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KIMCO: MORE RENT UPSIDE IN MEXICO THAN U.S.

Three years after its first investment in Mexico, Kimco Realty Corp. has put together a network of eight regional partners to help build its growing portfolio in that country, said David Henry, the firm’s vice chairman and chief investment officer, at a Credit Suisse First Boston real estate conference last month.

The New Hyde Park, N.Y.-based REIT has a 50-50 joint venture with GE Capital to build open-air shopping centers, many of which are to be driven by Kimco’s biggest U.S. tenants, Home Depot and Wal-Mart, Henry said. Both retailers see tremendous growth opportunities in Mexico, he said.

“Mexico is such a promising market, because there’s more upside in rental income than in the U.S.,” Henry said, pointing out that in Mexico, leases are adjusted for inflation annually.

Currently, Kimco has three centers in Mexico.

Tenants in Mexico are more willing to pay “meaningful” percentage rents, he said, and it is easier to raise rents in Mexican open-air centers than in the U.S., given the latter’s current economic climate.

Mexico is shifting from a nontraditional retail environment in which about 70 percent of sales comes from street vendors to a more shopping-center-based structure. “Mexico has less than one-twenty-sixth the amount of retail space per capita as the U.S.,” Henry said.

The community-style, open-air center format is most in demand, he added. “Because in Mexico shopping is a daylong event,” he said, most of the centers Kimco is investing in “usually have a grocer at one end and some kind of entertainment option at the other. There aren’t a lot of U.S.-type assets there.”

Cap rates in Mexico range from 12 percent to 13 percent, he said, but because of the peso’s value against the dollar, the cost of borrowing there is 9 percent to 10 percent higher than it is in the U.S.

Even so, returns are proving to be high enough to offset the extra cost, and Henry predicted that cap rates will reach 18 percent over the next four or five years.

Until a mortgage market for pesos emerges, Kimco and GE will keep buying properties on a leveraged basis, said Henry.

Kimco entered Mexico in 2002, buying two centers. The following year GE Capital became a partner in those properties. Kimco joined with a local partner to buy a third center, in Juarez, that October.

— Brannon Boswell