Fire Sale in Latin America

As distress mounts, U.S. investors can cherry pick commercial real estate properties.

The suddenness with which the global financial crisis hit Mexico has caused distress at many projects such as coastal hotels, condos and office and industrial buildings either just completed or under development.

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The oversupply of coastal buildings is most apparent in Northwest Mexico where resort destinations lie near the border with California, Nevada and Arizona — states considered ground zero for the U.S. housing recession.

A glut of industrial and office buildings extends along the border from California to Texas. It reaches inland to Mexico City, Guadalajara and Monterrey, the three cities that account for 70% of Mexico's $1.2 trillion economy.

Well-capitalized Mexican investors have started to snatch up properties for 50 cents to 60 cents on the dollar, while American investors have been conspicuously absent from the market so far.

Signs of distress

The Rosarito-Ensenada corridor in Baja California has experienced unprecedented growth since 2003. At least 90 condo towers have risen there, along with detached housing and hotels that mainly target the second-home market for baby boomers in Southern California.

Fresh or half-finished oceanfront towers stand empty. That includes the less than half-built Trump Ocean Resort Baja Mexico, which boasts condos and a hotel under development by Los Angeles-based development and investment firm Irongate and the Trump Organization.

Because many of these projects relied on Mexican bank financing, the dried-up buying market has hastened a number of insolvencies. Mexican lending terms were much less forgiving than U.S. terms.

For patient money, this presents a big opportunity. Across the border, The California Coastal Commission opposes any type of oceanfront development, and the cost and time to build comparable projects in California is staggering.

Oceanfront living and drivable destinations within Mexico from San Diego, Los Angeles, Phoenix or Tucson perennially lure Americans, Mexican-Americans and retirees.

Most condo, villa and home prices have already dropped 40% or more from their peak in 2005-2006, which at the time averaged $300,000 to $440,000.

Poorly financed Mexican savings and loan institutions and solid Mexican banks are being required to repatriate capital to repair battered balance sheets in the U.S. and Europe, and are desperate to unload these non-performing assets at fire-sale prices. Not only have coastal residences encountered distress in Mexico, but some industrial, retail and office towers also have quickly fallen prey to the crisis.

When capital flowed easily in Latin America between 2004 and 2008, real estate development exploded with U.S.-style leverage structures for institutional money, or relied on U.S. equity credit lines to American homeowners who suddenly felt they could purchase a second home on the cheap.

Solutions and opportunities

Bankruptcy laws in Latin America today are widely modeled after legal systems in the U.S. and Europe, which makes the process of redeploying real estate capital far more efficient than in decades past. Mexican and Latin American pension funds are slowly amassing capital, but they are highly regulated and typically unable to establish opportunity funds to snap up such discounted assets.

There also is virtually no indigenous version of an opportunity fund in Latin America as most investors have no experience taking advantage of bankruptcy laws, compared with North American or European investors. Our bankruptcy laws only came into existence in the late 1990s and early 2000s.

That scenario creates a great opportunity for U.S. and other opportunity funds to find jewels in Latin America, a sub-continent poised to weather the financial storm. Today, we have more responsible governments than in the past, record foreign exchange reserves and a large network of investment protection treaties like NAFTA. Importantly, Mexico is a growing market that aspires to global products and lifestyles.

Our young urban populations are demanding decent housing, craving Western shopping centers, nicer offices, and logistics real estate. Smart investors can cherry pick real estate assets in Latin America, a future Cinderella story.

Daniel Gutierrez is managing partner at the law firm Gutierrez, Diaz, Luna, Esparza, S.C., in Baja California Mexico. Reach him at dgt@nafta-law.com.


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