and are invested in very low rate assets. The afores are now receiving guidance from the central regulator on how to deploy their funds into the economy.

The real estate sector has been privileged in receiving significant funding from the afores, and there is still a lot of money to be invested. However, if the US Fed begins to hike rates and risk aversion sees currency outflows from Mexico, or a shift into safe havens such as dollar-denominated assets, the real estate sector could suffer.

What are the main drivers for the growth of the real estate sector?

There is a lot of growth driving the country’s economy, and despite the fact that growth sits at around 3% many cities and certain states are seeing far higher rates.

The provision of funds from the afores has also contributed to the growth of the real estate sector. REITs, or fibras, which became prominent in late 2011, have also brought a lot of funding into the sector. There is now close to the equivalent of US$20bn in funds in the fibra market in Mexico, which was not present 5 years ago. Such funds are providing an additional layer of financing and investment into the real estate market.

Real estate prices across the offices, industrial and commercial areas of the sector have all risen since the fibras became prominent in Mexico. This has created an appetite amongst investors both for funding new projects and for mature assets.

What are Acosta Verde’s growth plans in the short and long term?

We are currently developing three shopping centres that will open this year and in the second half of the year we will begin developing an additional three shopping centres.

In the long term, the plan for the next three to five years is to develop between four to five shopping centres each year.

Our growth plans are driven by and related to the fact that department stores and other retailers are having great sales successes. They have been storing cash reserves and are eager to open new stores.

For developers such as Acosta Verde, which has high grade assets that are well managed, located and operated, we see many tenants who are eager to expand their operations. We are having great momentum in leasing out shopping centres, which is growing faster than other business models.

What are the company’s funding requirements at present?

Regarding commercial real estate, there are two funding requirements, in the short term for the construction phase, as well as over the longer term. In Mexico both types of financing are still easily available, and both local and international banks are still eager to lend to the sector for construction funding.

How do peso and dollar funding compare in the real estate sector?

Typically in Mexico a company will turn to dollar funding if its assets have a dollar cash flow. The industrial real estate sector is typically funded in dollars. In the commercial sector only high-end shopping centres and offices are dollar funded, and the majority of the real estate sector is funded in pesos.

There are certain windows in which it is possible to acquire cheap funding in dollars for companies with peso cash flows, and there are possibilities to accommodate a derivative or a hedge but with current market volatility it is not cost efficient. Acosta Verde is more inclined to access peso funding as the company’s assets provide peso cash flows.

What advice would you have for anyone in the real estate sector looking to borrow in the current climate?

In the current climate, it is important to find a business model with a base and conservative scenario which includes a sensitivity analysis of economic uncertainty. Cash flow projections should undergo stress scenarios that can cover a company’s financing needs.

There is also a need to make sure the company will not face a liquidity crisis. Although this is ‘finance 1.01’, it is even more important with current market volatility, and assumptions used in the conservative and stress scenarios need to be considered carefully.

How does activity in the US impact the real estate sector in Mexico?

There is a strong economic connection between the US and Mexico and their economies are very closely linked. Although there are factors in the US that could affect the real estate sector in Mexico, it is still too early to measure the impact.

In the US, many shopping centres and assets within the country’s real estate sector are struggling, and there is a lot of debt linked to these centres that will need to be refinanced over the next couple of years.

The expectation is that this will be a challenge as their cash flows are not strong enough, and that this will lead to a slowdown across the sector in the US.

Americas Macro Mexico CFO Insights Latin America

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