I OVERVIEW OF THE MARKET

The real estate market has rapidly evolved in Mexico over the past seven years since new legislation was introduced to promote new instruments in which to invest in long-term return sectors and activities. Capital development securities (CKDs) and Mexican real estate investment trusts (FIBRAs) boosted capital market investment in real estate.

Nevertheless, the origins of the Mexican institutional real estate market started in the late 1990s after the 1995 economic crisis in Mexico. In 2009, CKDs made their entrance into the market to provide an investment alternative for qualified players that had the ability to understand the risks of investing in long-term projects with no fixed returns. Mexican pension funds were the natural target for the issuance of CKDs at a time of diminished liquidity for developers, given their need to invest more aggressively to seek more attractive returns for their members.

CKDs are basically securities issued by a trust listed on the Mexican Stock Exchange. CKDs differ from shares as they have an expiration term to be repaid that may not be longer than 50 years. CKDs are fully regulated by the Mexican Securities Commission and the issuer trust must comply with corporate governance and reporting regulations, and can only be subscribed by qualified institutions (as opposed to FIBRAs, which are open to the general public).

Considering the risk tolerance of addressee investors and the uncertain return nature of long-term projects, CKDs are appealing for real estate companies to use as financing vehicles for the development of their projects.

In 2010 Mexico’s first FIBRA was listed on the Mexican Stock Exchange and today there are more than 10 FIBRAs on the Mexican market. A FIBRA consists of a Mexican trust that issues securities (real estate trust securities (CBFIs)) that are placed on the capital markets for the general public to invest in. Specific rules apply to FIBRAs as they are also regulated by the Mexican Securities Commission, one of the most important being the investment of a substantial part of their capital in rent-generating properties (as opposed to CKDs, where assets do not need to exist at the time of the IPO and may be developed in the future).

Today there is correlation between CKDs and FIBRAs in that CKD funds are the future sellers of assets under their development to FIBRAs, considering that there are few large portfolio inventories left in Mexico that FIBRAs have not already acquired.

Private equity funds have also played an important role in the development of a sophisticated market in Mexico. Prudential is one of the pioneers creating club deals to invest in different asset classes (from multi-family to shopping centres to residential). Other companies such as Walton Street Capital, Black Creek, Blackstone and Credit Suisse are now investing in Mexico in different projects (on the equity and lending sides), in some cases through joint ventures with local players who participate with promotion fees and equity in exchange for providing property management services to those firms. Private equity real estate ventures are made in Mexico through investment promotion corporations (SAPIs), limited partnerships (LPs) or trusts, where the sponsor is the general partner, investors have a more passive role with some pre-approval rights and the local partner carries out the day-to-day operations over the assets.

II RECENT MARKET ACTIVITY

i M&A transactions

In July of 2012, Vesta was the first commercial real estate developer and asset manager to lunch an IPO and to become a public company listed on the Mexican Stock Exchange. At that time, Vesta had an important pool of German investors and a portfolio of 85 industrial properties covering more than 1 million square metres, mostly in central and northern Mexico, with revenues in 2011 of $50.3 million.

Macquarie, in December 2012, sponsored the IPO of FIBRA Macquarie, seeding a $1.5 billion industrial portfolio acquired from GE Capital Real Estate and Corporate Properties of the Americas, where GE Capital Real Estate and MetLife provided the seller with acquisition financing of $734.5 million and $182.5 million, respectively.

In December of 2013, Mexico Retail Properties (an affiliate of Black Creek) sold 49 retail properties located in 20 jurisdictions throughout Mexico, their corresponding management platforms and other related assets to FibraUNO for a purchase price of $2 billion.

Prudential’s FIBRA (Terrafina) acquired, in September 2013, from Kimco Realty Corp and its partner in Mexico, American Industries, an industrial portfolio of 87 properties in $600 million of 11 million square feet.

In April of 2015, Prudential Real Estate Investors sold 22 retail properties to FibraUNO for $700 million.

In June 2015, Mexican real estate company Grupo Gicsa set its price per share at 17 pesos in an IPO of up to 7.2 billion pesos for local and foreign investors. Gicsa, which builds and operates high-end residential developments, shopping centres and offices, sold 368.4 million shares without considering an optional greenshoe allotment of 55.2 million shares.

ii Private equity transactions

In May of 2013, Kimco sold a nine-property Mexican shopping centre portfolio of 2.6 million square feet, to Planigrupo for $274 million.

BK Partners and Vertex acquired Mexico City’s Hotel Four Seasons in June 2013.

In December of 2014, Finsa and Walton Street Capital, through their CKD1, completed the acquisition of a $302 million industrial portfolio of 35 stabilised properties in major Mexican markets, plus 160 hectares of land for future development from IDI Gazeley Brookfield Logistics Properties.

In August 2015, Blackstone acquired from GE its commercial real estate lending business in Mexico for $3.7 billion. GE granted $3 billion of seller financing to Blackstone for the transaction.

III REAL ESTATE COMPANIES AND FIRMS

i Publicly traded REITs and REOCs – structure and role in the market

FIBRAs are equity securities issued by Mexican trusts, which are similar to real estate investment trusts. They are created by a real estate sponsor with a trustee (usually a banking institution). A FIBRA has an asset manager that manages the operations and properties of the FIBRA.

Since FIBRAs are listed on the stock exchange (locally in Mexico and globally in the international markets), any person may invest and acquire their CBFIs. CBFI holders are represented by a common representative institution that is in charge of carrying out cash distributions to investors. There is usually a subsidiary project trust or special purpose vehicle (SPV) that holds each asset or portfolio, allowing leverage segregation per asset.

The two main governing bodies of a FIBRA are the security holders’ meeting and the technical committee.

The security holders’ meeting is in charge of approving, inter alia, the change of manager, amendments to the trust, an increase in fees to the manager or members of the technical committee, policies for obtaining credit facilities and investments worth equal to or more than 20 per cent of the trusts estate’s value (10 per cent when the transaction may represent a conflict of interest). A meeting may be called by 10 per cent of security holders, who can also designate one member of the technical committee to represent them; 15 per cent of security holders are able to request enforcement of legal actions against the manager and 20 per cent of them may dispute the resolutions of any meeting in court.

The technical committee has a maximum of 21 members, of which 25 per cent must be independent. The committee is in charge of approving, inter alia, investment policies, transactions worth equal to or more than 5 per cent of the trust’s estate value, related-party transactions, supervising the manager’s performance and the creation of ancillary committees.

The characteristics of a FIBRA are:

a 70 per cent of their assets must be invested in real estate properties or rights;

b their properties must be leased or destined to be leased;

c assets may not be sold in the four years following acquisition or construction to preserve tax benefits; and

d they must make distributions once a year (usually there are quarterly distributions) to CBFI holders of at least 95 per cent of net tax results.

FIBRAs were introduced to the Mexican capital markets in 2011 and have grown since then from one FIBRA (FibraUNO) with a market capitalisation of $300 million to 10 FIBRAs with a total market capitalisation of $18 billion today. They have also raised around $6.5 billion through follow-on offerings, primarily in the form of blind pools.

FIBRAs in Mexico have also opened new ways for real estate investors and developers to dispose of their assets and cash out their investments by sponsoring the creation of a FIBRA and becoming its manager or selling the assets to an existing one at better prices than the market saw before the existence of FIBRAs.

Although the FIBRA market is still young and there is not yet general asset specialisation by all FIBRAs, some of them specialise in certain asset classes. For example, FibraHotel targets only business-class hotels in large cities, Fibra Shop targets shopping centres, and FIBRA Prologis focuses on industrial buildings. Other FIBRAs tend to have a variety of property types: FibraUNO has industrial, retail and schools, FIBRA Macquarie industrial, retail and offices, and Fibra Danhos retail and offices.

Although FIBRAs are definitely the most popular investment vehicle, the Mexican real estate market has also in the past five years seen a few IPOs of real estate operators, in Vesta, Gicsa and Planigrupo.

The challenge for real estate operators in Mexico, which have traditionally been family-owned businesses, is getting used to being highly regulated once listed on the stock exchange (with corporate governance that includes independent members of the board and continual reporting to authorities and investors) while also competing with FIBRAs for assets in the market (without the tax benefits of FIBRAs). On the positive side, not being a FIBRA has proven to be a good choice for real estate operators with a land bank and development strategy, since they are not restricted to maintaining 70 per cent of their assets on a lease-up mode (as FIBRAs do). This gives them more flexibility in their plans for construction and land reserve acquisitions.

ii Real estate PE firms – footprint and structure

Real estate private equity firms in Mexico are also fairly new. There are more than 15 funds dedicated to real estate. Some of the best-known private equity companies are PGIM (formerly Prudential Real Estate Investors), Walton Street Capital, MIRA (in partnership with Black Creek), Blackstone, Artha Capital, Thor Urbana, Prologis, IGS, CPA and MRP.

Mexico does not have specific regulations for private equity firms. The general structure of a private fund includes three groups of participants: investors, a fund manager or general partner, and SPVs or project entities. The fund manager is in charge of structuring and operating the fund and usually makes equity investments of between 1 per cent and 5 per cent of total capital, charges a management fee of 1.5 per cent to 2.5 per cent of total commitments, and receives a promotion fee of around 20 per cent of profits after investors’ expected yield (6 per cent to 10 per cent average annually).

In order to create a fund, the manager incorporates at least two legal entities (the investment vehicle and the managing company). It is desirable that the investment vehicle may be considered transparent for tax purposes in order for different types of investor to coexist, such as pension funds and other tax-exempted companies with other local and foreign investors that accumulate income at different tax rates. The target is to avoid any taxation for the vehicle and to have all tax effects directed towards investors, who can then benefit from their respective tax regimes.

The two most common forms of investment vehicles are the Mexican trust and the SAPI. Trusts in Mexico may be set up as transparent vehicles for tax purposes and do not have legal restrictions in terms of the agreements between parties regarding exit rights and obligations, rights of first refusal, veto rights, and different rights and classes for participants. Trusts usually have a technical committee that acts as the managing body. SAPIs are legal entities with better and more sophisticated rules with respect to minority rights, shareholder agreements and corporate governance than regular limited liability companies in Mexico. SAPIs are governed by the shareholders’ meeting and a board of directors, and may include different classes and rights for shares, and impose share transfer restrictions, voting limitations, separation and stock amortisation rights, rights of first refusal and different dividend treatment for classes of shares. Furthermore, in terms of minority rights, in SAPIs 10 per cent of the shareholders may designate one board member and one examiner to represent them (as opposed to regular limited liability corporations, which require 25 per cent), 15 per cent of shareholders may enforce legal actions against the board or manager and examiners (as opposed to regular limited liability corporations, which require 33 per cent) and 20 per cent of shareholders may dispute the resolutions of any shareholders’ meeting in court (as opposed to regular limited liability corporations, which require 33 per cent). SAPIs are entities that are set up ready to be listed on the stock exchange (if ultimately an IPO is desired). It is important to note that SAPIs are not transparent vehicles and pay their own taxes; however, foreign investors may still benefit from international treaties with Mexico to avoid double taxation.

In recent years, Mexican legislation changed to authorise Mexican pension funds (AFOREs) to invest in CKD vehicles on the Mexican Stock Exchange. Therefore, many real estate private equity firms have set up and launched their own CKDs in the capital market to gain access to AFORE funds. The typical structure for CKDs is to have the sponsor become the manager of the assets to be acquired and developed by subsidiary project trusts. As opposed to the CBFIs of FIBRAs, CKDs do not have a de facto secondary market for the securities to be traded on nor follow-ons to raise more money (except for certain permissible capital calls), and have an expiration term to be repaid that may not go beyond 50 years.

Although CKDs are usually used for development and construction, in some cases funds are utilised to acquire stabilised assets. However, based on the characteristics of CKDs, and the fact that target investors are qualified institutions with better risk tolerance, a CKD is the perfect vehicle with which to speculate in land bank acquisition and construction, which, again, once stabilised, may be disposed of to a FIBRA in exchange for a favourable capitalisation rate exit.

IV TRANSACTIONS

i Legal frameworks and deal structures

As previously mentioned, the most important real estate players in Mexico are FIBRAs, REOCs listed on the Mexican Stock Exchange, and private equity firms with CKDs listed on the Stock Exchange. Considering that FIBRAs, CKDs and most private funds use Mexican trusts, SAPIs and (in fewer cases) limited liability corporations to set up their investment vehicles, the laws and regulations that govern buyers’ and sellers’ conduct in Mexico are the General Law Governing Credit Titles and Transactions, the General Law Governing Commercial Corporations, the Capital and Security Market Law and the Federal Antitrust Law (for tax considerations, see Section IV.v, infra).

The General Law Governing Credit Titles and Transactions regulates the creation of Mexican trusts, which is a type of commercial contract where assets are settled into a trust by a settlor who transfers them to a trustee in charge of representing the trust and preserving the trust estate (usually a Mexican banking institution with a trustee division). The beneficiaries of the trust have their rights established in the trust agreement.

The General Law Governing Commercial Corporations regulates the incorporation of mercantile legal entities such as limited liability corporations. It sets out the minimum requirements for the existence of each type of corporation and the rules for partner coexistence.

The Capital and Security Market Law regulates the issuance of securities and the listing of entities and securities on the Mexican Stock Exchange, a requirement for FIBRAs and CKDs to raise funds. It also provides the rules for the incorporation and operation of SAPIs.

The Federal Antitrust Law regulates the thresholds for transactions to be cleared with the Mexican Antitrust Commission prior to closing.

In closing sale and purchase transactions, the parties always consider different perspectives when structuring a deal. The most important aspects to consider are the tax effects for both parties and the legacy liabilities that may be transferred to buyers. Usually, the seller would prefer to sell the legal entity holding the assets to avoid triggering payment of deferred tax liabilities. On the other hand, buyers would most likely choose to buy assets directly into a newly formed SPV, avoiding any previous liabilities that sellers may have had during their ownership and operation of the assets.

Real estate transactions in Mexico have increasingly followed the US model and it is now common to see the following in large deals:

a letters of intent with confidentiality and exclusivity provisions in exchange for an escrow of 5 per cent to 10 per cent of the purchase price;

b master purchase agreements with extensive representations and warranties;

c conditions precedent;

d execution of closing documents;

e indemnities with deductibles, baskets and caps; and

f Foreign Corrupt Practices Act clauses.

For FIBRAs and CKDs to acquire an asset, if the property value is equal to or higher than 20 per cent of the total value of its assets at that moment (10 per cent when the transaction may represent a conflict of interest), the security holders’ meeting (CBFIs or CKDs) will be the body in charge of approving such acquisition. If the property value of the target assets is between 5 per cent and 10 or 20 per cent, the technical committee makes the decision. In all other cases, special purpose committees (e.g., investment committee) or the asset manager may decide.

In private equity funds, the general partner makes capital calls within capital commitments to acquire new assets and in some cases, based on the size of the deal, the board of directors would have to approve, depending on whether the fund is discretionary or non-discretionary.

All other material decisions such as mergers, dissolutions or selling of the entire business are subject to the approval of security holders’ meetings (FIBRAs and CKDs) and the partners or parties to the trust (for private equity funds).

When a portfolio of properties located in different cities throughout Mexico is the target of an acquisition, it is challenging to obtain title information from all the property registries as each has its own way of functioning and not necessarily all of them have the same systems and technology. Closing of multi-jurisdictional deals is complex and requires flawless notary coordination to assure accurate and timely information on each property and payment of property transfer taxes and registry duties.

Title insurance in acquisitions is also becoming standard practice in Mexico, mostly for funds sponsored by US companies. Local players do not tend to use it and prefer to rely on property registry information obtained during due diligence.

Antitrust filings are necessary in Mexico if the thresholds under the Federal Antitrust Law are met, even if the acquiring party has no participation in the relevant industry and there is no increase in market share from the transaction. Thresholds take into account the purchase price of the transaction with an impact in Mexico, the assets and sales of the target in Mexico, the capital stock involved in Mexico, and the global assets and sales of participants. Approval should generally be obtained within 60 days of filing being complete and the transaction may not close unless clearance is issued by the Mexican Antitrust Commission.

Another trend is the analysis of non-compete clauses by the Antitrust Commission being made with a higher level of scrutiny. Therefore, all parties that wish to include non-compete clauses in their transactional documents should be aware that generally their duration should not exceed three years and they should only involve parties and goods or services that are directly related to the transaction. Otherwise, parties run the risk of being heavily questioned on the content of their non-compete clauses and, in some cases, a transaction’s approval might be conditional on the amendment of existing non-compete clauses.

ii Acquisition agreement terms

There are different types of transactions for the acquisition of real estate properties in Mexico. The most common are stock purchase agreements, asset sales and purchase contracts, joint ventures and private equity fund structures.

A stock purchase agreement is usually preferred when the seller intends to sell its stake in a joint venture or the entire real estate business. A sub-type of this category is the sale of beneficiary rights under a Mexican real estate trust. Also tax considerations and current leverage being in place are reasons to choose this structure.

Asset sale and purchase transactions are generally carried out if the buyer does not want to assume the liabilities of existing legal entities holding assets or to segregate assets into clusters, or have them transferred to the estate of a FIBRA.

Deals start with a letter of intent covering the most important aspects of the transaction, including target assets, purchase price, due diligence period, escrow, exclusivity and confidentiality.

In some cases, depending on the complexity of the transaction, a master purchase agreement is executed with a layout price, assets, pre-closing conditions (e.g., release of liens, clearance from the Antitrust Commission), representations and warranties, prorated share of income from assets prior to and post-closing, indemnities (including baskets, deductibles, caps), and non-compete, non-solicitation and confidentiality clauses.

Whether a deal closes as a stock purchase or an asset sale, the most important and common terms and conditions are the following:

a purchase and sale;

b representations and warranties;

c conditions precedent;

d closing;

e covenants;

f indemnities; and

g transitional service agreements.

iii Hostile transactions

No hostile transactions have occurred yet in Mexico regarding public real estate companies or FIBRAs, nor are they viewed as a threat at this moment; however, the consolidation of FIBRAs may be expected in the coming years.

iv Financing considerations

There are two traditional commercial real estate lending structures in Mexico. One is the standard corporate credit transaction used mostly by banks. In this type of structure, a bank performs a market valuation of the assets based on asset class, construction and location, and determines the proceeds of the loan considering such valuation. A mortgage and a corporate guaranty are requested (usually a pledge over the borrower’s shares). The other loan structure used by lenders such as GE Capital Real Estate (before it was sold to Blackstone in 2015) is a non-recourse asset-based loan with a loan-to-value ratio based on the valuation of cash flow coming from rents (present and pro forma considering roll-over and down-time periods in terms of asset class, location, market, competitors and inventory). This type of structure usually targets portfolios that are cross-collateralised under a guaranty trust collateral agreement. If the assets do not have enough cash flow to cover debt service, the lender cannot ask the borrower to complete payment with resources other than from secured properties. The currency of the loan is arbitraged based on the currency of the lease agreements. In most cases, industrial leases are dollarised and those of offices can be mixed (some leases in dollars and some in pesos). Retail takes place mostly in pesos.

Another form of financing transactions is the placement of CKDs by private equity funds to obtain resources from AFOREs and other qualified investors.

FIBRAs have also reached out to the capital markets to obtain unsecured financing through the issuance of bonds, which have shown to give them better pricing (all-in rates) than typical banks do. The challenge for FIBRAs to issue this type of financing instrument is that most of the portfolios that they have acquired from third parties come with loan assumptions, and the usual negative pledges in unsecured bond issuances have restrictions on FIBRAs having mortgages or other type of guaranties over their assets. To respond to the bond threat, banks are starting to grant unsecured loans to FIBRAs by syndicating the risk among them, with more flexibility on negative covenants to preserve a market share against bonds.

v Tax considerations

As previously mentioned, tax considerations for structuring a sale and purchase agreement depend on the tax impact for each party. In addition to legacy liabilities, other costs and taxes for acquiring assets should be considered by the buyer, such as transaction recording fees with property registries,2 as well as property transfer taxes, which is locally regulated and may range from 2 per cent to 6 per cent of the purchase price.3

Private equity funds have different options to structure their investment vehicles from a tax perspective. One option is to create a Mexican trust that is deemed a transparent vehicle for tax purposes, meaning that the settlor or beneficiaries (or both) would bear the tax effects of the transactions. If the trust is revocable and the settlor may revert the property of the assets settled into the trust, the settlor will be considered the party responsible for the taxes over the transactions of the trust. On the other hand, if the trust agreement states its irrevocability, the beneficiaries will bear all tax effects.

There also exists a special type of trust called a capital risk investment trust (FICAP). An important characteristic of FICAPs is that Mexican tax laws recognise that the participants of the trust may have different income tax rates (e.g., exempted pension funds or foreign investors) and allows them to benefit from their respective tax regimes by paying taxes according to their respective tax regime or jurisdictions. This type of trust was put in place in Mexico to offer an alternative to private equity firms using Canadian LPs for their investments in Mexico, which was recognised as a transparent vehicle for tax purposes (under tax law interpretation by some players). FICAPs have different requirements and limitations such as:

a investing at least 80 per cent of their assets solely in stocks of target companies or providing financing to them;

b a prohibition on selling the stocks of the target companies for two years after the acquisition;

c no more than 10 per cent of annual income coming from service rendering;

d 80 per cent of income being distributed annually to beneficiaries; and

e having a maximum duration of 10 years.

If a private equity firm prefers to acquire assets instead of shares, project companies subsidiary to the FICAP may be incorporated to acquire assets directly and the FICAP can then acquire the shares of the project companies.

FIBRAs are considered transparent for tax purposes with the holders of CBFIs bearing tax effects of the transactions of the FIBRAs. However, income tax in connection with the transfer of real estate assets to a FIBRA may be deferred for the benefit of the transferee, if the transferee receives CBFIs in exchange for the assets, until such time as a CBFI holder sells the CBFIs. In many jurisdictions within Mexico, FIBRAs defer property transfer taxes until the CBFI holders sell their CBFIs. With respect to each year’s tax result, the trustee of the FIBRA is responsible for withholding the applicable income tax and no provisional payments are required.

Pension funds such as AFOREs are exempt from paying income tax from their yields over CBFIs and CKDs.

vi Cross-border complications and solutions

There are no special withholding tax regulations for foreign owners of property in Mexico. Nevertheless, foreign purchasers face different types of complications in Mexico.

Some US investors are used to retaining title insurance for their transactions and under Mexican regulations, title insurance for Mexican assets may only be obtained from insurance companies registered and authorised by the Mexican Insurance Commission and operating in Mexico. Although 10 years ago there were several international title insurance companies with established operations in Mexico, today, there is only one remaining in Mexico and, therefore, the offering is limited.

Another factor to consider is that foreign legal entities and individuals may directly acquire and own land in Mexico4 by waiving the right to invoke the protection of their country of citizenship in connection with the relevant real estate asset, therefore, being deemed Mexican nationals for that purpose only (i.e., subject to Mexican regulations and courts on land and property). In such case, aliens must, prior to the land purchase:

a gain a permit from the Mexican Ministry of Foreign Affairs to carry out the land purchase if Mexico does not have diplomatic relationship with the alien’s country; or

b file the waiver acceptance with the Mexican Ministry of Foreign Affairs if Mexico has diplomatic relationship with the alien’s country.

Foreign legal entities and individuals may indirectly acquire and own land in Mexico in the restricted area (other than for residential purposes) by participating in or setting up a Mexican legal entity that files acceptance of the waiver with the Mexican Ministry of Foreign Affairs and providing notice of the acquisition within 60 days. Foreign legal entities and individuals may indirectly acquire rights to use land in Mexico for residential purposes in the restricted area through a Mexican trust with a Mexican authorised financial institution as trustee, by obtaining a permit with the Mexican Ministry of Foreign Affairs to that effect. There are no restrictions on aliens leasing land in Mexico other than observance of the usual local and civil laws also applicable to nationals.

V CORPORATE REAL ESTATE

There is not yet a trend in Mexico to separate, in the real estate business, operating companies from property companies; however, non-real estate players with large numbers of properties are disposing of their assets to FIBRAs and other real estate operators. This has been the case for universities, franchises and even banking branches.

Another important change in the real estate arena in the past five years is the migration of the traditional real estate business of developing, owning or holding, and managing assets to a business of management fees, where developers have seeded their properties into FIBRAs and become their property managers and operators, focusing in some respects on the returns from fees charged to the FIBRAs.

CKDs have also seen private equity players seeking operating and promotion fees from pension funds in their listed investment vehicles.

VI OUTLOOK

The Mexican real estate industry has evolved rapidly in the past five years since the creation of FIBRAs and CKDs, both types of vehicle being listed on the Mexican Stock Exchange and the international markets, allowing individual and sophisticated investors to participate with equity in the real estate sector. Furthermore, small developers have become institutionalised players and large international investors have entered the country through joint ventures with local real estate operators or directly by setting up operations in Mexico. Title insurance has also become a practice in Mexico, giving more confidence to foreign lenders, while Mexican banks are now a competitive financing choice too. Finally, the public registries of property are in the process of updating and digitising their data, which will make them faster and friendlier to due diligence and real estate transactions in general.

In the near future there may be consolidation of FIBRAs, and more FIBRAs moving to specialise in asset classes. Investments from AFOREs in CKDs will continue to grow as AFOREs (with funds of around 3.8 billion pesos) have so far only invested 3.8 per cent of their funds in CKDs of the 20 per cent that some of them are authorised to invest and 1.9 per cent in FIBRAs of the 10 per cent that some of them are also authorised to invest.

Private equity firms will continue to develop retail, industrial and office buildings, which they will eventually sell to the FIBRAs at the end of the investment period. Some of them will sponsor and create their own specialised FIBRAs with their portfolios.

Multi-family will become a new asset class in Mexico, where FIBRAs and CKDs will look to maximise their liquidity and amplify their size when the inventory of class A stabilised assets is running off and will have to wait until private equity players build and lease up new properties.

Financing of projects and assets will continue to be supported by bonds issued by FIBRAs in the capital markets and unsecured syndication lending to support FIBRAs complying with maximum allowed debt ratios under the Securities Regulations. Nevertheless, new players like Blackstone and Credit Suisse will bring new commercial real estate structures through CKDs and mortagage REITs to serve as their source of funds in order to provide lending to other FIBRAs, CKDs, real estate operators and private equity firms. New lending structures will most likely be need to be put in place to keep up with regulations and the needs of real estate players (mezzanine loans, recourse corporate credits, flexibility to asset guaranty releases and substitutions, and unsecured lending transactions).

Footnotes

1 Alejandro Trujillo is a partner at Galicia Abogados.

2 Some jurisdictions do not have a cap and calculate fees on purchase price.

3 In the event of buying the entity holding the assets, these taxes may not be paid, unless the entity is a Mexican trust and buyer acquires the seller’s beneficiary rights over the trust. Property transfer taxes would be triggered when beneficiary rights under a trust are transferred to a third party.

4 Other than in the ‘restricted area’, which conforms a strip of land of 100 kilometres along borders and 50 kilometres along beaches.