Greystar offers fully-integrated real estate services, including property management and investment management, as well as development and construction services. It has over 437,000 multifamily and student units under management globally and more than US$11.4 billion of sponsored multifamily projects in the US.
Q: To what extent is the rental housing market developed in Mexico and how does it compare to the US market?
A: The US rental housing market is much more mature than in Mexico. The majority of assets stabilized and new supply is directly correlated with the creation of jobs. New sources of employment attract people from different areas, increasing the demand for rental housing locally. This is compounded by existing local demand, which is the bedrock for any new asset. Despite the maturity of the US market, we expect continued growth in key cities that host new jobs and economic activity.
Demand for rental housing in the Mexican market, however, is linked to demographics and consumer behavior rather than the creation of new jobs. This is due to a lack of existing supply of professionally-managed and high-quality rental housing. The country’s large renter population lives in informally leased units referred to as the shadow market. Macroeconomically, Mexico is experiencing steady growth with a positive switch from informal to formal labor. Demographic trends in Mexico are also positive, with a large percentage of young people entering the workforce, accelerating social and geographic mobility, growth in single and two-person households, and other dynamics that are conducive to rental demand.
Q: How did the September 2017 earthquake impact the rental market in Mexico City?
A: We have witnessed a significant change. People still want to live in central locations with proximity to work and urban amenities but as an outcome of the earthquake, the market is beginning to differentiate between high-quality and poor-quality buildings. The Polanco, Cuauhtemoc and Juarez neighborhoods absorbed the excess of artificial demand as people from the hard-hit areas of Condesa and Roma searched for new homes. Newer and undamaged apartments in buildings in these areas experienced a 20-30 percent rise in rent. This clearly demonstrates the imbalance between supply and demand, where residents continue to rent and compete for the limited supply of quality rental units available. Cities continue to grow, attracting not only investment but also foreign nationals, further increasing the demand for quality rental apartments.
Q: What has been Greystar’s experience in raising capital for these types of projects?
A: We manage foreign capital and are in the process of expanding our assets under management through a CKD with Mexican capital. Raising a CKD is a lengthy process. There are many CKDs in the pipeline and many managers are looking to raise capital for their projects. Meanwhile, the Afores have limited resources to underwrite the pipeline of opportunities before them. As this backlog continues to clear, the market of developers and investment firms looking to enter the industry has become increasingly competitive and sophisticated. However, Mexican capital has historically been conservative and not accustomed to venturing into innovative sectors which are operationally intensive. Mexican institutional investors work over long cycles with small teams charged with making important decisions. This can lead to a lengthy process to raise a CKD.
International funds continue to have a large appetite for Mexico. Despite changing macroeconomic conditions and uncertainty I do not believe these have had a substantial impact on the long-term thesis for investment multifamily housing in Mexico. Project financing has incurred increased volatility in interest rates, raising the cost of leverage. This is especially important in large housing developments like ours with three to four-year timelines to design and build. Over the last few years, we have established a strong relationship with the Federal Mortgage Society (SHF), which has created loans specifically designed to incentivize the construction of rental housing. We hope that these products and our partnership with SHF will prevail through the political changes over the coming year. Additionally, commercial banks are beginning to show more interest in investing in Mexico.
Q: Why should investors and banks look to rental housing as a favorable option for the next year?
A: Purpose-built rental housing is one of the largest real estate opportunities in which institutional capital in Mexico has almost no presence currently. The asset class has several attractive characteristics that makes it very desirable for institutional investors. Firstly, it is a liquid investment with attractive yields. Secondly, it has proven to be less cyclical than other asset classes in the case of economic downturns. And thirdly, there is very high demand for the product. In more developed markets such as the US, Europe and Japan, purpose-built rental housing has the lowest cap rates of all real estate classes. This speaks to its attractive risk-return profile and its desirability as an investment product.
In the case of Mexico, we are convinced that the first professional players in the industry will achieve outsized returns. Simple demographics indicate there is an extremely large demand for quality rental housing. In my opinion, we are very far from attaining balance between supply and demand of rental housing across Mexican cities. Greystar is focused on developing directly and through partnerships 10,000 new apartments in the next five years in Mexico. Upon achieving this goal, we will only have scratched the surface of Mexico’s profound market opportunity.
This is an exclusive preview of the 2019 edition of Mexico Infrastructure & Sustainability Review. If you want to get all the information, plus other relevant insights regarding this industry, pre-order your copy of Mexico Infrastructure & Sustainability Review 2019 or access the digital copy of the 2018 edition.
Eduardo Orozco participated as a panelist at Mexico Infrastructure & Sustainability Summit 2018, at the Marquis Reforma hotel in Mexico City this November 14! Find the highlights of his panel here or click here to register for next year’s event!