Executive Profile

Sergio Arguelles: The View from Mexico

Under Sergio Arguelles, FINSA Holding has become Mexico’s largest industrial developer and property-management company, with a 12 million-square-foot portfolio.

The family business started with the opening of its first industrial park in Matamoras, in 1977, across from Brownsville, Texas. Since then, Arguelles has built up FINSA around international trade, going on to develop industrial parks throughout northeastern and central Mexico, including one in Coahuila and one in Puebla dedicated to the automotive and auto parts industries.

Nearly 30 years later, Arguelles points out, the relationship with the U.S. continues to play a huge role in the Mexican Economy. In 2005, investors pumped a total of $18.8 billion into Mexico, down slightly from $18.9 billion in 2004, reports Mexico’s Ministry of Economy. The United States now accounts for 62% of all foreign direct investment in Mexico, according to the latest figures from the Federal Reserve Bank in Dallas. One of those investments was a deal by GE Real Estate (the sponsor of this newsletter) to purchase a Finsa portfolio for $453 million in 2005. With these properties, GE founded Interamerica Real Estate Group, in which the Arguelles family has a minority interest.

Arguelles recently sat down with Global Real Estate Monitor to discuss the opportunities and challenges that face real estate investors in Mexico.

GREM: What is the outlook for the Mexican real estate market?

Arguelles: The returns are good, and better than the returns you might get in the states. The reason is a so-called Mexican risk factor. But to the professional and the well-known developer the Mexican risk is non-existent. The rate of returns vary depending on the product, depending on the term of lease and depending on the credit workings. But you might be able to expect an 18% to 20% return. The market is getting tighter and tighter for all new projects.

GREM: Which Mexican markets are high on investors' radar? What are some up-and-coming markets to watch?

Arguelles: Definitely the markets that have been very hot and active are the Ciudad Reynosa market, the Monterrey market, Tijuana and the Mexico City area. Markets to watch I would say are Guadalajara, and Mexicali, which is the supporting market from the Tijuana activity. And Juarez has been an active market and the surrounding areas of Juarez are going to continue to be active. Chihuaua is a market to watch and the interior corridor of Mexico and the San Luis Potosi (accent over i) area.

GREM: What is the country doing to attract investors?

Arguelles: The country is doing a lot in regards to maintaining their role to establish stability. That’s in regard to the political, financial and social areas, but especially on the economic side of the equation. Mexico has done a tremendously good job establishing a good solid economy. We have a great amount of reserves, we have very low inflation and our interest rates are at historic lows. So, as an economic position, we are very privileged right now. We've had solid social stability. Politically, we have had our ups and down in regards to our political system, but nothing major has evolved out of that. We saw a presidential election very similar to what your presidential election was a couple of years ago.

GREM: What factors are driving development in the country?

Arguelles: We continue to see the auto sector as having great growth. Mexico, because of its proximity [to the U.S.], offers a great alternative for production. And basically we see that as a potential growth market. And distribution services--we have very high quality of technical and educated people in Mexico and we have established call centers in Mexico. We have the electronics industry and appliances-those are markets to watch in Mexico.

GREM: How is the maquiladora sector doing?

Arguelles: We have 12 million square feet under lease throughout Mexico and our occupancy is at an all-time high. We have a 98.5% occupancy in our portfolio. The companies are renewing contracts. The vacancy space from the recession of 2003 has been taken over. That is an indication that the maquiladora industry in itself is doing well.

GREM: How does the industrial market look to you north of the border?

Arguelles: The vacancy rate in Mexico is a little lower than what you have in the states. You have more product being offered there than in Mexico. I would say that in a good market in the states you might have a 5% or 6% vacancy, in Mexico you might have 2% or 3% vacancy.

GREM:Is Mexico benefiting from California's port congestion?

Arguelles: I think Mexico could benefit and is benefiting. I think definitely Mexico could offer an option for those types of situations. Mexico lacks the quality of infrastructure that the California ports have. We are not prepared for some of the bigger and better ships, but Mexico could definitely be an option. The Mexican government is doing a substantial amount of development to update its infrastructure. In the Gulf we already have very sophisticated and good quality ports that have updated their infrastructure. They are attracting heavier type industry, and in the Pacific (coast) we have good ports with good infrastructure.

GREM: How is Mexico positioned to attract U.S. companies in comparison to competing countries, like China and India, over the next five to ten years?

Arguelles: We are neighbors to the largest consumer economy in the world. In the past decade, we had not taken advantage of that. Our proximity is our greatest advantage. We have now developed good infrastructure and our markets have proven themselves. We can compete with the China market. China offers lower cost of labor and we might not be able to compete in the textile sector, but in higher-quality sectors, yes, we can compete. And with the just-in-time type of requirements like the auto sector may have, we can definitely deliver.

GREM: Is Mexico benefiting from the rise of China and India? How?

Arguelles: The whole world is benefiting. I think the tide is getting bigger and we are seeing a lot more demand for different products. China is growing at about a 10% rate; their economy is getting stronger and stronger. They are requiring a higher supply of products from around the world. I'm a believer that the bigger the pie gets the more the demand will be for world product.

GREM: What’s next for FINSA? What does the GE investment do for you?

Arguelles: GE has been with us since 1994. Back before ’94, the Mexican financial market was very polarized. When GE came, they came in with newer and better structures of financing for the Mexican market. We securitized part of our portfolio to work with GE. We were their first client back then and we grew with them.

What we are going to do with the $453 million generated by that joint venture? We are going to put that money to work. We started a company called FINSA II. We are basically starting new projects throughout Mexico. We are practically doing a repetition of our past 30 year success story.

GREM: Are all these projects industrial?

Arguelles: Mainly industrial. The places that we are building are the traditional, very active locations: The northeast part of Mexico, the Matamoros corridor, the Monterrey/ Saltillo corridor, Mexico City/Toluca corridor, Tijuana/Mexicali corridor, and San Luis Potosi (accent over i). We are starting new projects and new buildings in those areas.

GREM: Do you plan to build up FINSA's U.S. presence?

Arguelles: We have some buildings on the American side in the south section of Texas. We did so following the requests of our Mexican clients. There are other states where Mexican clients require warehouses. Do we plan to do more in the American markets? That's not part of our strategy right now. But if a client requires that we do something in that market, then, yes, we'll take a look at it.

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