In November 2012, LaSalle Investment Management filed with the Mexican Stock Exchange for its first listed private equity real estate fund in Mexico, known locally as certificados de capital de desarrollo, or CKD. The fund sought to capture capital from a new group of potential investors, Mexico’s pension plans, which had started to invest in real estate just a few years prior. Now, nearly 18 months later, the Chicago-based real estate investment manager has decided to pull the $300 million offering, citing flagging demand for real estate on the part of the pension plans, known as Afores.
“We really saw the local pension plans, at least in their minds, somewhat over-invested in real estate and really cutting back on their exposure on that asset type,” said Eduardo Guemez, head of Mexico at LaSalle, which has been investing in the country since 2004. The firm currently manages more than $1 billion of investments in the country through its LaSalle Mexico Fund, which closed on approximately
$300 million in 2009, and two separate accounts.
Part of the wariness of Afores toward real estate has to do with the disappointing performance of Mexican real estate investment trusts, or Fibras, that went public in 2013, as compared to those that had initial public offerings in earlier years. “In the minds of investors, they still are putting the REITs with the CKDs that are real estate-related,” added Manuel Zapata, the firm’s chief investment strategist for Mexico.
Guemez said he began seeing a lack of appetite from the local pension plans in the second half of last year. Earlier this year, the firm decided to switch gears with regard to its fundraising strategy for Mexico.
Not all firms, however, hold the same view as LaSalle. Antonio Ruiz Galindo, director general at Mexican real estate developer Grupo IGS, disagreed that Afores are cutting back on all of their real estate exposure. Instead, he said the difficulty of issuing CKDs had more to do with the negotiation process with the Afores, which often can be protracted and complicated.
Last August, Grupo IGS filed to issue a CKD, focusing on hotel investments in Mexico, in partnership with Miami-based Brilla Group. Since then, the partners have revised the terms of their offering multiple times in response to feedback from the Afores. Ruiz Galindo expects that the firms will make a final filing in May and issue the CKD in late June or early July.
“I’m certain that firms with a sound track record, a business plan that makes sense with the future economic growth of the country and projections that can be based on conservative premises and good corporate governance can still raise a CKD,” Ruiz Galindo said.
Ruiz Galindo noted that potentially challenging negotiations with the Afores has deterred some foreign fund managers from issuing CKDs. “It’s not that they don’t know the process, it’s just that they don’t want to go through it,” he said. “They say, ‘I can raise the money I need with my own investors back home’.”
Meanwhile, LaSalle currently is in conversations with a number of institutions based in the US, Europe and the Middle East to raise capital for Mexico. “We’re really looking to our more traditional base of investors, which are more international in nature,” Guemez said.
Investor discussions will help to determine whether the new capital raised by LaSalle will be through a club deal, commingled fund or separate account, Guemez noted. Whatever the structure, however, the firm is seeking to raise
$300 million to $400 million in the near future. While its new fundraising target is similar to that of the CKD, LaSalle now will be focusing on industrial and office real estate as compared to the previous offering, which would have been invested across property types and geographies in Mexico.
Driving industrial demand is Mexico’s robust growth in exports, particularly from industries such as automotive and aerospace, which are booming and investing millions and even billions of US dollars to build new manufacturing plants in the country. Meanwhile, energy and telecommunications reforms that were passed in 2013 are expected to attract new companies to the country, which in turn will increase demand for more office space, particularly in Mexico City.
“Industrial and office also happens to be mostly denominated in US dollars, and obviously that makes this appealing to investors,” added Zapata. “It makes it a little easier to understand.”
Development will account for the majority of LaSalle’s new investments in Mexico, given the highly competitive market for acquisitions in the country. “At this point, we don’t think we can get opportunistic returns if we stick to 100 percent acquisitions,” said Guemez. “The investors that we’re talking to really see Mexico as an opportunistic play and, as such, are looking for overall returns in the mid- to high teens.”
Over the past five years, limited foreign capital has been placed in the country, according to Guemez. While the country’s economic growth and improved image have helped, questions such as security continue to be brought up in most conversations. “The challenge is really getting people comfortable again with Mexico,” he said.