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April 9, 2018

CCLA and GIC’s US$300 million deal to develop multifamily assets in Mexico’s urban centres underscores institutional investor confidence in the country’s real estate market.

On February 28, CCLA, a powerhouse real estate partnership between Compass Group and CIM group focused on Latin America, joined forces with GIC, Singapore’s sovereign wealth fund, in a venture that aims to develop multifamily rental buildings in Mexico’s cities; including Monterrey, Mexico City and Guadalajara. The high-rise and mid-rise buildings, each with approximately 250 to 400 units, represent much more than an ambitious construction endeavour.

A project of this scope and nature signals the industry’s confidence in the country’s real estate sector, according to Hector Klerian from JLL’s team in Mexico, who says the move shows that “institutional investment is available for Mexico.”

The country benefits from a structured environment, fully functional legal system and reliability of financial and banking institutions. These coupled with the recent commitment from GIC, “shows that the Mexican real estate market is a viable option for institutional investment,” says Klerian.

Changing regulations benefit multifamily

Until recently, multifamily housing was all but unheard of in Mexico. Mexico City boasted few purpose-built rental units and tenants had to rent from individual condo owners—a low transparency process that left many frustrated and prompted investor caution.

But this has started to change as the government has relaxed rent control regulations and increased protection for landlords.

“For many years, this market had not grown due to tenant-favourable laws that made it very difficult to terminate the lease in the case of rental default. Laws have changed, and now there is much more clarity for the landlord,” Klerian says, though he readily acknowledges that the system is still far from perfect. As more and more tenants see landlords winning cases though, he predicts the number of rent disputes will fall.

He also believes that Mexico’s rapidly rising middle-class and shifting demographics will be a boon to investors. Traditionally, young urbanites looked to Mexico City, but in recent years, secondary cities like Queretaro or Guadalajara have become especially attractive.

Risk and reward

Still, investing in Mexican real estate is not without risk. General uncertainty around the diplomatic relationship between the U.S. and Mexico, coupled with anticipation for Mexico’s impending July election, has made some uneasy.

Investors know that multifamily investments are long-term and trans-period, nonetheless, elections and trade uncertainty contribute to market volatility, Klerian says.

Nevertheless, the advantages are myriad and, for the time being, industry analysts remain optimistic.

Multifamily housing has also consistently proven to be a reliable option. In the U.S. market, multifamily housing saw more transaction activity than any other property sector in 2017. While the U.S. and its southern neighbour are distinct, the two markets are not without their similarities.

“Many people do not want to sell for a variety of reasons but this asset class allows for long-term holding of the land. There is also the huge advantage of tax deferral on profits that would be a blow to any seller on an outright sale,” Klerian says.

The country’s overall economic outlook thus far has also been largely positive, with the Bank of Mexico raising its growth predictions for both 2017 and 2018. JLL projects that 2018 will deliver a record amount of new office space in Mexico City, which is a solid indication that the real estate market will continue to grow.

Notably, in the last quarter of 2017, the commercial real estate market saw three significant leasing transactions, totalling almost 50,000 square meters of floor space. These spaces were leased by media company Grupo Salinas, Metlife and WeWork. While office supply increased nine percent last year, tenant demand was also strong, according to JLL’s Global Market Perspective report.

Regardless of residential or commercial real estate, JLL has observed that asking prices for land parcels sold, on behalf of owners, in the recent past have surpassed past bids, a signal that the property market fundamentals are healthy, says Klerian.

Click to read more about multifamily real estate investment.

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Hector Klerian

JLL Mexico

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