Reit boss warns trusts may cause Mexican bubble

Property trusts surge in value as more seek to enter the market amid new projects

PUBLISHED : Wednesday, 31 July, 2013, 12:00am
UPDATED : Wednesday, 31 July, 2013, 6:25am

There is a danger that the growing value of Mexico's real estate investment trusts could form a property price bubble, according to the head of Macquarie's Mexican Real Estate Investment Trust.

The trusts, known locally as fibras, issue certificates that function much like shares on the stock exchange, and allow investors to participate in Mexico's property market without owning buildings.

But the extra liquidity generated by the funds, which have posted dizzying gains on the local bourse in recent months, has led some to suggest an inflated price bubble is around the corner, possibly resulting in painful price adjustments.

Jaime Lara, the chief executive of Fibra Macquarie, Mexico's top performing trust, said a price bubble could form. But he added that sensible industry-wide acquisitions, coupled with a possible upcoming interest rate increase, would dampen gains.

"There is a danger," Lara said in an interview, noting he had seen prices rising steadily. "The only way for us to defend against that is to be very cautious with new acquisitions."

The fibras have proved popular since their market debut in 2011, and six are now listed on the Mexican stock exchange. Fibra Macquarie, part of Australian bank Macquarie, has risen more than 85 per cent this year, while Fibra Uno and Fibra Hotel have both gained more than 30 per cent.

Mexico's IPC index has dropped more than 6 per cent over the same period.

With more fibras lining up to list by the day, the speed at which the market overheats could increase as funds compete for a shrinking asset pie. Fibra Shop had a spotty debut on Wednesday last week, while Fibra Danhos said on Friday it was preparing its IPO.

Fibra Macquarie is banking on an improving US economy and the benefit that brings Mexico's manufacturers, Lara said.

He said the fund, which focuses on commercial real estate, also expects to profit from a government-backed scheme to promote reurbanisation. The policy, which seeks to combat urban sprawl and lure development back into city centres, has left some of Mexico's top homebuilders, including Homex, Urbi and Geo, on the verge of bankruptcy.

The troubled homebuilders, which hold large swathes of increasingly worthless land outside cities, have also been saddled with flagging sales and a heavy debt burden. "There's going to be more residential development and at the same time, that's going to be accompanied by commercial real estate," Lara said.

Lara also acknowledged that Mexico's challenging security situation, in which over 70,000 people have died in drug-related violence since 2007, could impede growth.

The fund mainly holds properties in Mexico's industrialised north, which has also been the scene of some of the worst atrocities in Mexico's drug war.

"I think that the worst part is over," he said. "As time goes by and as the violence continues to recede, more companies are going to explore those markets. From an economic perspective, it makes a lot of sense to be next to the border with the United States."