Mexico 2018 | FINANCE | B2B

Evolving investment programs and models are financing Mexico's real estate sector.

Jorge Ávalos Carpinteyro
Fibra MTY
Andreu Cors
Managing Partner
Gava Capital

How will your new programs and structures help expand your businesses?

JORGE ÁVALOS CARPINTEYRO “Programa Multivalor" is similar to what the Americans did in the mid-1980s with a structure called at the market (ATM) programs. Before ATMs existed, most of the listed real estate investment trusts (REITs) in the US used to access the capital markets through follow-ons, which involved high costs and several months of structuring. Typically, the issuances were in big amounts to mitigate those huge costs. The capital structure of FIBRAs was inefficient since most of the follow-ons involved large amounts of cash that was invested in treasuries, which created a negative carry for the dividend yield. With the existence of this Programa Multivalor, the issuances will be used to cover acquisitions that are under negotiation, and it will likely take no more than six months to deploy that money in an investment. Fibra Mty was the first FIBRA to get an approval for a domestic Programa Multivalor for an amount of up to MXN10 billion (USD525.3 million) through a five-year period. We did the first issuance in August 2017 for MXN1.5 billion (USD78.8 million). Of that, we have already invested more than 40% of those resources. In this regard, we have used an efficient capital structure, and our strategy has always been to deliver our promises and align with our stockholders. It is important for us to be perceived as a company that has an orderly strategy with predictable cash flows.

ANDREU CORS The focus of Gava and the way that we operate has not changed; we simply transitioned to a different type of investor. We started Gava in 2009, and our original investors were family offices from Monterrey. We created a track record with local investors, people who knew and trusted me and my partner. We then continued to raise funds every 12-18 months for the projects we were going to support. Issuing capital development certificates allows us to have more long-term money and attract investors with a longer view. We set a certain amount of money that we need to raise and the deadline to spend it. We raised MXN2.5 billion (USD131 million) and have five years to invest it. After that investment period, we have a 12-year period where we need to exit the fund or sell all the assets. Therefore, there is a longer-term perspective than the typical investment from family offices. It comes with pros and cons; a positive aspect that we had before with family offices was more flexibility in terms of governance and decision-making. In addition, all the projects are combined together; if one project is unsuccessful, it diminishes the returns of the rest, which makes it harder to achieve a higher rate. On the positive side, if we do a great job on delivering what we promised to our investors, there is a large sum of money going to pension funds. This means that we could be raising a fund twice the size of what we did before just two or three years down the road.

What opportunities do you see across the sector?

JAC We do see other opportunities, though we only want to specialize in corporate real estate in office and industrial buildings. We know that some domestic and international institutional investors have been active in the multifamily market, especially in the rent market since it is still small in Mexico and has a great deal of growth potential. In terms of geographical diversification, we want to concentrate on primary northern cities and the Bajío area. We want to maintain a mix between 60-70% of our revenues in dollar terms with a mix of 60% office and 40% industrial buildings.

AC It is a niche game in real estate. In one city there might be numerous opportunities while in another city it could be the complete opposite. We are a national player developing in 15 cities in Mexico, and every city has opportunities as well as areas that are not worth developing. We focus on what we do, which is for-sale housing; we do not do hotels or shopping centers. Certain areas are extremely urban, and in order to maximize returns, we have to develop apartments that also have offices and retail. We see opportunity in middle- to high-income housing and play in the middle range from MXN1-5 million (USD52,000-262,000). There is high demand in that segment in Mexico, and the mortgage penetration rate is low. We see opportunity in that sector, specifically in cities that have populations close to 1 million.