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GE REAL ESTATE’S EARLY FAITH IN MEXICO PAYS OFF

Plaza Saltillo is one of the first two Mexican shopping centers GE Real Estate has acquired for its equity portfolio. It was closing on the deal at press time.

One of the greatest changes in Mexico’s real estate market in recent years is the relatively recent availability of long-term financing. Among the pioneers was GE Capital Real Estate, which began investing in the country in 1994, just before the peso devaluation that derailed the plans of other U.S. firms to enter the country. GE stayed, however, and has expanded its portfolio greatly. Joaquin De Monet, managing director of the renamed GE Real Estate Mexico, spoke with SCT about GE’s experience in the country and how investing has changed.

SCT: GE Real Estate began investing in Mexico in 1994. How did you proceed?

De Monet: We really started with more of a single-product approach, U.S. dollar portfolio-debt products, mainly focused on industrial properties along the border. Since then, we’ve evolved into office, hotel and retail. Initially, we took very limited back-end risk, almost a fully amortizing type of structure, because at that time, getting repaid was more of a theory in Mexico for long-term lending. As we continued to evolve, we’ve most recently expanded our debt, doing more participating products, [being] a little bit more aggressive. And we’re also doing equity down here, trying to offer more flexibility to meet our customers’ needs and help them facilitate their growth.

Who exactly are your customers?

Our customers initially were family-owned development companies, [with] kind of a regional flavor. Then they were more institutional, national coverage developers. Those tend to have institutional investors as part of their capitalization, either on a property-by-property basis or, in some cases, even as part of the corporation itself.

What attracted GE to Mexico in the first place?

We came down and were pleasantly surprised by the quality of assets, specifically in the up-and-coming office market. At that time, NAFTA was on the verge of being passed, and a lot of banks were seeking modern office space as they shifted from a representation office in Mexico to more of a full-service corporate function.

We also realized there was a huge lack of liquidity to finance what traditionally was a for-sale office space market, as opposed to a for-lease office space market. So with some of our developers, such as Grupo Acción, we would bring long-term financing that would enable [companies] not to have to sell property in the form of condominium space, and then do long-term leases in their office buildings.

The devaluation hit in 1994, and you had a period of high volatility. At the same time, that facilitated the industrial market along the border, especially for all of the export manufacturers. The peso devalued against the dollar, and all of a sudden wages were [cut] in half. That’s what drove the 15 percent per annum growth from 1995 to 2001.

What was the structure of the financing?

It was a dollar-denominated product, backed initially by solid multinationals. In 1994, right after the devaluation, you didn’t have a lot of modern, high-ceilinged, air-conditioned, good-quality electric-industrial facilities for light manufacturing along the border. All those facilities had to be built, and the only way they could be built was if the multinationals chose to do a build-to-suit. Then they would have to go find the land and hire a developer. Or they could lease them, and to lease them they would have to sign long-term leases, in dollars, with corporate guarantees. That enabled us to go out and actually finance — you pulled these properties together and made a loan. In essence, the equity they continued to create by making payments enabled us to take a little bit more risk at a time and continue to facilitate that growth.

We were actually growing our portfolio by about 25 percent a year from 1995 through 2001. Now we’re at about $1.5 billion in assets.

 

 

When did you begin investing in retail?

In 1998. That was a function of a nice opportunity with several grocery-anchored retail stores here in Mexico City. Mexico City has the [country’s] largest population, with 25 million people, and the deals were set up nicely for what we’re looking to do.

What are you looking to invest in now?

In terms of retail, we are expanding right now to do portfolios of grocery-anchored retail centers in Mexico City, and probably in the central and northern parts of Mexico. We’re involved in permanent financing of the construction portion, where you have a grocery anchor and then some shop space on the side.

Like the U.S./Canadian neighborhood centers, a format that is less common in Mexico?

More and more those centers are starting to take form, replacing the local [stores serving customers] who go out and buy their bread in one place, vegetables in another. I think these neighborhood centers, with modern facilities, have really come in and taken hold. [You have] HEB in the northern section, and Kimco has also become attracted to Mexico. Now the time is right to look at those opportunities, which are anchors we know are financially solid, have a proven track record in Mexico and are willing to sign long-term leases.

They don’t need to own their box, so to speak, which is a challenge, initially. The boxes buy their stores and then they develop the shop space. Eventually, they consider selling off the shop space to somebody or may have the shop space developed. But it’s very difficult for a lender to come in when you don’t also control the big draw.

Are we slowly moving to the U.S./Canadian model in terms of ownership?

I think we’re moving more toward the U.S./Canadian ownership [model], but for new development. Conceptually, now, these are being designed with the main anchor in mind and then financed.

Is your financing done in pesos or is it dollar-denominated in retail?

Retail, in most cases, is pesos, and we finance those in pesos, with a combination of fixed and floating, depending on the amount of percentage rent. But it’s a portfolio product, so we’ll do two to four centers, and we do offer different flexibilities depending on the quality of the portfolio.

Have various laws or structures changed to make your job easier?

I wouldn’t phrase it as reforms or laws. I’d say [it’s] more of a track record of credibility and confidence that Mexico has now with the international community. Since the 1994 devaluation, Mexico has been relatively stable in economic measures. It continues to attract foreign investors, interest rates have continued to taper off, inflation is down. It’s just become an attractive haven, and it’s a haven that people can understand. It’s user-friendly; it’s close to the U.S. [and] uses dollars in many cases for real estate transactions — not so much in retail as in other institutional investments. People tend to speak English, or there’s a lot of English spoken. The combination of user-friendly, a solid track record and stability will be key to making my life easier in terms of structuring transactions.

How large is your retail portfolio?

We’re still working on closing on our first [equity portfolio], which is two centers — one in Monterrey, one in Saltillo. That, hopefully, will close by the time this is published. We have four shopping centers in Mexico City and another $50 million in more-entertainment-oriented retail in Cancún.

Might you expand from Mexico into Central America?

We still see significant opportunity, especially in the retail segment, here in Mexico. We have a combination of good real estate fundamentals and growing and favorable demographics. With interest rates where they are today, it makes all the sense in the world to continue to push opportunities here in Mexico. Central America is such a small market. Mexico is the largest market in all of Latin America, so until we fully develop this market, we’ll probably continue to focus our attention on Mexico.

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