Hines is gearing up for a major investment drive in Mexico, with plans to invest some $250 million in property deals in the country over the next five years. As part of this initiative, the Houston-based firm also is preparing to launch its largest Mexico-focused fund yet.
“We’re more bullish on Mexico than we’ve been in a long, long time,” said Palmer Letzerich, senior managing director and director general for Mexico and Central America at Hines. He attributes the positive outlook to Mexico’s stronger economic growth versus other Latin American nations; labor, tax and energy reforms under president Enrique Peña Nieto; and additional liquidity from the proliferation of real estate investment trusts, known locally as fideicomisos de inversión en bienes raíces, or Fibras.
“We have the deepest pipeline we’ve had in the last five years right now,” Letzerich added. “The actionability of our pipeline is going to demand that we move forward on some of these investments.”
Indeed, Hines currently is evaluating in excess of $500 million of investment opportunities in Mexico, ranging from single-building, build-to-suit office projects and industrial park developments to off-market office and industrial acquisitions. In contrast to previous years, the firm plans to focus solely on the office and industrial sectors, allocating approximately half of its investment capital to each. Office investments will target various submarkets in Mexico City, while industrial ventures will be concentrated in the Bajío region of central Mexico.
Hines first began investing in Mexico in 1975, initially in projects in and around Mexico City. Nearly two decades later, in 1992, it made its first fund investments through its Emerging Markets Real Estate Fund. The firm then went on to create two Mexico-focused funds, the $195 million HCM Holdings and the $100 million HCM Holdings II, in conjunction with the California Public Employees’ Retirement System in the mid-2000s. Both vehicles, which targeted residential, retail, office and industrial developments and acquisitions, are now in the harvesting stage.
Among the dispositions for HCM Holdings was the February sale of a 1.3-million-square-foot industrial and retail portfolio to Mexican-based REIT Fibra Uno for a total of approximately $122.18 million. Hines has now sold all of its existing office and industrial assets in Mexico, with just a mix of land and retail properties remaining. “With this last sale, we are in a position where we need to develop and acquire some assets,” said Letzerich.
In support of this, Hines is planning to raise approximately $250 million from Mexican pension plans through a publicly-listed private equity real estate fund, known locally as certificados de capital de desarrollo, or CKDs, according to a filing with the Mexican National Banking and Securities Commission. The firm made the initial filing in July 2012, and PERE understands that the offering is not likely to go public before this summer. The firm also may raise additional capital from non-Mexican investors through joint ventures or co-investment arrangements.
With its current go-around in Mexico, Hines also is shifting away from a purely opportunistic approach – hence its work on two build-to-suit office projects, which carry lower risk than speculative developments. “Before, we’d push returns and take a little bit more risk,” said Letzerich. “Right now, we think we can generate attractive returns with less development risk associated with it.” Targeted net returns are in the 15 percent to 20 percent range, compared with 20 percent-plus prior to the global financial crisis.
Furthermore, Hines is viewing Mexican real estate investments as a somewhat longer-term hold in light of current values and liquidity. “Before, going way back into the 90s, Mexico was a true emerging market,” said Letzerich. “As a result, you wanted to be able to get in and get out of an investment in two years, and you wanted to generate a very high return in order to do that.” Hold periods now will extend to five to seven years, compared with three to five years previously.
Hines’ bid to ramp up its investments in Mexico, however, may be beset with challenges. Raising capital through CKDs, for one, has become less of a sure bet. After collecting nearly $800 million in 2012, such funds drew in less than $160 million last year, according to a January report from Prudential Real Estate Investors (PREI).
Indeed, Hines isn’t alone in its delay to go public with its offering. For example, LaSalle Investment Management, which filed in November 2012, also has yet to launch its CKD. Capital raising through CKDs has started to pick up again, however, with Walton Street Capital and Artha Capital completing their respective fundraises of $66.7 million and $58.1 million during the fourth quarter, the report noted.
Meanwhile, rising investment volumes in Mexico, fueled largely by the Fibras, have driven up pricing and consequently lowered potential returns. This has made it more challenging to attract capital from US investors, which have noted that the same mid-teens returns being touted for Mexico can be achieved on domestic deals without the political and currency risks.
Still, with nearly four decades in the country, Hines has proven its staying power in Mexico. To continue its long run, however, the firm will need to address a real estate market very different from those of the pre-crisis days.