Investor caution around real estate in Mexico is affecting the ability to get deals done in the country’s hotel industry, experts said.
Editor’s note: Quotes in this story were derived from a Mexico Hotel & Tourism Investment Conference panel that was conducted in Spanish and translated by event staffers in real time at the event.
MEXICO CITY—Caution seems to be the prevailing feeling around the real estate sector in Mexico, according to a panel of experts speaking at the 2019 Mexico Hotel & Tourism Investment Conference.
Talking during the “Capital markets overview—Trends in the debt and equity markets” session, Raul Gallegos, managing director of asset management for Credit Suisse, said retirement funds and institutional investors are sitting on investment dollars due to a heightened level of nervousness.
“So we’re feeling the same way in the banking sector,” he said. “We’ll see how things unfold with the new presidency and (if we have) have more confidence to make great investments.”
The flipside of that, according to Adrián Cano, managing director of real estate for Evercore Partners Mexico, is those real estate funds ultimately will have to sink money into real estate investment.
“The funds already in Mexico have gone through several cycles and … have long-term strategies,” he said. “There are really two profiles. The recent ones are very cautious. They are short runners because they need ROI in the short term. The others are very, very long term and have been through several difficult cycles, not just in Mexico but across Latin America. They will continue to invest.”
Where is money coming from?
Panelists said there seems to be investment interest in Mexico from European companies with a long-term outlook.
Rodrigo Meza, VP of GFG Securities, said underwriting today means adjusting for past mistakes and issues such as “an excess offering in city hotels, especially in secondary cities.”
Manuel Muñoz, director of hotels and tourism at Banco Sabadell, said it looks like the deals pace is “set to slow down,” and the current environment is not very dynamic.
What are the issues?
Cano pointed to the FIBRAs (Mexican real estate investment trusts) as a litmus test for institutional investment in Mexican hotels. Those vehicles have existed for roughly 25 years, and are just now overcoming investor skepticism over external management structures and a perceived lack of alignment with shareholders, he said. They have largely overhauled themselves to address that, but the work needs to continue to get money flowing, he added.
“I think important things must happen, such as a review of corporate governance and other interests to make investor appetite grow,” Cano said.
Gallegos also noted FIBRA executives need to be more transparent in how they value their own assets, as many complete their trading at a significant discount to their net asset values.
“That may be creating uncertainty for investors,” he said.
Gallegos also said Mexico is currently in an unhealthy interest rate environment, which tampers down activity.
Muñoz said the appetite to issue debt in Mexico “depends on the bank.”
“We see more appetites for resorts,” he said.
He doesn’t expect that to change.
“The banks will also go to the destinations where something is proven already,” he said. “Others still need infrastructure to be bankable.”
Gallegos noted there is generally good financing available for real estate projects, but “there’s always a limit there.”
Meza said debt markets in the country have matured considerably over the past decade.
“Ten years ago, we didn’t have the products we have today or they were three times more expensive,” he said. “Today we can structure more tools and competition in the market than was available in the past. A well-set-up project today has more channels of liquidity.”
Gallegos said it’s becoming more complex to fund deals in pesos, and Muñoz noted resorts in Riviera Maya and Los Cabos are working to “dollarize their properties.”
“You see a little less dynamism” in pesos, Gallegos said.