Mexico clears way for maiden real estate investment

Fri Dec 3, 2010 11:02pm GMT

* Tax uncertainty had delayed offerings for years

* Local, federal government cleared some obstacles

By Patrick Rucker

MEXICO CITY, Dec 3 (Reuters) – Mexico will offer shares of its first real estate investment trust early next year as Latin America’s second-largest economy mints an asset that could help stimulate property markets.

Investors have complained for years that Mexican real estate investment trusts, known as REITs, were impossible to structure due to murky tax rules and and other costly regulation.

Market uncertainty and a small pool of eligible properties have also discouraged investors but local financiers have bundled 16 commercial and industrial properties that will underpin the new security.

“These kinds of instruments are never easy to structure. Piece by piece, though, we have put the puzzle together,” said Augusto Arellano, director of Protego Asesores, which spent 18 months putting together the REIT to be dubbed ‘Fibra Uno’ after the Spanish acronym for the security.

Mexico finance ministry officials have helped clarify the federal tax treatment for REITs while some states in Mexico have forgone their tax take in order to encourage the market, Arellano said.

Regulators have also recently cleared the way for Mexican pension funds to bet some of their $114 billion on the new security in a move that should reassure outside investors.

President Felipe Calderon has tried to stir infrastructure investments by cutting red tape and pushing the pension funds to invest in roads, bridges and other construction projects.

The size of the new REIT has not been disclosed but one source close to the deal said he expects the security to go on the block before the end of February.

Mexico’s commercial and industrial real estate sector is underdeveloped compared to regional peers like Brazil, where foreigners see securities markets as more dynamic.

Lawmakers created a Mexican version of real estate investment trusts more than five years ago but the securities have not been used due chiefly to adverse tax implications.

“The shared view is that the tax uncertainty was the main obstacle,” Arellano said.

Since they bundle a variety of real estate projects, REITs add liquidity to the market while hedging risk for investors. The securities, which can be traded like shares, typically shield the fund from corporate income tax.

Santander, Merrill Lynch and UBS are to help shepherd the investment to global investors.

(Reporting by Patrick Rucker; Editing by Kenneth Barry)