Mexico project final

New York University Schack Institute of Real Estate

OVERVIEW OF CROSS-BORDER REAL ESTATE BUSINESS IN MEXICO

Felipe Kohn, Xiaolong Wang, Mo Han, Ameni Kabboudi COMPARATIVE INTERNATIONAL REAL ESTATE Spring 2016

” Tabla de contenido” Fundamentals......................................................................................................................... 4 Geography ............................................................................................................................ 4 Geopolitical Market Access ................................................................................................. 6 Demographics ....................................................................................................................... 7 Demographic changes ........................................................................................................ 9 Economy ..............................................................................................................................10 GDP ..................................................................................................................................10 Sovereign debt..................................................................................................................10 Growth, Exchange Rate, Inflation Rate and Unemployment Rate..........................................11

Barriers for Cross-Border Business Activities .................................................................... 13 Restriction on foreign ownership..........................................................................................13 Taxation...............................................................................................................................13 Real Estate Acquisition Tax – “Impuesto Sobre Adquisición de Inmuebles (ISAI)”...................13 Value Added Tax (VAT) – “Impuesto al Valor Agregado (IVA)” ..............................................14 Income Tax – “Impuesto a la Renta” ...................................................................................14 Sale of Real Estate Tax .......................................................................................................14 Tax Incentives to REITS – “Beneficios fiscales a FIBRAS”.......................................................14 Appraisal Tax.....................................................................................................................14 Investment risks...................................................................................................................14 Corruption ........................................................................................................................14 Crime and Drug ..............................................................................................................14 Owne rship Types in Re al Estat e.....................................................................................15 CO-OWNERSHIP ................................................................................................................15 National Land Goods .........................................................................................................15 RESTRICTION.....................................................................................................................15 REI Ts...................................................................................................................................15 Mex ico City Rea l Estate Market .....................................................................................16 Office ...................................................................................................................................16 Industrial .............................................................................................................................17 Residential...........................................................................................................................18 Multi-family fundamentals.................................................................................................18 Comparison between Multi-family and other asset types in the Mexican market ..................19 Demand drivers for Multi-family in Mexico City...................................................................19 Characteristics of the current supply for Multi-family in Mexico City ....................................20 Our Deve lopment: Multi fami ly ......................................................................................20 Site ...................................................................................................................................20 Neighborhood...................................................................................................................21 Accessibility ......................................................................................................................21 Roma Norte Market Overview............................................................................................22 Comparable Properties ......................................................................................................22

Development Project: Micro Apartments............................................................................23

Sources ................................................................................................................................. 29 Annex.................................................................................................................................... 30

Fundamentals Geography Mexico, officially name Estado Unidos Mexicanos, is a country in North America. Politically is democratic republic and it formed by 32 federal entities (31 states and the capital, Mexico D.F., is considered a singular federal entity). The Mexican territory has a surface of 1,964,375 square kilometers. Mexico is also home to one of the oldest and greatest civilization in the world’s history.

With rich and diverse resources, the country boasts a powerful context that is contributing to its social and economic background. In this report we go through the political system as well as the financial health of the economy that have significant effect on the real estate industry.

Politics Mexico is made of 31 states and one federal district which is Mexico City, DF. EXECUTIVE The Last election was held in 2012 where Enrique Pena Nieto was elected as a president less than six years according to Mexican rules. It is considered a stable country even though it is facing a ‘civil war’ against drug dealing and corruption. The Political Hierarchy of the country consists of 5 LEGISTLATIVE components, the executive which is the highest power who is the president, then the legislative where the senate and the deputies formed about 628 members. The judicial as well is divided into two groups the federal and the state systems. Later the state government which has its own constitution with the right to legislate and levy taxes decided on a JUDICAL national level. Last but not least, the local government which is the basic and the lowest in hierarchy known as municipalities which take responsibility for public services. With deep correction in juridical system as well as the administrative structure, the government is trying to boost the sluggish THE STATE economy of the country. Mexico is also member of the United Nations.

GOVERMENT Interestingly enough, the drinking age is 18 as well as the voting age and this complies with most of other countries where citizens who reach the age of 18 have the right and also the obligation to participate in political election. To qualify as a president, the person needs to be Mexican citizen with THE LOCAL GOVERMENT a minimum age of 35.

Federal Entity

Capital

Population

Surface [km2]

Aguascalientes

Aguascalientes

1 184 996

5 625

Baja California

Mexicali

3 155 070

71 546

La Paz

637 026

73 943

San Francisco de Campeche

822 441

57 727

Tuxtla Gutiérrez

4 796 580

73 681

Chihuahua

3 406 465

247 487

No aplica

8 851 080

1 479

Coahuila

Saltillo

3 055 395

151 571

Colima

Colima

650 555

5 627

1 632 934

123 367

Baja California Sur Campeche Chiapas Chihuahua Ciudad de México

Durango

Victoria de Durango

Guanajuato

Guanajuato

5 486 372

30 621

Chilpancingo de los Bravo

3 388 768

63 794

Pachuca de Soto

2 665 018

20 856

Guadalajara

7 350 682

78 630

15 175 862

22 333

Morelia

4 351 037

58 667

Cuernavaca

1 777 227

4 892

Tepic

1 084 979

27 862

Monterrey

4 653 458

64 203

Oaxaca de Juárez

3 801 962

93 343

Puebla de Zaragoza

5 779 829

34 251

Santiago de Querétaro

1 827 937

11 658

Chetumal

1 325 578

42 535

San Luis Potosí

2 585 518

61 165

Sinaloa

Culiacán Rosales

2 767 761

57 331

Sonora

Hermosillo

2 662 480

184 946

Villahermosa

2 238 603

24 747

Ciudad Victoria

3 268 554

80 148

Tlaxcala

Tlaxcala de Xicohténcatl

1 169 936

4 016

Veracruz

Xalapa-Enríquez

7 643 194

71 856

Yucatán

Mérida

1 955 577

39 671

Zacatecas

1 490 668

75 416

Guerrero Hidalgo Jalisco México Michoacán Morelos Nayarit Nuevo León Oaxaca Puebla Querétaro Quintana Roo San Luis Potosí

Tabasco Tamaulipas

Zacatecas

Toluca de Lerdo

Geopolitical Market Access Since the North American Free Trade Agreement (NAFTA) was settled in 1994, the Mexican states bordering USA have tripled in population. Extending on both countries, the 50 kilometers free trade zone represents a partnership that has fused the economies of both countries. Because of the current structure of USA and Mexican economies and the amount of trading, there is a strategic interest in this relationship.

Exports to:

Imports from:

Country

Percentage

Country

Percentage

USA

79.87 %

USA

48.19 %

Canada

3.03 %

China

17.01 %

China

1.38 %

Japan

4.40 %

Spain

1.24 %

Germany

3.75 %

Brazil

1.17 %

South Korea

3.35 %

Colombia

1.02 %

Canada

2.34 %

Germany

0.92 %

Malaysia

1.71 %

Japan

0.90 %

Taiwan

1.60 %

Switzerland

0.72 %

Italy

1.40 %

Netherlands

0.65 %

Thailand

1.20 %

Other

9.10 %

Otros

15.05 %

Source: INEGI

Demographics

The population in Mexico is in decline to reach only 1.32% as a population growth rate. The population is growing in size but the median age is in decline which will have future impact on the labor as well as the type of properties that need to be serving the demand. In fact, 78.7% of poplation are living in urban areas while only 21.3% of the population is living in rural area. Mexico City accounts for 21.2 million people which makes it 4th most populated city in the world.

2012

2013

2014

Population, total

122,070,963.0

123,740,109.0

125,385,833.0

Population growth (annual %)

1.4

1.4

1.3

Surface area (sq. km)

1,964,380.0

1,964,380.0

1,964,380.0

Population density (people per sq. km of land area)

62.8

63.7

64.5

Life expectancy at birth, total (years)

76.4

76.5

..

Fertility rate, total (births per woman)

2.3

2.3

..

Adolescent fertility rate (births per 1,000 women ages 1519)

66.0

64.7

63.5

Births attended by skilled health staff (% of total)

96.0

..

..

Mortality rate, under-5 (per 1,000)

15.3

14.5

13.8

Prevalence of underweight, weight for age (% of children under 5)

2.8

..

..

Immunization, measles (% of children ages 12-23 months)

99.0

89.0

97.0

Forest area (sq. km)

663,148.0

662,232.0

..

Terrestrial and marine protected areas (% of total territorial area)

13.7

..

..

Annual freshwater withdrawals, total (% of internal resources)

19.6

19.6

..

Improved water source (% of population with access)

95.1

95.6

96.1

Improved sanitation facilities (% of population with access)

83.7

84.4

85.1

Urban population growth (annual %)

1.8

1.7

1.7

These are the main cities according to the census of 2010 (source: INEGI): City

Population

5

Tol uca

1 936 126

20 116 842

6

Ti jua na

1 751 430

1

Ci uda d de México

2

Gua dalajara

4 434 878

7

León

1 609 504

3

Monterrey

4 106 054

8

Ci uda d Juárez

1 332 131

4

Puebla

2 728 790

9

La La guna

1 215 817

10

Querétaro

1 097 025

18

Chi huahua

852 533

11

Sa n Luis Potosí

1 040 443

19

Morel ia

829 625

12

Méri da

973 046

20

Sa l tillo

823 128

13

Mexi ca li

936 826

21

Vera cruz

811 671

14

Agua scalientes

932 369

22

Vi l lahermosa

755 425

15

Cuerna vaca

924 964

23

Reynosa

727 150

16

Aca pulco

863 431

24

Tuxtl a Gutiérrez

684 156

17

Ta mpico

859 419

According to the census of 2010 there are 59 metropolitan areas, adding up to 63,8 million inhabitants, representing 56,8% of the total population of the country. 1

Demographic changes Mexico has gone through big demographic changes in the 20th century. In 1914 there were 15 million people and 100 years later, in 2014, they have 120 million (8 times more). Life expectancy in Mexico today is 75 years, one century ago it was of 40 years.

According to the United Nations hypothesis of their 2012 revision, the peak of population will be in year 2057 with 157 million people, after that the population is expected to decrease. In 2064 it expected to reach 156 million, and then in 2100 it is expected to be 140 million. Meaning that after the second half of this century the population is expected to start decreasing. The demographic growth rate between 2015 and 2020 is estimated to be 1.1% annually. 2 The migration to the USA has decreased significantly. In 2010 only 140.000 mexicans were accounted as new immigrants in the USA, this is very low compared to the 550.000 in the year 2005. 3 This change can be expected due to the economic contraction in the USA and also the downfall of the construction industry. Nowadays there is a lot of optimism in the economic development of Mexico, which could mean not only that there will be less people migrating, but also some immigrants could return to Mexico, further contributing to the population growth.

Also according to the UN population prospects, the mexican population around 65 years of age will go from 7.1 million in 2010, to 31.5 million in 2050. 4 This means that the old population will almost 1 http://www.inegi.org.mx/sistemas/biblioteca/detalle.aspx?c=265&s=inegi&upc=702825003884&pf=P

rod&f=2&cl=0&tg=0 2

United Nations (2012), World Population Prospects, The 2012 Revision.

3

Zenteno, René (2012), “Saldo migratorio nulo: el retorno y la política anti-inmigrante”, en Coyuntura Demográfica, núm. 2, México, 2012, pp.17.

4

“La Situacion Demografica de Mexico 2014”, Consejo Nacional de Población, Mexico 2014, pp. 20.

quadruple in 40 years. While in Europe the aging of the population was a slow process, it is still causing problems even though they are much more developed. In Mexico the aging of the population will present itself in a very accelerated and sudden manner, which will present a big challenge.

Economy GDP The Gross Domestic Product (GDP) of Mexico was worth 1,294.69 billion US dollars in 2014. The GDP value of Mexico represents 2.09% of the world economy. GDP in Mexico averaged 390.89 USD Billion from 1960 until 2014, reaching the highest in 2014. GDP in Mexico is reported by the World Bank Group.

Economic Indicators

 15TH LARGEST ECONOMY IN THE WORLD 1.26 trillion economy

 UPPER MIDDLE CLASS GDP Per Capita is $10,000

 3.5% ECONOMIC GROWTH 4-5% before 2008 and 1994 Crisis

 THE END OF THE COMMODITY SUPER CYCLE Low prices of commodity - $ 130 B revenues from oil

Services account for 62% of total GDP. The biggest segments within Services are: Wholesale and Retail trade (16%), Real Estate (10%), Transport, Warehousing and Communications (7%) and Financial Services and Insurance (6%). Government spending accounts for 4% of GDP. 5

Sovereign debt Until June 2015 sovereign debt was at 32.7% of GDP, according to Banco de México, the sovereign debt was 81,069 Million dollars. The country also has a flexible credit line of 72 billion dollars with the IMF to use in case of macroeconomic contingencies.

5

http://www.tradingeconomics.com/mexico/gdp-growth

Foreign Debt As Percentage of GDP. Source:https://upload.wikimedia.org/wikipedia/commons/2/2d/Deuda_del_sector_pĂşblico_en_MĂŠxico_como_porcentaje_del_PIB.svg

The sovereign debt in foreign currencies represents 21.7% of the total, while the rest is in Pesos, this is in contrast to past crisis (20 years ago) where 80% of the debt was in dollars. Of the sovereign debt in foreign currencies, 79% is in American dollars, 13% euros, 4 to 5% yen and 3% in pounds. 6

Growth, Exchange Rate, Inflation Rate and Unemploym ent Rate The Mexican economy continues to expand to a modest growth rate of 2.4%. The modest growth during 2015 was attributed to the weak industrial production of USA, a decrease in the production of oil (which reduced GDP in about 0.4%), and the volatility of the financial market. A slow recovery is expected to continue, with an expected economic growth of 2.6% in 2016 and 2.9% in 2017. 7

6

http://www.cnnexpansion.com/economia/2015/08/06/deuda-externa-de-mexico-en-riesgo-por-elsuperdolar 7

http://www.bancomundial.org/es/country/mexico/overview

The economic expansion will be based on growth in the private investment and the private consumer, with an expansion of the manufactured exports following the exchange rate and the economic growth of USA (which will provide further support).

The inflation rate was 2.61 percent in January of 2016. The low inflation rate is good for people, but it is not good for economic growth.

Mexico unemployment rate was 4.24 percent in January of 2016. The rate is low and steady.

The substantial depreciation of the Mexican peso against the dollar during last year has increased the prices and the concerns on the stability of the financial market. The authorities have already intervened in the currency market to help soften the fluctuation of the peso. The effects of the depreciation on the domestic prices have been limited with inflation below the 3%.

Jun-15

Jul-15

Ago-15

Sept-15

Oct-15

Nov-15

Dic-15

Ene-16

Monthly Inflation (var.%)

0,17

0,15

0,21

0,37

0,51

0,55

0,41

0,38

Annual Inflation (var.%)

2,87

2,74

2,59

2,52

2,48

2,21

2,13

2,61

Average Exchange Rate (peso/USdollar)

15,48

15,94

16,54

16,86

16,56

16,64

17,07

18,07

Price of oil (dollars/barrel)

53,87

46,56

39,71

37,93

37,46

35,43

28,68

--

Source: INEGI

Barriers for Cross-Border Business Activities Restriction on foreign ownership Mexico amended the constitution allow foreigners to buy the property within the restricted zone by manes of a fideicomiso. No restriction applies in the case of non-residential real estate in these areas, provided the real estate is acquired by a Mexican legal entity (regardless of the nationality of the shareholders/ partners), and provided notice is given to the Foreign Affairs Ministry within 60 days after the acquisition takes place.

Investment restrictions prohibit foreigners from acquiring title to residential real estate in so-called "restricted zones" within 50 kilometers of the nation’s coast and 100 kilometers of the borders. In all, the restricted zones total about 40 % of Mexico’s territory. 8 Nevertheless, foreigners may acquire the effective use of residential property in the restricted zones through the establishment of a 50-year extendable trust (called a fideicomiso) arranged through a Mexican financial institution that acts as trustee.

Taxation9 Real Estate Acquisition Tax – “Impuesto Sobre Adquisición de Inmuebles (ISAI)” It is a state level tax towards individuals and entities that is paid at the moment of receiving title. The basis is on the total value of the property and the rate ranges from 0.5% to 4.5% depending on the estate.

Exceptions may apply depending on the estate of the republic that the transaction is made.

8

http://madb.europa.eu/madb/barriers_details.htm?barrier_id=960156&version=5

9

Doing Buisness in Mexico, PwC January 2015

Value Added Tax (VAT) – “Impuesto al Valor Agregado (IVA)” Construction goods acquired by construction companies are not exempt from value added tax. Also construction companies and residential developers have to trespass the value added tax to the buyers.

Income Tax – “Impuesto a la Renta” Non-resident individuals are taxed at a rate of between 3% and 33%, depending on their level of income.

Sale of Real Estate Tax In determining taxable gain or loss on the sale of real estate, the historical-cost basis of land and buildings may be adjusted (i.e., increased) for inflation, according to the time that the assets have been held. This is done by applying inflation-adjustment factors to the net undepreciated balance.

Tax Incentives to REITS – “Beneficios fiscales a FIBRAS” Mexican tax authorities grant some tax incentives to the REITs whose main activity is the construction or acquisition of real estate property for sale or lease.

Appraisal Tax If the appraisal value is greater than 10% of the price you paid for it, you will be asked to pay 20% tax on the difference between the two amounts. Due in 15 days of the appraisal report.

The trustees and beneficiaries are exempt from making advance payments of income tax, on the income received by the FIBRA. In addition, the transfer of real estate made by grantors will not be considered as a sale in accordance with the Mexican Income Tax Law if the grantor is a beneficiary of the trust or otherwise retains the right to reacquire the property.

Investment risks Mexico is experiencing some difficult problems to solve for several years now.

Corruption Mexico is a place that is not new to corruption; in fact it is well known that there is a lot of corruption in the country. The government official fed by billions dollars.

Crime and Drug It is also very well known that there is a large drug trade in Mexico and the drug cartel is becoming stronger by the day. The drug trade organizations are continuously increasing, and the government has not responded well to the problems and thus overpowering the national police. The drug cartels are to blame due to increased crime rates in Mexico City and abundance use of illicit drugs. Drug cartels disguise if doing normal businesses but instead they are fueling drugs to their criminal customers situated in different neighborhood. The government has also to face the serious gang problem. This can make a potential investor think twice about sending his money or assets into a country with such problems.

Ownership Types in Real Estate Most of foreign investors who are involved with international business and mainly in real estate industry are very cautious and tend to be risk-averse when it comes to legal matters and restrictions on asset ownership. Unlike what is very popular in emerging market, real property rights do exist in many emerging markets and Mexico is not an exception. Even though the overall idea behind ownership is recognized globally, it can be slightly different from one country to another. So property rights are granted in Mexico and can be transferred as well.

CO-OWNERSHIP Co-Ownership has the same definition as in The U.S that two persons occupy and hold a space with equal or unequal share of interest. However, this is not trendy in Mexico due to the different restrictions imposed by law and the disadvantages held. The biggest limitation is when one of the owners want to transfer his right, the other co-owner needs to approve it before transfer it to a third party which can turn into a null trial with the disapproval of one party.

CONDOMINUIM Regulations in owning a condominium might vary from state to another. This method of ownership is quite preferred in Mexico as the owner of this property owns his public deed while confirming the property’s title. Condominium is not restricted to apartment and houses but also warehouses.

Registering the deed on Public Registry of Property is necessary and keeping a track of the activity of the acquisition is important.

National Land Goods Private ownership of land is quite common practice in many countries. However, there are few lands which are restricted and usually held by group of entities who can own a national land, forest or even water access which are often referred to ‘common land’ or ‘Ejidos’. This asset type is usually endowed and is subject to specific to specific legal and regulation system.

RESTRICTION Restriction applies to foreigners in acquiring lands in the prohibited zones on the coast of the country and this is restricted to foreign buyers and Mexican incorporated company with foreign investment to acquire property. Further details are explained in foreign ownership section later in the report.

REITs FIBRAS or known as REITs are the hottest trend in Mexico’s real estate, with the first REIT Market being traded publicly in March 2011.

For 2014, there are about 8 REITs with a market cap reaching $ 18.1 Billion.

The purpose of Mexican REIT is the acquisition or the construction of immovable property in order to be used in leasing activities. These immovable properties are required to be held for at last 4 years before being sold.

Investors who are taking part in the immovable property has the right to defer the payment of income tax on the gain of these properties until the investor sells the equity certificate or until the REIT sells the property.

A REIT is required to invest at least 70% of its fund in acquisition or leasing of the real estate while the rest should be invested in government securities.

Also, a Mexican REIT should have at least 10 investors each should hold less than 20% of interest.

One advantage given for investors in real estate is the fact that no income tax is paid monthly. A yearly payment of tax is related to its activities.

Mexico City Real Estate Market Mexico’s city is the largest urban agglomeration in the Americas according to Knight Frank Report on emerging markets. The Real Estate market is seeing another boom since growth rate reach 6% to 4% in all sectors in the last quarter of 2015. In fact, home prices in Mexico rose by 6% each year in the last 10 years. The biggest housing crisis occurred after the tequila crisis in 1994 where currency has devaluated sharply which affected the other currencies of the region due to the $50 billion loan granted under the administration of Clinton while interest rates reached its highest at 40% of bank loans was put into default.

Sector

Volume

Rent USD/Sq.M/Month

RESIDENTIAL

NA

NA

COMMERCIAL

87.5 Million Sq. Ft

24.18

RETAIL

125 Million Sq. Ft

65

HOTEL

28,000 Quality Rooms

85

INDUSTRUAL

43 Million sq. Ft

5.18

Office According to CBRE’s report, Mexico’s city has the largest class ‘A’ market in the entire Latin America driven by the high demand of international companies which reach 1 million Sq. meter which were under construction in 2012 and accounts for 28% of net absorption in the region. Overall, Mexico’s absorption has always surpasses completions in recent years while office space will increase dramatically in the next 3 years. According to Knight Frank recent report on emerging market, in the last 20 years, developers have added 45 million square feet of new office space in Mexico City, and an additional 15 million square feet will be ready by 2017 which accommodates many modern office spaces. According to CBRE Report of 2016, 154 thousand sq.m have been pre-leased for the following years:

  

2016: 82,394 Sqm (42.5K of a Telecom Company, AON, UBER e IZA in Torre Diana, 25K Bayer in Corporativo Bayer, 1.3K IZA, 1.4K of IOS in Torre Reforma, 2.1K IOS Offices in Miyana, and 2.8K of IZA in Torre Cuarzo).

2017: 68,500 Sqm (21K of Grupo Bal in Moliere 222, 19K of ICA in Corporativo ICA, 28.5K of Alsea and a Commercial Bank in Gran Patio Barranca-Revolución) 2018: 3,150 Sqm (3.1K IOS Offices in Punto Chapultepec)

Industrial The industrial market is not dominated by Mexico in the region. Panama is the leader and this is explained by the canal expansion project. The highest industrial activity occurs in the northern part of Mexico due to the convenience of trade and closeness to the U.S as stated in the previous section, economic review in the report. Rent is keeping increasing due to the lack of quality space and vacancy rates are falling in most of Mexican Market. Rents are very stable and they are continuing to do well.

Commercial

Industrial

• Total Stock: 87.5 Million Sf • Vacancy Rate: 8.8% • Net Absorption: 100,000 Sq. M • Average Asking Price: $ 24.18 per sq meter per month

• Total Stock: 43 Million SF • Vacancy Rate: 4.5% • Net Absorption: 40,000 Sq. M • Average Asking Price: $ 5.218per sq meter per month

Hospitality Mexico is ranked at top 15 most visited countries in the world with over 24 million visitors each year which makes it the most efficient market among other Latin American countries. Although most of foreign investors are considering the coastal side of Mexico such as hot markets in Cancun and Acapulco, Mexico City remains strong in this competition.

In 2014 alone, more than 5,000 rooms were occupied generating revenue that reaches over $ 700 Million. A rise of 15% is expected in deal flow and the foreign investors’ appetite is still strong which is expected to keep growing. It is not surprising that U.S investors own about 15% of hotels shares in Mexico and REIT’s vehicle has been very convenient as the sector is quite illiquid which gives flexibility for exist strategy for foreign investors. Mexico City alone has witnessed $270 million revenues

according to JLL report on hotel intelligence in Mexico and the cap rates will reach between 6.5% to 7%.

Retail As for retail market which is driven by the strength of the purchase power of consumer is seeing a strong come back. With a positive outlook to demographics, there are so many malls and retail development taking off in Mexico City, with growing population and an increase of middle class as well as a high urban concentration, the retail supply is estimated to reach 11,612,000 Sq. meters. Shopping centers with superstores chains as anchors continued to dominate the inventory in Mexico. Below is a diagram that shows the diffent type of shopping centers in Mexico City.

Type of Shopping Centers in Mexico, 2015 8%

Community Center

6% 9%

29%

Power Center Fashion Mall Regional Mall

20%

Neighborhood Center 28%

Other

Residential Multi-family fundamentals     

We intend to implement a well-defined strategy, focused on developing and managing efficiently operated large to mid-scale assets, in preparation for selling to an institutional investor.

Most of the big cities in Latin America provide attractive investment opportunities for multi-family assets from a supply/demand point of view.

Availability of long-term financing and the legal framework for leases are the main determinants in selecting this market.

Apartments for rent are a major asset class within real estate portfolios of institutional investors in developed markets.

There are opportunities to develop rental assets with strong fundamentals and attractive risk-return profile.

Comparison between Multi -family and other asset types in the Mexican market Real Estate Class

Tenant diversification

Inflation protection

Rental correlation

Rental elasticity

Obsolescence

Institutional Investors participation in Mexico

Land suitability / availability

Industrial

None

Low

GDP Correlation

Low

High

High

High

Office

Low

Medium

GDP Correlation

Low

Medium

High

Medium

Retail

Medium

High

Consumption correlation

Medium / Low

Medium

High

Low

Multifamily

High

High

Wage correlation

High

Low

Very Low

Medium / Low

High number of tenants per building. No anchors

1 year adjustable leasing contracts

Downward stickiness of wages

Price sensitive.

High unit turnover

Properties in prime locations maintain their value over time

Future FIBRAS highly considering this type of assets

Similar rationale for identifying multifamily and office locations

Multi-family properties (i.e., apartments for rent) represent some of the most compelling investment opportunities for institutional players looking for an attractive risk adjusted return in Mexico due to: Tenant diversification, inflation protection and being a defensive asset class (in an economically distressed context, investors postpone their buying decisions and continue leasing). Thus, they are countercyclical assets that generate a stabilized income flow in the medium term.

Demand drivers for Multi -family in Mexico City    



Mexico City is a high growth metropolitan area, with more than 20MM inhabitants.

The average age of the population is 27 years old, and people in the 25-30 year age have the highest propensity to lease apartments in the city, more than twice the average of the total population.

In the Federal District one out of every five families is a tenant in a multifamily apartment unit.

In some neighborhoods (such as Polanco and Condesa) this ratio exceeds 50%.

According to the latest census there was 1MM leased dwellings in the city, 32% of the leased dwellings are apartments. 84% of all rented apartment dwellers occupy only 1 or 2 bedrooms in their units, although only 35% of the rented apartments in the market consist of 1 or 2 bedroom units. The highest propensity to rent apartments is concentrated in 1 and 2 people households.

In terms of income and education, the highest propensity to lease apartments corresponds to head of households with college or grad school degrees, more than twice the average of the total population, and representing more than 40% of all rented units. Although the middle class represents only 27% of the population (1.3MM households), 2/3 of the apartment renting population of Mexico City has income of MXN 30,000 or higher, which is the target market of the Fund.

Characteristics of the current supply for Multi -family in Mexico City       

 

SCATTERED SUPPLY: The supply of apartments for rent is a disorganized array of individually owned units.

UNPROFESSIONAL BROKERAGE HOUSES: There is no institutional brokerage houses specialized in rental units. Rental units are generally rented by the owners themselves.

UNCLEAR LEASING PROCESS: In general, there are vague requirements and inefficient service in connection with the leasing process.

OWNERS MINIMIZE MAINTENANCE COSTS: Units are generally delivered in poor condition.

Units are usually delivered without appliances, curtains or light fixtures.

POOR OWNER-TENANT RELATIONSHIP: Owners generally have other priorities, do not take time to meet tenants’ demands and often establish poor communication with tenants TARGET CLIENT FOCUS: While middle-income and upper middle income families have a higher propensity to rent, there is no specific offer for that socioeconomic segment, especially for small families looking for apartments with 1 or 2 bedrooms.

LIMITED SUPPLY OF 1 & 2 BR UNITS: Almost 80% of rented apartments have between 3 and 5 bedrooms, but in most cases only 1 or 2 bedrooms are actually used. 91% of rental units supplied have more than 80 sq. meter (60% are units of 150 sq. meter or more and 31% units of between 80 sq. meter to 150 sq. meter), while only 9% of units have 80sqm or less. The management team believes the supply is too large and expensive for the target demand.

INADEQUATE TENANT SCREENING: Owners normally focus on the guarantee and the amount of the deposit and not on the payment capacity and history of the tenant.

DISPERSION OF SALE CHANNELS: Leasing is typically done with very limited marketing and advertising is normally limited to a street sign.

Our Development: Multifamily Based on our research, a multifamily project seems the ultimate investment. However, microapartment concept is the main idea of the project. This is a new concept in Mexico City and we do not see competitors developing such property type.

Site We picked a site located between Calle Jalapa and Calle Durango in Roma Norte neighborhood which is often thought of Soho of Mexico City. The site is basically a redevelopment of 4 existing apartments which are combined into one big apartment. Different amenities will be added to be tailored to the needs of prospective tenants who are mostly young professional and students. One of the biggest strengths of the site is being at the intersection of two streets which allows the building to have french balcony as it is widely attached to the historical buildings around it with a portional view over the park.

The overall site stretches over 140 sq.meters (15,823 sq.feet) and the total perimeter is 160 meters (526 feet) which allows to unify the façade and make it compatible with the existing neighboring and build retail spaces.

Fig1. Site

Neighborhood The neighborhood is hip, safe, full of countless amazing restaurants offering every type of cuisine you ,hipster-run coffee shops, Retail Boutiques, hotels, clubs, bars and parks such as Plaza Del Janerio. The neighborhood is as shown below in the table is undersupplied and this creates a great opportunity for us as a developer to serve the market which seems balanced.

Neighborhood

Median Price

Quantity Supplied

Percentage Of Supply

Zona Condesa

22,591

170

20%

Condesa

23,267

119

14%

Juarez

19,892

79

14%

Zona Roma

16,070

58

9%

Roma Norte

16,969

43

7%

Tabacalera

21,773

41

5%

Zona Centro Historico

10,143

41

5%

Accessibility Mexico City International Airport is only 45 minutes by car and 44 minutes by public transit. Zócalo which is the downtown is about 25 minutes by car or 29 minutes by public transit. Insurgents’ Subway Station is a walking distance from our site and this allows our main target market who is the young demographics to have full acess to different part of the city. According to walkability score, the site is a walking paradise with a score of 98. As the map shows below many other secondary public transit stations are available.

Fig2. Accessibility Map

Roma Norte Market Overview Even though the most common rental property type is house, as a developer, we are going to implement another multifamily property. The young generation which consists of Millennials is more likely to live in apartments. So the appetite and demand is already there. As we can see for our comparable markets, 46% of apartments are newly developed which also creates a big opportunity to develop a new building that serves the targeted market which consist of young professional and students. As the demographics shows in Mexico, this targeted market is definitely the main stone of the real estate market.

Type Of Residential Properties‌ 14%

Age of Rental Apartments In Roma Norte New (0-4)

23% House Apartments

86%

Fig3. Type of residential properties available

46%

9% 17%

5-9 10-19

5%

20-29

Fig4. Age of Rental apartments in Roma Norte

Comparable Properties To compare our building to the availability in the market within 5 miles in Roma Norte neighborhood, we looked around Roma Norte for similar asset class, what we found is an interesting combination that

units are usually bigger than our plan since we are doing a micro-apartment. While most buildings lack the amenities that targeted market of young professional and students need.

Building

Address

Puebla, Colonia Roma, Del. Cuauhtémoc, CP. 06700, Distrito Federal

Mexico df Grupo Forests , Colonia Roma Norte, Del. Cuauhtémoc, CP. 06700, Distrito Federal

Sinaloa #179, Colonia Roma Norte, Del. Cuauhtémoc, CP. 06700, Distrito Federal

Type of Apartments

2 bedroom-1 bathroom

2 bedroom-1 bathroom

1 bedroom-1 bathroom

Size

86m2

40m2

45m2

Rental Price in

17,500

19,000

14,000

24 hour security, cable, parking, washer dryer, microwave, roof garden, elevator

2 large terraces, 24hour digital surveillance, part-time doorman laundry

Pool, playground, laundry room, balcony, Jacuzzi, surveillance, gym, rooftop

MX pesos

Amenities

Property number 3 is the most likely that is competent with our project, they have a great lounge and a spectacular view and this is estimated to be the competitor. That is why the amenities will match and exceed what is available.

Development Project: Micro Apartments Micro Apartments might be the trend in many cities in the U.S but this concept is relatively new to Mexico. As a developer, we believe that this can be the ultimate investment opportunity. The graph shows below Durango Street on which the site is located is relatively affordable for tenants as the average one bedroom rental is traded for over $20,000 Pesos. This is important as we need to take into account the market condition as well as including premium since amenities such as a common shared space/lounge will be featured. Retail space is also included in the ground floor. The available rental

buildings have a fully-equipped kitchen and good layout of amenities. This is also a strategy included to provide tenants with comfortable use of amenities and a modern outlook that fits their lifestyles. $35,000 $30,000 $25,000

$20,000 #REF!

$15,000

11 blocks with greater supply of Rome Area Apartments for Rent

$10,000 $5,000

$-

Fig5. Average Asking Price for one unit by streets in Roma Norte The building consists of:          

4 Floors 30 units in each floor 120 units overall Ground floor has a secured lobby as well as retail space 10 units of 2 bedroom, 1 bedroom and one studio are implemented in each floor Gross Buildable Area is 1470 sq.meters Loss Factor of 18% 2 bedroom is 50 sq.m (538 sq.ft) for 800$ 1 bedroom is 40 sq.m (430 sq.ft) for 750$ Studio is 30 sq.m (322 sq.ft) for 500$

Construction will start this year and should end in 3 years and pre-lease is offered too, with an 8 months absorption rate. The allocation of sources and uses is described in the table below.

The project is estimated to have an unlevered IRR of 20.18% with an equity multiple of 1.45X, while the project won’t be profitable until the third year. This is estimated to be a good investment.

Sources Construction Loan Equity

LTC 45.09% 54.91%

Amount 5,877,394 7,156,085

Total

100.00%

13,033,479

Sources Construction Loan Equity

LTC

Amount

45.09%

Uses LTC Acquisition 48.52% Construction Loan Fees 0.62% Construction Loan Interests 1.88% Construction Costs 48.02% Permanent Loan Fees 0.96% Total 100.00%

Uses

LTC

Acquisition

48.52%

Construction Loan Fees

0.62%

Construction Loan Interests Construction Costs

1.88% 48.02%

Permanent Loan Fees

0.96%

5,877,394 54.91%

Amount 6,324,000 81,323 245,086 6,258,120 124,950 13,033,479

Amount 6,324,000

7,156,085

81,323 245,086 6,258,120 124,950

Total

100.00%

Total 13,033,479

Financial Analysis

100.00% 13,033,479

Unlevered Cash Flow Unlevered IRR NPV EM Cash on Cash

(12,582,120)

15%

16,406,086

(6,038,437)

15%

-

16.01% 218,911 1.34 x 3.62%

Levered Cash Flow Unlevered IRR NPV EM Cash on Cash

455,024

(192,842)

130.39% 8,953,923

-

20.18% 564,326 1.45 x -3.19%

148.28%

The total development cost will be ~$13 million, within that 45% will come from equity and 55% will be financed through debt. At the time of closing the deal, ~6.3 million of equity will go in first to acquire the existing land and building shell. After that we will secure a 1-year, 10%, interest only construction loan at 90% loan to cost at the beginning of year 1 for the amount of ~$5.8 million, to transform the existing building into micro apartments. We will secure another 50% loan to value permanent loan at the end of year 1 to replace the construction loan, it will be 2-year, 6%, 25-year schedule amortization.

The valuation of the building will be based on the 2019 stabilized year’s NOI at 6% cap rate. At the year of reversion in 2019, the building will be sold for ~$16 million, after paying back outstanding loan balance we will pocket ~$8.1 million net proceeds.

Construction Budget Total Acquisition costs Acqui s i tion Cos t Cl os i ng cos t Construction costs Ha rd cos ts Soft cos ts Financing costs - construction loan Cons truction fi na nci ng fees Cons truction l oa n i nteres t Total Cost of the Property Financing costs - permanent loan Cl os i ng fees Total Development Costs

Equity

Loan

Per SQFT 56,892 s qf

-

108.98 2.18 111.16

6,200,000 124,000 6,324,000

6,200,000 124,000 6,324,000

5,689,200 568,920 6,258,120

568,920 56,892 625,812

5,120,280 512,028 5,632,308

100.00 10.00 110.00

81,323 245,086 326,409 12,908,529 100.00%

81,323 81,323 7,031,135 54.47%

245,086 245,086 5,877,394 45.53%

1.43 4.31 5.74 226.90

124,950 13,033,479 100.00%

124,950 7,156,085 54.91%

5,877,394 45.09%

2.20 229.09

Key Assumptions Acquisition Closing date 12/31/2016 Acquisition Cost Closing cost 2%

Building info Total SF Rentable space Retail Retail space Residential Studio 1 bedrooms 2 bedrooms

120 40 40 40

$6,200,000 $124,000 $6,324,000

units units units units units units

total avg size total avg size avg size avg size

Construction costs Hard costs Soft costs

Sale of property Sale date Sale cap rate Cost of sale

$100 PSF 10% of hard costs

12/31/2019 6% 3%

Rental assumptions leasing commissions Retail Lease term Monthly rents Vacancy and collection loss Increase 2% Residential Lease term Studios 1 bedrooms 2 bedrooms Vacancy and collection loss Increase 4%

5.00%

2018 2019 2020

2018 2019 2020

Residential Rent Growth Commercial Rent Growth Expenses Lease-up year Stabilized year Growth RE Tax

56,892 sf 51,720 sf sf sf 51,720 sf 323 sf 430 sf 540 sf

2018 2019 2017 2018 2019

1.00%

years $0 3.00% 3.06% 3.12% 3 years $550 $700 $850 5.00% 5.18% 5.36% 5.00% 5.00%

15% of PGI 10% of PGI 3.00% $62,000 $63,860 $65,776

5,285 m2 4,805 m2 m2 m2 4,805 m2 30 m2 40 m2 50 m2

$5,689,200 $568,920 $6,258,120

2020 NOI $882,647 Sale Proceeds $16,048,125 Net Proceeds $15,566,681

Cash Flow Proforma 2017 Construction Revenues: Res i denti a l Renta l Income Studi os 1 bedrooms 2 bedrooms Tota l Res i denti a l Income Reta i l Renta l Income Potenti a l Gros s Income Va ca ncy a nd Credi t Los s Res i denti a l Reta i l Tota l Va ca ncy a nd Credi t Los s Effective Gross Income Expenses: Opera ti ng Expens es Rea l Es ta te Ta xes Tota l Expens es Net Operating Income Rent Up Cha rges Acquisition Cost Purcha s e Pri ce Cl os i ng Cos t Tota l Acqui s i ti on Cos t Construction Cost Ha rd Cos t Soft Cos t Tota l Cos t Disposition Sa l e Proceeds Cos t of Sa l e Net Proceeds Unlevered Cash Flow Unlevered IRR NPV EM Cash on Cash

15%

Financing Cost Cons tructi on Loa n Perma nent Loa n Tota l Fi na nci ng Cos t Construction Loan Proceeds Permanent Loan Proceeds /Ba l a nce C-Loa n Outs ta ndi ng Ba l a nce Net Proceeds Debt Servi ce Levered Cash Flow Unlevered IRR NPV EM Cash on Cash

15%

2018 Lease-up

2019 Stabilization/Sale

2020 Year After Sale

-

187,000 238,000 289,000 714,000 714,000

277,200 352,800 428,400 1,058,400 1,058,400

291,060 370,440 449,820 1,111,320 1,111,320

-

(35,700) (35,700) 678,300

(54,772) (54,772) 1,003,628

(59,524) (59,524) 1,051,796

-

107,100 62,000 169,100 505,424 50,400

100,363 63,860 164,223 839,405 -

103,374 65,776 169,149 882,647 -

(6,200,000) (124,000) (6,324,000)

-

-

-

(5,689,200) (568,920) (6,258,120)

-

-

-

(12,582,120)

455,024

16,048,125 481,444 15,566,681 16,406,086

-

16.01% 218,911 1.34 x 3.62%

130.39%

(81,323) (124,950) (206,273)

-

-

-

5,632,308

-

-

-

6,995,042 (5,877,394) 1,117,648 (6,038,437)

(647,866) (192,842)

(6,804,297) (647,866) 8,953,923

-3.19%

148.28%

20.18% 564,326 1.45 x

-

Sources            

United Nations (2012), World Population Prospects, The 2012 Revision.

La Situacion Demografica de Mexico 2014, Consejo Nacional de Población, 2014 http://www.conapo.gob.mx/work/models/CONAPO/Resource/2422/1/images/La_Situacion_D emografica_de_Mexico_2014.pdf Secretaria de Hacienda y Credito Publico www.shcp.gob.mx Trading Economics http://www.tradingeconomics.com/mexico/gdp-growth Market Access Data Base http://madb.europa.eu/madb/barriers_details.htm?barrier_id=960156&version=5 INEGI (Instituto Nacional de Estadistica y Geografia) http://www.inegi.org.mx Doing Buisness in Mexico, PwC January 2015 https://www.pwc.de/de/internationale-maerkte/assets/doing-business-mexico.pdf Mexico's Admirable Housing Market." Global Property Guide,2016. http://www.globalpropertyguide.com/Latin-America/Mexico/Price-History More Americans Immigrate to Mexico Than Vice Versa." About.com News & Issue, 2015 http://useconomy.about.com/od/worldeconomy/p/Mexico_Economy.htm Property Prices in Mexico+City." . Price per Square Foot/meter in Mexico, 2016 http://www.globalpropertyguide.com/Latin-America/Mexico Real Estate - The Global Asset." Strategies, Structures, Decisions Global Property Investment,2011 http://www.wiley.com/WileyCDA/WileyTitle/productCd-1444335286.html Valor Estimado De Departamentos, Renta, Zona Roma,2016 http://propiedades.com/valores/roma/departamentos-renta

Annex 2012

2013

2014

GDP at market prices (current US$)

1,184,499,844, 413.2

1,258,773,797, 056.1

1,294,689,733, 233.0

GDP growth (annual %)

4.0

1.4

2.2

Inflation, GDP deflator (annual %)

3.2

1.6

4.7

Agriculture, value added (% of GDP)

3.3

3.3

3.3

Industry, value added (% of GDP)

36.4

34.5

34.4

Services, etc., value added (% of GDP)

60.2

62.2

62.3

Exports of goods and services (% of GDP)

32.7

31.9

32.4

Imports of goods and services (% of GDP)

33.8

32.7

33.5

Gross capital formation (% of GDP)

23.1

21.7

21.6

Time required to start a business (days)

..

6.3

6.3

Domestic credit provided by financial sector (% of GDP)

46.7

49.6

50.3

Tax revenue (% of GDP)

..

..

..

Military expenditure (% of GDP)

0.6

0.6

0.7

Mobile cellular subscriptions (per 100 people)

83.4

84.8

82.5

Internet users (per 100 people)

39.8

43.5

44.4

High-technology exports (% of manufactured exports)

16.3

15.9

..

Overall level of statistical capacity (scale 0 - 100)

87.8

87.8

85.6

Merchandise trade (% of GDP)

63.4

61.2

62.5

Net barter terms of trade index (2000 = 100)

106.3

104.4

..

External debt stocks, total (DOD, current US$)

348,945,146,0 00.0

406,042,143,0 00.0

432,602,236,0 00.0

Total debt service (% of exports of goods, services and primary income)

17.7

10.1

12.2

Net migration

-523,585.0

..

..

Personal remittances, received (current US$)

23,365,990,95 7.0

23,432,844,10 8.0

24,462,290,75 7.0

Foreign direct investment, net inflows (BoP, current US$)

19,491,663,03 0.0

44,885,843,19 0.0

24,154,173,75 0.0

Net official development assistance and official aid received (current US$)

417,930,000.0

560,600,000.0

..