Monday, November 3, 2014
Mexico City: The Monarch takes flight
With a massive population, a new REIT
regime, and an airport on the way, Mexico City is ready for more
investments. Christopher O’Dea reports
http://realestate.ipe.com/markets-/regions/americas/mexico-city-the-monarch-takes-flight/10004250.article
Every
autumn, a magical event takes place – the annual Monarch butterfly
migration to Mexico. Navigating by instinct alone, butterflies migrate
from America and Canada to mountains in Mexico where they have never
been before.
Another migration to Mexico is
creating its own kind of magic – the flow of investment capital into
commercial property projects in Mexico City. An autonomous federal
district, Mexico City is a sprawling megalopolis that covers more land
area than Los Angeles, and has twice as many people as LA. The property
boom is in turn creating a vibrant real estate investment sector. Growth
is being fuelled by industrial migration to the most optimal locations
for manufacturing, while an expanding digital supplier and customer
support services sector also takes up space. Regulatory reforms have
created a sophisticated real estate investment trust market that is
attracting talent and expertise to a city eager to make its mark as a
global destination.
Mexico’s ambitions are many and, as
the federal capital, Mexico City is at the forefront of the country’s
charge into the 21st century. With output worth of nearly $200bn
(€156bn) per year, Mexico City’s economy ranks as the eighth largest
urban economy in the world. The ministry of economy says, if it were a
country, it would be the fifth largest economy in Latin America. Recent
reforms aimed at modernising the energy, education and
telecommunications industries, while reducing government bureaucracy,
are expected to boost Mexico’s GDP, starting in 2015. In real estate,
the creation of REIT-like investment vehicles called FIBRAs has
stimulated creation of a professional property investing market. It has
also spurred an organised capital market focused on commercial property,
creating pools of capital large enough to sustain significant future
development.
The industrial and manufacturing resurgence is
fuelling development across commercial property sectors, including
offices, retail and hotels. “The success of the structural change that
the Mexican economy is experiencing lies in both the economic and the
political agreements that the country’s different economic stakeholders
have achieved,” according to CBRE’s Q2 outlook for Mexico City office.
“This sends a message of confidence to investors,” which is illustrated
by “the dynamism that we see in the search for spaces by companies that
are expanding or looking to establish for the first time in the city.”
As
car companies, appliance manufacturers and electronics firms bring
production capacity back from China and the Far East, Mexico is becoming
an industrial hub and manufacturing platform for North America.
According to the 2014 KPMG Competitive Alternatives guide, Mexico is an
important country for the international automotive industry, offering
car companies not only a good geographic location, but also a network of
business agreements and a qualified workforce.
The
State of Mexico, which lies to the north of Mexico City, ranks third
nationally in vehicle manufacturing, with 12.5% of the market, behind
only Coahuila and Puebla. The reversal of outsourcing – or reshoring –
over the past two decades is well under way, and already fuelling a
second stage marked by the rise of call centres and back-office tech
support.
Mexico’s national statistics and geography
institute INEGI reported that, during the first four months of 2014,
industrial activity grew 1.1% compared with the same period in 2013. The
influx is challenging Mexico City industrial park developers, says
CBRE. The firm says there is “growing, rapid demand for industrial space
– mainly due to the arrival of new investment and the expansion of
other large consolidated companies in the region – since Mexico City is
considered a hub for distribution and logistics.”
The
Mexico City Metropolitan Area (ZMCM), has 5.8m sqm of class-A industrial
plant inventory, and nearly 400,000sqm under construction. ZMCM is
expected to have more than 6m sqm in inventory by the end of 2014, says
CBRE. Among recent projects in and around Mexico City, Walmart de México
y Centroamérica will invest MXN1.07bn in the construction of new units
and the expansion of a distribution centre in the State of Mexico, and
possibly a second dedicated to perishables.
Infrastructure and energy
One
of the most significant signs of Mexico’s ambitions is the plan to make
Mexico City a flight destination as important to the global business
community as the countryside is to the Monarch butterfly.
Mexico
City’s airport, opened in 1931, is the second busiest in Latin America
after Sao Paulo Guarulhos. It is surrounded by one of the highest
density cities in the world, and despite recent renovations, the traffic
– nearly 32 million passengers in the past year – is straining the
aviation infrastructure and restricting building new logistics and other
facilities to accommodate Mexico City’s economic resurgence.
The
airport is also a tourist gateway – Mexican tourism has grown,
especially with US travellers looking for affordable city and resort
breaks. Several airlines in Europe, Asia and Africa reportedly been
denied landing slots due to lack of capacity.
In
September, the government announced that world-renowned British
architect Norman Foster and Mexican architect Fernando Romero, a
son-in-law of billionaire Carlos Slim, had won the bid to design a
futuristic new airport for Mexico City. The project will pump funds into
every sector connected with real estate. The new airport is expected to
cost $9.2bn and generate $19.6bn in additional tourism revenue between
now and 2040 (see Airport Infrastructure for more detail).
The
biggest impact is expected from energy-sector reform that will open the
market for private companies to bid on potential production fields from
2015. “The constitutional amendments that were passed… only last
December are really a game changer,” says Jesus Reyes Heroles, former
Pemex general director and now executive president of EnergeA, an energy
consultancy. “Now private investment in Mexico’s energy sector is
possible,” he adds.
CBRE says: “Once the energy reforms
take effect, industrial sector growth is expected to become more
dynamic, due to the new investments it is expected to stimulate,” says
CBRE. Construction and plant location data, it adds, “indicates that
2014 will turn out to be a highly dynamic year for the industrial market
in Mexico City, and 2015 is expected to have major new sources of
supply and stable prices with slight, upward trends.”
CBRE
has focused strategically on the federal capital, identifying nine
sub-markets in Mexico City, where the availability rate of class-A
industrial spaces is just 9.5%. Although that is above the 4% vacancy
rate in late 2012, CBRE says the rate declined nearly two percentage
points in Q2 2014 – a drop that had not occurred since vacancies began
rising in Q4 2012.
The drop reflected strong demand
that absorbed new supply; during the quarter nearly 198,000sqm of space
were added to the market, while just over 305,000sqm were absorbed. Some
Mexico City industrial sub-markets have no class-A space, and this is
attracting capital to modernisation projects. “One could expect this
effect to be reversed with the new projects that are planned for both
sub-markets, which are considered as B and C reconversion in class-A
spaces,” says CBRE.
With more than 48m sqft of office
space – nearly four times as much as runner-up Monterrey – Mexico City
is home to the majority of office space in the country. Demand for
class-A and A-plus office space has been increasing consistently and is
reflected in the absorption of new space and in the increase in rents.
Absorption of A and A-plus corporate space in Mexico City exceeded
162,000sqm in the first half of the year, CBRE reports, with significant
demand from the financial sector and technology companies.
Google,
for example, rented 8,700sqm in the Lomas Palmas sub-market, one of
Mexico City’s three prime office districts. The city and federal
governments are investing heavily in digital labs and tech incubators,
leveraging the concentration of universities, media and financial
companies in the capital to attract ‘clean industry’. The digital
know-how is paying off – the call-centre industry is worth $6bn,
handling customer service calls, billing and IT support. From 2005-10,
the sector more than doubled in size, and it is expected to maintain
that rate of growth.
TeleTech, a 30-year-old company
based in Denver, Colorado, runs a major call centre at the heart of
Mexico City. Like the half-dozen other major call centres in the City,
TeleTech works only with US companies. Many of its workers used to live
in the US, a key factor for success in call centre operation – companies
today want employees who possess not only language skills but cultural
affinity with the customers they serve. Financial services companies
that have already located in Mexico City are also building call centres,
according the Mexican ministry of economy.
Total
office inventory in the city’s 10 sub-markets in the second quarter was
7m sqm, including five new buildings that added 60,000sqm, according to
Colliers International’s Mexico City market research manager Flavio
Gomez. Class-A-plus space represented 35% of the total, with 24% for
class-A and 41% for class-B. The quarter saw an overall vacancy rate of
9% for Mexico City, with 16% in class-A-plus space, and 6% each in
class-A and class-B. Colliers says the office market is near the line
between expansion and oversupply, but space is being occupied gradually
when buildings are brought on line. But the practice of opening
buildings that are not fully leased presents a risk that vacancies might
rise.
It is common for tenants in Mexico not to commit
to leases until a building is near completion, says CBRE, which leads
to last-minute activity. CBRE foresees the average asking rent remaining
stable between now and 2016, despite a full construction pipeline. As
of April, 45 buildings totalling 1.1m sqm of class-A and class-A-plus
space were under construction, with 610,000sqm due for delivery by the
end of 2014. Although nearly 70% of that space is being built in the
three most expensive sub-markets, CBRE expects it will continue to be
absorbed in the wake of favourable economic conditions.
Airport infrastructure
Covering
more than half a million square meters, the new airport planned for
Mexico City aims to be the world’s most sustainable airport.
Instead
of traditional warehouse-style terminals, it will use a single giant
structure wrapped in a unique skin that lets in natural light and air
and collects rainwater. The outer skin will incorporate daylight
reflectors to reduce heat, and photovoltaic panels to collect solar
energy; support buildings and fields on the site will hold more solar
panels, ultimately providing 50MW of peak power.
The
six-runway project, with an ultimate capacity for 120m travellers a
year, will be built on government-owned land close to Lake Texcoco, just
east of the existing airport. The first phase envisions two runways and
capacity for 50m passengers. Construction is expected to start in
mid-2015 and continue through 2018. Speculation about the impact on the
real estate sector focuses in the first instance on which entity will be
awarded the construction contract. In mid-September, Luís Zarate, the
president of Mexico’s Chamber of the Construction Industry, nine
Mexican construction firms, including Grupo Ica, a private Mexican
infrastructure construction company, and Grupo Carso, a company owned by
Slim, formed a committee to bid for the airport. Analysts say numerous
other companies are likely to bid on the work, such as Spain’s Obrascon
Huarte Lain SA, which has experience in the sector and in Mexico, while
many firms will benefit, such as Promotora y Operadora de
Infraestructura SAB, which operates toll roads near the new site.
Billionaire
Carlos Slim’s involvement with the airport in part reflects the Mexican
government’s reform programme. His telecommunications empire, the
source of his $88bn fortune, is being reined in by the reforms, and the
airport contract would mark a major expansion of his construction
activities.
Some major names are readying new
high-end buildings. Reichmann International is developing the 33-story
Torre Diana, an office tower along the city’s central boulevard, El
Paseo de la Reforma, for completion in mid-2015. One partner in Torre
Diana is Fibra Uno, one of the new breed of real estate investment
trusts, most of which are controlled by Mexican families with deep roots
in the country’s property markets and public sector. The FIBRAs are
emerging as major players in the Mexico’s property resurgence.
According
to CBRE, André Elman, director of Fibra Uno, said it will acquire 15
properties of commercial and industrial buildings in Mexico City, and
other areas at a cost of MXN23.5bn. One of the trophies on the list is
the Hotel Hilton Centro Histórico, a 40,000sqm property containing 458
rooms. Acquired for a price of $90m, the hotel is expected to generate
MXN8.3m in net annual operating revenue.
In a recent
report on Mexican real estate, Goldman Sachs says FIBRAs are a new asset
class with strong growth potential. Since being introduced in 2011,
FIBRAs now account for 3.5% of Mexican market cap. Curent regulations
allow Mexican pension funds that are investing in FIBRAs to benefit from
tax-free dividends, and Goldman Sachs says the funds have room to
increase their ownership in FIBRAs in a structured securities
allocation. President Nieto’s reforms also give the sector a tailwind.
“We
expect strong structural demand for real estate assets in Mexico,” the
report says. “In addition, we see room for a gradual convergence in
prices per square meter of Mexican real estate towards Latin American
peers, which are currently 40% more expensive on average.”
And
if the tailwind continues, the new trusts will help international
property capital migrate to Mexico City as regularly as the Monarch
butterflies.
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