A Young Mexican REIT Market Evolves

A Young Mexican REIT Market Evolves

Fibra industry grows into major channel of public capital for nation’s commercial property sector

 By Peter Grant and Janet Morrissey

Mexican real-estate investment trusts have had a bumpy ride since their launch five years ago and today many of them are trading below their initial public offering prices.

But signs are emerging that the industry is gaining traction as it tries to become a major channel of public capital into the country’s commercial property sector. For example, one of the few IPOs currently in the pipeline in Mexico’s anemic stock market is a REIT, named Fibra Plus.

Moreover, the industry has begun to respond to some of the earlier criticisms of its transparency and management structures. And analysts say that the sector may benefit by a victory in the U.S. presidential race by Hillary Clinton over Donald Trump, who has promised to overhaul the two countries’ trade agreements.

 Some investors and tenants may be holding back on decision-making until results of the Nov. 8 U.S. election are known. Mexican REIT share prices rose after each of the three presidential debates, which Mrs. Clinton is widely believed to have won, according to an event study by the Advisory Group at real-estate research firm Green Street Advisors.

Mrs. Clinton has been leading in the polls. But it isn’t over yet, says David De La Rosa, senior vice president of advisory and consulting at Green Street. “Given the surprise of Brexit, we could see a surprise of Trump in the U.S.”

Mexican REITs—called Fibras or Fideicomiso de Inversión en Bienes Raíces—made their debut in March 2011, after government regulatory changes made the structure possible. Fibras offered investors an easy way to own Mexican real estate and pick up an attractive dividend at the same time. Like U.S. REITs, Fibras avoid paying corporate taxes as long as they distribute at least 95% of their income to shareholders as dividends.

Numerous emerging countries have been cultivating REIT industries to increase investment in much-needed development, says  Matthew Cypher, director of Steers Center for Global Real Estate at Georgetown’s McDonough School of Business. “You’re bringing a public capital source into very important areas such as housing and infrastructure,” he said.

There are now 10 equity Fibras in Mexico with a market cap of $13.3 billion, up from one Fibra with a market cap of about $300 million in 2011, according to Green Street Advisors. Most of the Fibras went public in 2013 and 2014.

Shares of many of the REITs initially rose thanks, in part, to the country’s growing economy.  As multinational auto makers, aerospace companies and other industries set up shop in Mexico, demand increased for office, industrial manufacturing and distribution space, as well as business-traveler hotels in Mexico.

An index of eight Mexican Fibras showed total returns averaged 71% in 2012, 10.4% in 2013 and 20.8% in 2014, according to S&P Global Market Intelligence.

But some investors steered clear of Fibras because most were managed by outside companies rather than hiring their own internal management staffs. These so-called external management structures have fallen out of favor in the U.S. because of concerns of possible conflicts between the interests of managers and investors.

“It’s a big reason why a lot of U.S. REIT investors won’t look to invest in Mexico,” said Mr. De La Rosa.

Also, last year, Mexico’s economy was hit by a falling peso, ballooning debt and falling oil prices. Mexico’s Central Bank raised interest rates three times this year to fend off inflation and the effects of the depreciating peso, and cut growth forecasts to between 1.7% and 2.5% from 3%.

The Fibra index fell 7% in 2015, according to S&P Global Market Intelligence.

But the industry’s performance has improved this year. S&P Global’s index of Fibras is up 8% and most of the companies have solid balance sheets, occupancy levels and profit margins.

For example, Fibra Prologis, which is 46% owned by San Francisco-based Prologis Inc., last month reported that its third-quarter occupancy was 96.7%, up from 96.3% in the same quarter last year. The company signed 2.3 million square feet in leases during the quarter, up from 1.8 million in the same quarter in 2015, thanks in part to strong demand in Mexico City fueled by e-commerce.

Meanwhile, the critics of external management are being heard. Fibra MTY and Fibra HD, which went public in 2014 and 2015, respectively, are both internally advised. Also, Fibra Inn recently announced plans to bring its management arm into the company, putting pressure on other Fibras to follow suit.

“It’s a good direction for the companies to move in,” said Jason Yablon, a senior vice president and U.S. and Global portfolio manager at Cohen & Steers.

While some investors are taking a wait-and-see approach until after the U.S. election is decided, others think the election risk brouhaha is overblown.

“It’s really a bunch of election year hooey,” said Jamie Anderson, managing principal of Tierra Funds, which includes the Tierra XP Latin America Real Estate ETF (LARE). “Capital has continued to move into Mexico this year, and businesses are in general unfazed.”

 Mr. Anderson noted that Citigroup recently unveiled plans to inject $1 billion into its Mexican consumer-banking operations.

“Foreign multinationals have not stopped their announcements on investments in Mexico,” said Alberto Moreno, senior director at Fitch Ratings Mexico.

And Fibras stand to benefit from this as the Mexican economy rebounds.

“Mexico has 66 free trade agreements with countries around the world—and Nafta is one,” said Alfonso Munk, chief investment officer of the Americas for PGIM Real Estate (formerly Prudential Real Estate Investors), which is the adviser for Fibra Terrafina. “Whether trade agreements get revised or changed, it won’t have an impact. Mexico is going to continue to be one of the big manufacturers around the world.”

Write to Peter Grant at peter.grant@wsj.com and Janet Morrissey at janet.morrissey@wsj.com