The Fibras Offer an Excellent Oportunity to Invest in Real Estate
Mexico’s capital markets recently entered into a new phase of maturity with the introduction of the FIBRAS.
These new financial investment venues similar to the ldquo;Real Estate Investment Trustsrdquo; or REITs as referred to in the U.S., were created in Mexico as ldquo;Fideicomisos de Infraestructura y Bienes Raicesrdquo; known simply as ldquo;FIBRASrdquo;. Their purpose is to invest in real estate income producing assets and development projects.
MEXICONOW spoke with Alberto Chretin, Terrafina’s CEO and Chairman of the Board. Terrafina is the newest FIBRA in the market place and as of recent quickly became the likely leader among the industrial real estate portfolios in Mexico as measured by the amount of gross leasable area (GLA).
WHAT ARE THE ADVANTAGES FOR INVESTING IN A FIBRA?
This relatively new form of investment in Mexico represents a great opportunity for both institutional and individual investors.
In essence, a FIBRA allows investors to have ownership of income generating properties through a financial structure that minimizes risk.
The real estate business is very rewarding but it requires a lot of capital and knowhow. Prior to the FIBRAS, the possibility of participating in the development and leasing of industrial and distribution facilities was available only to a small number of wealthy people or financial institutions.
Through a professionally managed FIBRA, which is a publicly traded security, similar to stocks, small and large investors have open access to the real estate business.
The FIBRA Terrafina, for example, is an independent public company, with a corporate board which is aligned with the interests of the investors. In our case, Prudential is an external consultant which has only a minority ownership; over 85% of the firm is owned by foreign and domestic institutional investors, including the Mexican pension funds; ldquo;retailrdquo; or individual investors own about 15% of Terrafina.
According to the regulations, a FIBRA must distribute 95% of its net income (in a typical FIBRA this is about 50% of the rental income), so investors have a steady income; in addition, if times are good, they enjoy capital gains as the trading price of the security increases.
So, with even a minimum amount of capital, an investor is in a position to be like a landlord, with excellent tenants and without the hustles of managing the properties.
HOW IS TERRAFINA PLANNING TO LEAP TO THE TOP OF THE INDUSTRIAL REAL ESTATE BOARD IN MEXICO?
When Terrafina was founded it initially acquired a large portfolio of properties that had been assembled since 2003 by Prudential Real Estate Investors. This initial portfolio of 132 industrial and distribution properties had a total amount of 19.8 million square feet of leasable space.
And recently, Terrafina is in the final stages to acquire a group of 87 additional industrial properties from co-owners KIMCO/American Industries with a total leasable area of 11 million square feet for about US$600 Million. This transaction is contingent to some final customary conditions.
The resulting portfolio will have 219 properties with an area of 30.9 million square feet and it will be the largest industrial real estate holding in Mexico.
For Terrafina, the new acquisition means an improvement in or diversi- fication of industrial sectors, our geographical landscape and our roster of customers.
WHAT IS THE CURRENT SITUATION OF THE MAIN INDUSTRIAL REAL ESTATE REGIONAL MARKETSIN MEXICO?
Terrafina has a lot of confidence in the emergence of the border locations, which were battered by ldquo;The perfect stormrdquo; of the combination of the recession and violence. But now, in general, we have turned the corner in the northern border region.
Reynosa is where our vacancy rate is highest. In addition to the perfect storm, Reynosa has an unusual supply of facilities. What happened was that Reynosa enjoyed double-digit growth during 2006-2007 which prompted developers to build speculative space. Demand plunged and we ended up with an overbuilt market.
Ciudad Juarez has extraordinary potential to fully recover because it has all of the market fundamentals in good order. It is ideally located for logistics to the U.S. market; it has experience labor, management and engineering. The manufacturing operations in Juarez are very successful with excellent productivity and costs. Bosch, GE, Honeywell and literally hundreds of other companies have successful operations and are growing.
After a few years of negative absorption (vacancies exceeded new leases), in 2012 Juarez had positive absorption. But we still need to get to the healthy pipeline of prospects that Juarez enjoyed in the pre-recession/per-violence years.
Although, the industry and its managers have never been targeted by the criminal entities, and given the fact that violence is down to only 10% of what it was at its peak, the negative image is still out there. Juarez needs to communicate its significant recovery to the global investing community by means of testimonials from the local operations. And it needs of course, more evidence of stability for a few more years.
Terrafina is a leading player in the Juarez market with a healthy and stabilized portfolio of properties, and we have nothing else but very good growth expectations in Juarez and the rest of the border locations.
As we move towards central Mexico, our mix of properties shifts to a larger share by distribution/logistics facilities. Mexico City and the surrounding areas are having excellent growth, the submarkets are very active, and so is the competition.
The Bajio region is booming, it is becoming the center of gravity for logistics operations and as of late, the most important growth area for the auto industry.
Highways, intermodal facilities and a growing supply chain are rapidly developing in the Bajio region. Our hope is that the labor situation for skilled and unskilled workers is properly managed on the face of accelerated growth and that the industrial and distribution supply of space is harmonic with the pace of growth and the market is not overbuilt.
HOW ARE THE NEW FINANCIAL TOOLS, FIBRAS AND CKDS GOING TO AFFECT THE INDUSTRIAL REAL ESTATE MARKET IN MEXICO?
While the FIBRAS generally only invest in income generating properties, the CKDs (Structured Capital Securities, known in Mexico as Development Capital Certificates) have a mandate to invest capital en development projects in real estate and infrastructure. For the most part, the CKD’s manage money from the workers’ pension funds in Mexico (AFORES) and are under great scrutiny by them. Because of their nature, unlike the FIBRAS, as it relates to the industrial real estate market, the CKD’s will have more of a tendency to increase the supply of real estate products such as buildings and industrial parks. Besides professionalizing the real estate markets, the new financial instruments are generating a process of consolidation. This is particularly true in the case of industrial real estate, where the larger entities such as Terrafina acquire income generating properties from other developers. Evidently, the FIBRAS represent an opportunity for industrial developers to monetize, sell their properties to the larger operators. SO HOW DOES AN INDIVIDUAL INVESTOR BUY INTO TERRAFINA? You just go with your stockbroker in Mexico or the U.S. Our trading symbol is TERRA13, the initial public offering price was $28 pesos per share (About US$ 2.20) and it is currently trading closer to $30 pesos.