The Paseo 2000 shopping center in far eastern Tijuana is the largest in the Mexican state of Baja California, with 470,000 square feet (43,664 sq m) of space. In addition to an outlet of the Coppel department store chain, which the Bloomberg news service reports as having the widest profit margin of any major Latin American retailer, the center includes such familiar U.S. anchor stores as Walmart and Home Depot, along with a multiplex theater and restaurants. (Also see: Retailer Brands Have Value in Outside the U.S..)
The shopping complex was developed by Mexico Retail Advisors (MRA) of San Diego and Kimco Realty Corp., a publicly traded real estate investment trust (REIT) headquartered in New Hyde Park, New York, which says it owns and operates North America’s largest portfolio of neighborhood and community shopping centers.
Experts say improving demographic trends, such as decreasing family sizes and increasing educational levels, portend greater consumer consumption. At the same time, however, developing real estate in Mexico remains challenging.
In Mexico, “developing property is full of obstacles. It is not easy,” says Raúl Villarreal of Mexicali, one of the three partners in MRA. The obstacles are related to difficulties in buying land, obtaining permits, and dealing with infrastructure and environmental issues. Nevertheless, “Mexico is a safe bet if you dot your i’s and cross your t’s on what you’re doing and do your proper risk analysis—I mean, the same risk analysis you would do if you were going to invest in the City of Industry in Los Angeles,” says José “Pepe” Larroque, an attorney who opened Baker & McKenzie’s Tijuana office 27 years ago.
Concerns about the physical safety of those venturing into the country to do business represent another element of risk. The U.S. State Department has issued a travel advisory for Americans considering travel to many parts of Mexico, particularly along the border regions. However, Larroque says that despite the headlines and the tens of thousands of people killed in Mexico’s drug war, crime does not affect much of the nation’s normal economic life.
Adriana Martínez, a former director of Ensenada’s economic development corporation, says, “What I would always recommend to non-Mexicans wanting to develop property in Mexico is to get a Mexican professional to help them with all the legal requirements.” She says that in Baja California, people wanting to buy and develop land can find reputable professionals to help them through cities’ economic development corporations.
David Mayagoitia is the president of Tijuana’s economic development corporation, known by its Spanish acronym DEITAC, and chairman of the Cali Baja Bi-National Mega-Region organization promoting the competitiveness of the San Diego/Imperial County/Baja California area. He says the development corporation is supported by nearly 100 companies including developers and builders from the region, and real estate sales companies, accounting firms, customs agents, and bankers.
Larroque says buyers need to look into the details of their plans, seeing what permits are required, whether there are title issues, what land uses are permitted and at what density, what utilities are available and at what cost, what infrastructure is close by, and whether the land is in Mexico’s federal zone. Mexico’s 1917 Constitution says that non-Mexicans cannot own property within 62 miles (100 km) of the border or 31 miles (50 km) from the coast. Mexican officials later realized that foreign investment in those areas could benefit the nation, and subsequent legal changes mean that property now can be bought through the use of renewable fideicomiso bank trusts. Larroque recommends getting U.S.-based title insurance.
Local politics can come into play as well. Gabriel Garzo, owner of the Grupo Loponti land development firm in Tijuana, recommends that buyers find agents who can maneuver through possible political minefields without being tied to any specific party. Baja California has had a National Action Party (PAN) governor for 24 years, but all its municipalities have Institutional Revolutionary Party (PRI) mayors. This year, however, that may change: a new governor will be elected for a six-year term and new mayors will be elected to three-year terms.
Brett Ellsworth, whose California-based Contact Development Company is developing resort property in Nayarit state, says it is helpful to work well with federal, state, and local officials, who generally seek the benefits that foreign investment can bring. “When you get a hiccup, you can call the governor and get a reaction,” he says. However, government intervention is not assured.
While developers generally try to avoid the subject of whether they have to pay bribes, some experts say the practice is commonplace in many parts of Mexico, and considered an acceptable cost of doing business.
A hard look at utilities and surrounding infrastructure is important: Jean-Paul de Kervor, a director at Cushman & Wakefield, who recently helped the Mormon Church acquire property in Tijuana for a temple, says he knows of one company that bought land without realizing that it was not connected to the city’s water supply.
Permitting in Mexico takes about one-third the time it takes in the United States, Mayagoitia says. While Tijuana and other Mexican cities have master plans, he says they are not as stringent as those in the United States. “Land use planning in Mexico has not been very effective,” he notes.
Still, experts say it has become more difficult to get permission to build because of environmental concerns. In some places, like parched Baja California Sur, big developments have had to agree to build desalination plants. And environmental-based opposition is finding success against some development. For example, last year the Mexican government, following protests by environmentalists, canceled provisional permits that would have allowed the Spanish construction company Hansa to develop a megaresort near the Cabo Pulmo National Park in Baja California Sur. Currently, controversy is raging over a proposed project on the east coast, near the resort city of Cancún in Quintana Roo state. Environmentalists concerned about damage to nearby coral reefs and other forms of environmental degredation are fighting a proposed Dragon Mart Cancún megaproject designed to showcase Chinese products. The Yucatan Times says the project would comprise 474 acres (192 ha), including an Asian-style shopping center, industrial buildings, wineries, and housing.
Mexico offers financial and tax considerations that American investors may find attractive. “Mexico has very significant advantages in that it is simple to work with from an investor’s standpoint because it is very homogeneous with the U.S.,” Larroque says. He says the fact that Mexico has a tax treaty with the United States “presents a significant advantage in addition to proximity.” As such, there are substantial advantages in using REITs to invest in Mexico.
Non-Mexican companies investing in Mexico include Prologis, Corporate Properties of the Americas, GE Capital, and Kimco Realty Corp., a developer of the Paseo 2000 shopping center. Kimco chief executive officer David Henry told REIT.com that there is “great demand” for shopping centers in Mexico. He noted last year that the United States had about 100,000 community and neighborhood shopping centers for a population of 314 million, while Mexico had only about 1,000 centers to serve 111 million people.
Carlos de la Mora, Mexico director for AECOM, says the recent entry of Mexican REITs into the arena “is changing the game” and should mean more work for everyone involved in real estate. Larroque says Mexican banks, most of which are now foreign-owned, are strong as a result of the lessons learned from the country’s 1994 monetary crisis.
Industrial development has been the driver for the border economy, and it is where the money is for most foreign investors in Mexican real estate, according to Larroque and Mayagoitia. The latter says that in Tijuana, most companies seeking to take advantage of Mexico’s relatively low wages and proximity to the United States will buy or lease a site at one of the city’s more than 40 industrial parks, often with a broker such as CBRE, Cushman & Wakefield, or Jones Lang LaSalle. This last firm, for example, is the agent for the Silicon Border industrial park in Mexicali created by San Diego investors. Mayagoitia says companies seeking to develop property will get design and engineering done locally or through a company’s country of origin, be it Japan, Korea, or the United States. He says the big design firms such as HOK, AECOM, and Fluor are in Mexico, partner with Mexican counterparts, and often will hire a Mexican architect to make sure a design complies with local standards.
Mayagoitia spoke from his office on the fifth floor of Tijuana’s only Leadership in Energy and Environmental Design (LEED) building, which also is the location of a liaison office that San Diego Mayor Bob Filner established in Tijuana. Mayagoitia says manufacturers construct high-quality buildings, but because they are concerned with keeping costs down, they are not likely to spend extra to make them LEED-certified. He says many companies lease facilities and think three to five years down the road—a time frame too short to justify covering factory roofs with solar panels that might take ten years to amortize.
Mexico is dependent on its oil sector, and Larroque says energy and fiscal reforms that could gain government approval this year could “create a huge amount of investment into Mexico.” This should further help central Mexican states such as Querétaro, Guanajuato, and San Luis Potosí that have been growing significantly, with their clusters of automotive and aerospace manufacturing, their proximity to Mexico City, their relative closeness to the United States by rail and truck, and their access to the Pacific port of Lázaro Cárdenas in the state of Michoacán. Companies such as San Diego’s Sempra Energy and Spain’s Gamesa and Iberdrola have been involved in wind-energy projects.
Mexico’s low- and middle-income housing market is huge, but it is not a prime target for foreign investment because of the small margins involved and other complications. Larroque says that Mexican residential developers such as GEO, Urbi, and Homex “know their market very well. It is a very low-margin, financially driven market.” Many of the homes measure less than 600 square feet (55.7 sq m). The economic downturn hurt the housing market because many people stopped making payments and abandoned their homes, but Larroque says measures are being taken to stanch the bleeding. Much of the housing being built has had to meet sustainability standards to qualify for low-cost government financing; one result is that new developments sprouting up across the country feature solar water heaters on every roof.
Resort and Upper-End Housing
The Baja coastline is littered with failed projects. Trump Ocean Resort Baja Mexico financially collapsed in 2008, with many U.S. buyers losing large sums of money. The Tiger Woods Design Punta Brava golf course and resort near Ensenada was put on hold as a result of the U.S. recession. Mayagoitia says there are 5,000 empty resort and residential units on the Baja California coastline in all stages of construction, but the expectation is that as California’s market recovers and as violence in Baja California continues to diminish, sales will rebound. Also, more Mexicans are buying higher-end properties once sold mainly to Americans. The Pacifica at Ensenada Bay is now focusing on marketing to Mexican buyers, whereas before it was pitching to Americans. Its homes were designed by U.S. architect Rob Quigley, designer for San Diego’s central library scheduled to open this year.
The Puerto Vallarta region also markets to both Mexicans and Americans. Punta Sayulita is a planned development of 62 single-family detached homes on a 33-acre (13 ha) private peninsula on the Riviera Nayarit adjacent to the popular surfing village of Sayulita, about 40 minutes north of Puerto Vallarta at Bahía de Banderas. “We’re the closest tropical jungle to a significant majority of the U.S.,” says Ellsworth of Contact Development Co., which is selling homes in the $1.5 million to $4 million range, including one in a treehouse design. Sales began picking up last year, he says.
Planning and sustainability may become greater influences on development in coming years. AECOM’s De la Mora, who used to work in the San Diego/Tijuana region, says that in some ways, the recession saved Mexico from having some terrible projects built. He hopes that now that the economy is coming back, people on both sides of the border will have stopped and reflected and will build more of the sustainable-type projects that Mexico deserves.
