Bloomberg News

Shrinking Debt Returns Spur REIT Push by Pensions

February 04, 2013

Diminishing returns in the Mexican government bond market are prompting the nation’s pension funds to shift some of the $152 billion they manage into real estate.

Mexican peso bonds advanced 1.5 percent last quarter, the smallest return in a year and less than half the 5.4 percent increase in the second quarter. The faltering rally led eight of the country’s 12 Afores, as the pensions are known, to buy shares in Fibra Uno Administracion SA (FUNO11) when Mexico’s biggest real-estate investment trust, or REIT, offered stock on Jan. 29.

The biggest institutional money managers are chopping peso debt holdings to an all-time low after foreigners seeking to profit from Mexico’s economic growth and higher interest rates sparked a 0.9 percentage-point drop in yields, the biggest since 2005. Fibra Uno returned 65 percent in the past year, versus 11 percent for Mexican bonds and 7.8 percent for local-currency emerging-market debt tracked by Bank of America Corp.

“It’s tied to the macro story directly, very similar to a bond story,” Benito Berber, a strategist with Nomura Holdings Inc., said in a telephone interview Jan. 31 from New York. “If people are really buying the macro story, they will buy real estate through fibras and directly.”

REITs are known locally as fibras.

Less Attractive

Peso debt has become less attractive to the pension funds after foreign investors boosted holdings of Mexican debt to a record 37 percent, data compiled by Bloomberg show.

Yields on the country’s benchmark bonds due in 2024 fell to 5.13 percent on Feb. 1, within three basis points, or 0.03 percentage point, of its all-time low.

Afores reduced bonds in December to 54 percent of holdings, according to Consar, the nation’s pension fund regulator. REITs and other so-called structured products made up a record 3.5 percent of Afores’s holdings in December.

The pensions received approval to buy structured assets for the first time in 2008. In addition to Fibra Uno, Afores bought shares in a Nov. 29 sale by Concentradora Fibra Hotelera SA, Mexico’s first hotel-focused REIT, as well as Macquarie Group Ltd.’s Mexico Real Estate Management SA.

The trusts, which began in Mexico two years ago, enjoy tax- exempt status on capital gains under the condition that they distribute a portion of their income as dividends. They are traded on stock exchanges and can deliver equity-like returns.

Mexico’s Economy

Edouard Boudrant, the chief financial officer of Fibra Hotelera, says his trust is attracting demand from pension funds because real-estate assets offer a way to profit from Mexico’s economy and can deliver higher returns.

FibraHotel, as Boudrant’s trust in known, operated 18 hotels and had four under development as of the end of 2012, according to Jan. 29 report.

The hotels include those aimed at families and business travelers, with some rooms priced at under $100.

Latin America’s second-biggest economy will expand 3.6 percent in 2013, outperforming Brazil for the third year, according to the median forecasts in Bloomberg surveys.

The funds “see it as a new asset class that allows them to diversify their investments, with the particularity that we’re obligated to pay dividends,” said Boudrant, who became CFO after leaving an investment banking career with the Mexican unit of Spain’s Banco Bilbao Vizcaya Argentaria SA. (BBVA) “You have the dividend yield, which is significant.”

Dividend Yield

Fibra Uno’s 22 billion peso ($1.7 billion) share sale offered investors a 12-month implied dividend yield of 4.59 percent, according to data compiled by Bloomberg. FibraHotel announced a shareholder payout last month equal to an annualized yield of about 4 percent, also based on the offering price in its November IPO.

Mexican bonds due in December yield 4.35 percent.

Government bonds are running out of room to rally, with yields on fixed-rate bonds unlikely to drop more than 30 basis points this year across most maturities, according to Gabriel Casillas, an economist with Grupo Financiero Banorte SAB.

“REITs are made for the Afores,” Casillas said in a telephone interview from Mexico City. “Afores love them, and they’re going to be absorbing as much as they can. It’s the diversification issue. Their investments are highly concentrated in government bonds.”

Biggest Investors

Afores were the biggest local investors in Fibra Uno’s Jan. 29 offering, according to Chief Financial Officer Javier Elizalde. Fibra Uno’s offering in 2011, the country’s first REIT sale, also lured pension fund participation.

Paula Chirhart, a New York-based spokeswoman for Macquarie, didn’t respond to a request for details on its real-estate trust’s IPO.

The Sydney-based bank’s Mexico Real Estate Management invests in industrial parks, especially along the U.S.-Mexico border region, while Fibra Uno’s holdings include shopping malls and Mexico City’s tallest skyscraper.

Gerardo Copca, an analyst at Metanalisis SA in Mexico City, says REITs are likely to post more “moderate” returns after their rally made them more expensive.

“The next fibras are likely to come out at slightly more pricey levels, given the performance of the others,” Copca said in a telephone interview.

Extra Yield

The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries rose 11 basis points to 163 basis points last week, according to JPMorgan Chase & Co.’s EMBI Global index.

The cost to protect Mexican debt against non-payment for five years with credit-default swaps rose six basis points to 98 basis points last week, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value if the issuer fails to comply with debt agreements.

The peso rose 0.8 percent to 12.6062 per dollar last week.

Yields on interbank rate futures contracts due in December, known as TIIE, fell 13 basis points to 4.54 percent last week.

Pensions for workers 36 years old and younger can have as much as 20 percent of their assets invested in structured products, according to Consar data, meaning more property trusts are likely to come to market this year to tap into growing demand.

Trustee Asesor de Activos Prisma SAPI filed for an IPO of a trust known as Fibra Inn, the company said in its prospectus, without specifying how much money it will seek.

“The real story is the emergence, the supply of these things,” Nomura’s Berber said. “If there’s really demand, then we will see way more fibras.”

To contact the reporter on this story: Jonathan J. Levin in Mexico City at

To contact the editor responsible for this story: David Papadopoulos at

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