July 25, 2013
Interviewed by: David Snow
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Private Equity Real Estate in Mexico

For Antonio Ruiz Galindo of Industrial Global Solutions, Mexico’s industrial and low-income housing sectors are some of the most compelling investment opportunities around. The Chairman and CEO explains his firm’s approach to the real estate sectors.

For Antonio Ruiz Galindo of Industrial Global Solutions, Mexico’s industrial and low-income housing sectors are some of the most compelling investment opportunities around. The Chairman and CEO explains his firm’s approach to the real estate sectors.

Private Equity Real Estate in Mexico

A Privcap Conversation with Antonio Ruiz Galindo of IGS

A public security known as a “CKD” were recently created to allow Mexican pension funds to invest in private equity. Why are they so important?

Galindo: You know, CKDs have been a great vehicle, a great change for Mexico. When we started with our first fund, I remember you know, doing road shows her in the States and you come up and say, okay I want your money because I’m building a fund and everything. And the first question you had is, who is investing in Mexico with you? Nobody was. So it was very difficult to convince a foreign fund to come into Mexico if the Mexicans were not investing. So the SECADES is a great thing because right now, there are around twenty-one billion dollars waiting to be invested by the pension funds in Mexico in the private… two private equity funds, private equity directly or real estate or infrastructure, so on so forth.

So this is great. Great news for us and has worked very well because now today, when we issue our SECADE in 2011, we said okay, we’re going to do it fifty/fifty. Fifty percent the private equity… the private pension funds for Mexico, and fifty percent foreign investors, foreign funds.

What are the most compelling sectors for Mexican real estate investment today?

Galindo: I would like to talk first of the industrial sector. Industrial sector is a mature sector, it’s a sector that keeps on growing, especially today because China has lost part of their advantage of low cost labor. Their labor has been increasing very fast, the cost of it. The other thing, transportation has come to be an issue. And the third thing is just in time, you know, it’s an issue for the companies that have to finance inventories. So Mexico, which is next door to a larger market which is the U.S. and Canada, takes advantage of that. So the industrial sector, even though is very competitive. We have been able to stay there competing with a lot of large funds.

I think the other issue in the sector, in this sector, in the industrial sector is that the Chinese are looking to joint venture with Mexican companies to bring in parts from China, assemble it here and sell it to the U.S. taking advantage of the NAFTA agreement that we have with the U.S. and Canada. So that’s a picture of the industrial sector. It’s a sector that [IRR] has come down because of competition, which is logical but it’s very steady, very safe, and has proven to be a good business in the past I would say ten, thirteen years.

The other market that’s very hot is the low income housing market. Even though we have had some issues with the public companies of low income… that build low-income housing, it’s not because of the market. It’s because their structure. And because of changes on public policy that we will not… or the government will not accept any more to have developments very far away from the urban cities. Because sometimes it takes two hours and a half for the workers to come to their workplace which is… it’s not logical. So that change… And the market is still very strong regarding demand. We have seven million… within seven and eight million deficit of homes in that market, in the low-income housing.

So we still believe that our design of attacking this market through a land bank, through trusts, has been a very good deal for us and for the developers. Because Mexico has a takeout that is made through institutions that were created by the government to finance the buyer and they have been very successful.

Also employment is growing in Mexico, the need for housing is going to grow too. So I think that’s going to be a strong play for the next, I don’t know, ten, fifteen years still. So that’s… I think those two things are very attractive. When the financing comes back to the U.S. maybe second homes would be an alternative.

AIG recently partnered with your firm. What types of deals are you looking at together?

Galindo: Yeah, basically there are two areas in the industrial sector that we have been looking at. Because of the growth of the secondary cities in Mexico, the decentralization of the manufacturing industry, there’s a lot of need for distribution centers, okay. You have to take the merchandizers to all the cities that are growing very fast. So a lot of the companies that… like Walmart, like Comercial Mexicana, like Soriana, which are big boxes, and they sell to all this products throughout Mexico, they are in big need of distribution centers. So we have taken advantage of that, we have built several distribution centers. The other thing… it’s very attractive is companies like the contract manufacturers today that are building like flat screens, like the hardware for all the copying and computers.

There are several companies like Flextronics, which are from Singapore, that are putting their new facilities in Mexico for export to the U.S. That also has been an issue. The other area, which is we have been investing with AIG and ourselves and the certificates that we put it through the stock market, is the automotive industry.

The automotive industry…Mexico has become very strong on the automotive industry. And because the way it’s structured, there are the OEMs but there are also the auto part that has to be sold to the OEMs. So a lot of the suppliers for the OEMs are coming down to Mexico to put their facilities so they can take advantage of these exports. Mexico has become the fourth largest producer of motors for cars in the world. So that says, you know, a lot and we are exporting very… a lot of vehicles. So industrial… the automotive sector in the industrial real estate has become very important.

There’s another sector is coming in very fast which is the aeronautical. Now in Mexico we have several hubs where they’re building motors, parts for planes. They will be building planes very soon in Mexico, or assembling planes very soon in Mexico.

So as you see, there are several sectors that have been attractive because of the good situation of Mexico, the good fundamentals, economic, political, that have attracted… well, producer, manufacturers which are willing to make, you know, a built suit or sailing these back for their facilities and that’s where we come in.

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