Viewpoint 2007
Recently I attended the FIABCI International Real Estate Conference in Barcelona, Spain. One of the highpoints of this conference is the chance to hear real estate professionals from all over the world explain what is happening in their markets. At this conference, Australia had a large presence as well as a number of speakers on investment opportunity. A reference was made by one speaker that according to the Jones Lang LaSalle’s 2006 Real Estate Transparency Index (which ranks the real estate transparency market in 56 countries and territories) Australia is considered to be the most transparent market in the world. Australia is closely followed by the USA, New Zealand, Canada and the UK. This statement made me curious as to how Mexico was ranked on this transparency scale.
Well, here is what I found out:
The JLS Real Estate Transparency Index shows that the transparency of Mexican real estate markets increased markedly between 2004 and 2006, and Mexico is now the highest ranked in Latin American. Mexican real estate markets are considered “semi-transparent” by the index/level and are similar in degree of transparency to Mediterranean and Central European countries. Also, Mexico’s real estate markets are considerably more transparent than other countries with similar levels of economic development.
What is happening then with the Mexican economy and how is it viewed as an investment opportunity in comparison to other places in the world for investors to put their money?
According to Jones Long LaSalle, the world’s leading real estate services and money management firm, foreign direct investment in Mexico rose to almost $15 Billion USD in 1994-2005. This period of time was when the previously protected industries were opened up to foreign investment. Privatization of public utilities may be one of the reasons Carlos Slim is now the second richest man in the world. He was the organizer and one of the investors in the group buying Telmex when it was privatized. Almost 15 Billion dollars in foreign direct investment for this 10 year period was in sharp contrast to $1.6 Billion US dollars invested in the period of 1980-93. Foreign direct investment stocks were US $101 Billion or 26% of GDP in 2005. This is a huge amount of investment both in direct dollars and in stock purchases.
What are the stocks being most invested in Mexico business? Fifty percent of FDI stocks are in manufacturing (mainly *Maquiladoras) and 25% are in the financial services sector as FOREIGN CAPITAL NOW CONTROLS MOST MAJOR BANKS IN MEXICO.
Where does Foreign Direct Investment come from? Sixty-five percent comes from North America in *Maquiladoras and 20% is invested in financial services and telecoms from the European Union. The amount of direct foreign investment in 2005 was $17.8 Billion US and was greater than investment into most other emerging markets in the world. The only emerging countries drawing more direct foreign investment in 2005 were China and Russia.
Mexico’s more liberal and open economy is attractive to foreign investors. Mexico shows well on rankings scoring political and institutional environments, macroeconomic stability, market opportunities, private enterprise and foreign investment policies, foreign trade and exchange, the tax system, financing, labor and infrastructure.
A key point is that since 2001, Mexico’s central bank has maintained a free-floating Peso which has increased transparency and stabilizing of the currency. What was 35% inflation of consumer prices in 1995 is under 5% currently. As the economy has stabilized, the differences between the Mexican and US interest rates have narrowed. What a nice position to be in if your reserves are 1.25 times your foreign debt! This is the current position of Mexico!
Mexico’s growth has been in exports and is closely tied to the performance of the US economy. Growth is forecast to average from 3-4% per year until 2010. Besides the current strength of exports, private consumption within the country is growing rapidly. Consumer credit is growing with the better environment of reduced interest rates and no rampant inflation. Two factors aiding internal consumption are remittances and the average age of the population. Remittances are funds sent into Mexico by Mexicans working and earning abroad. There are 10 million migrant workers who send billions of dollars annually into Mexico. The demographic profile of Mexico is young with an average age of the population of 27 years old (one third under 14 years old). The labor force is 34.5 million people and most are young. Life expectancy is 75 years old, which is high for a developing country and comparable to the US with 77.5 years.
While Mexico’s per capita income is US $10,000US and among the highest in Latin America, it is only 25% of current US levels. There is significant inequality between regions within the country. Per capital income in Mexico City and other prosperous north cities are comparable with that of Spain. The riches 20% of the population receive 57.4% of total household income, and the poorest 20% receive just 3.5%. High income inequality currently holds the country back from its higher potential. Education is a key to changing this inequality as well as stable laws for real estate ownership by the general population.
Over 65% of the population in Mexico lives in urban areas, while 24% live in isolated rural communities with fewer than 2,500 inhabitants. An additional 10 million Mexicans live in the USA. Mexico City is the world’s second largest city with a population of over 20 million.
The current political climate is favorable with its multi-party democracy. The recent closely watched election for President of Mexico showed a commitment to democracy during the elections and its aftermath in July, 2006. Felipe Calderón of the center-right PAN was elected to replace Vincent Fox, also of PAN. Until 2000, the PRI party controlled Mexican politics for the previous 71 years.
All parties, however; seem to be committed to promoting economic reforms for the largely poor population and the group moving to middle class. However, consensus building has continued to be lacking and holds back reforms needed in energy, labor and tax reforms.
Calderón’s government needs to boost economic growth and foreign direct investment to improve Mexico’s international competitiveness and reduce the poverty. Commitment to the cost of education is required to reduce poverty and become truly a world power.
In Mexican Real Estate Markets, Mexico as investment grade commercial real estate is valued at $200 BILLION USD. This commercial real estate value makes Mexican stock the world’s 13th largest traded and is 45% of all of Latin American stocks traded.
Cross-border investors are becoming increasing prevalent and transparency is improving. This change is from the past where most real estate in Mexico was owned by local occupants, investors and entrepreneurs. Many credit the direct investment in Mexico to the implementation of the fideicomiso trust to allow foreigners to invest US dollars into real estate in the restricted zone of Mexico. This restricted zone was established to protect the border of Mexico with the USA as well as its shore line. Over 90% of funds purchasing real estate in México in 2005 were cross-border. The research of Jones Lang La Salle’s global real estate research shows that Mexican real estate was the 7th largest destination for foreign investment in 2005.
Mexico’s residential housing is estimated at 22 million homes. The chronic shortage of housing has been due partly to rapid population growth and growth of the number of households. It is estimated that the country needs between 4-6 million more homes to meet the current need. The Mexican government is currently trying to rectify the housing shortage with a national plan to coordinate all public offices involved in this sector, as well as encourage primary and secondary markets for mortgages. The government is also promoting a greater supply of land for housing. Part of this process involves continuation of programs to privatize former communal lands.
Mexican banks increased their mortgage lending by 50% in 2005 and mortgage backed securities issued tripled. The first type of Real Estate Investment Trust vehicle known as “FIBRAS“ was approved in 2005 by the Mexican Congress.
Mexico is the world’s 8th most popular tourist destination and many resorts are expanding and moving into an up-market. Investment of US dollars for purchase of second home and resort real estate remains important to the economy as well as does the spending of tourist dollars on accommodations and services.
Mexico is set to become the worlds 5th largest economy in 2040 behind Japan, India, the USA and China. What an opportunity for investment we have!
* Wikipedia: A maquiladora or maquila is a factory that imports materials and equipment on a duty-free and tariff-free basis for assembly or manufacturing and then re-exports the assembled product; usually back to the originating country.
"Maquiladora" is primarily used to refer to factories in Mexican towns along the United States–Mexico border, but increasingly is used to refer to factories all over Latin America. Maquiladora factories encompass a variety of industries including electronics, transportation, textile, and machinery, among others. Maquiladoras may be 100% foreign-owned (usually by U.S. companies) in most countries. The use of maquiladoras is an example of offshoring. Other countries such as Japan, Germany, and Korea have maquiladoras as well, but the majority of them are located in Mexico and are associated with United States' companies.
The term "maquiladora", in the Spanish language, refers to the practice of millers charging a "maquila", or "miller's portion" for processing other people's grain.
Harriet Cochran Murray
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller conduct his own due diligence and review.
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