New Frontier: Mexico Real Estate Investment

RIO GRANDE VALLEY, TX-Looking to bridge the gap of misperceptions, Deloitte Touche Tohmatsu took hundreds of investors across the border into Mexico in a webcast presentation focused on development trends and tax tips for investing south of the Rio Grande.

The hot properties, as would be expected, are residential and hospitality, with beachfront development at the forefront of the discussion and spending patterns. Mauricio Monroy, managing partner of Deloitte Sonora and Baja California region, and Ed Gonzalez, international tax director of Deloitte Tax LP, provided street-savvy tips about legislation implemented in the past three years to entice foreign investment.

“There is a trend of looking at Mexico,” Monroy said, “and the three big players are the US, Canada and Spain.” Just this year, it’s projected that $2 billion will be invested in Mexico’s residential market. And, it’s only going to go up due to retiring Baby Boomers, mainly from the US. He says the five-year projection is another 10,000 residential units will be needed to meet Boomers’ demands. Beach development accounts for 75% of the near $1.6 billion spent in recent years by US investors.Monroy says one of the newest trends to emerge is the shifting investment ratio by foreign and national investors.

In 2005, Mexican investors funded 80% of the development growth whereas they have contributed just 5% of the 13.1% growth that’s taken place to date this year, according to Monroy. There are now 30 pension funds, primarily from the US and Canada, registered to do business in Mexico.

As Boomers, many from Texas, check out the residential and hospitality product, it’s the office and industrial markets that are attracting capital from US and European institutional circles. Among Mexico’s legislative changes has been to open the door for a REIT or “fibra” structuring, but to date not one has emerged on the nation’s stock exchange. Monroy said one REIT–a development group for sports complexes and racetracks–is claiming it’s cleared all listing hurdles although it has yet to debut. And, at least three office REITs are being processed.

The presenters polled listeners to gage their knowledge about their southern neighbor. Most respondents believed Mexico City’s office market was considerably smaller than the 50 million sf that it is. Other surprises: it’s two-thirds rental space and roughly five million sf came on line last year, just in Mexico City. Stats weren’t provided for its other two office strongholds, Monterrey and Guadalajara.

And a discussion about Mexico wouldn’t be complete without touching on maquiladora development. Monroy says there’s been a significant uptick in the number of European and US institutions financing and taking on sale-leasebacks in the industrial developments along the border. With maquiladora trade now bouncing back from last year’s slump, there’s been an increased need for support services, further fueling real estate development.

As the other commercial sectors gain momentum, the door opens for stepped-up retail development. Monroy said the activity right now is concentrated around the Big Three cities. “It’s very active,” he said. “Not only Mexico chains are building, but also there’s an influx of big names from the US and UK.”

But, there are investment differences that do need to be heeded. Monroy and Gonzalez pinpointed several areas of caution about Mexico’s tax laws, including a mandated 10% profit-sharing plan for employees. They explained the way around the mandate is to set up a real estate service company. Similarly, there are ways to defer and reduce the 29% corporate income tax, which drops to 28% in 2007. And unlike before, real estate can be 100% owned and managed by foreigners.

“The symmetry is critical when dealing with Mexico and making sure the tax considerations are addressed from a US tax perspective,” Gonzalez stressed.

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