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Mexico's Retail Market -
Residential boom & credit availability drive development

Editor's Note: This story is the second in a two-part series about investment opportunities in Mexico. This story covers Mexico's growing retail real estate sector. The first story, which covered Mexico's booming economy and housing market, was published in GREM's November 2007 issue.

Like many emerging countries, Mexico has never enjoyed an abundance of quality retail offerings. In fact, it has been underserved for decades, despite its growing population, increasing wealth and access to personal credit.

Fortunately, retailers and retail real estate developers have finally realized the need and are working to meet it. Over the past three years, Mexico's retail real estate market has grown rapidly, according to Victor Lachica Bravo, president & CEO of real estate brokerage firm Cushman & Wakefield Mexico.


While most retail projects are funded locally, foreign capital has become increasingly active in Mexico. U.S. investors are particularly interested in Mexico's retail market, and U.S. investment funds are expected to invest $3 billion in shopping center development over the next three years, according to Commercial Real Estate Advisors. These investors hope to realize returns somewhere between 12 percent and 15 percent.

Today, Mexico has about 2.5 square feet of retail space per person compared to just 1.4 square feet of retail space per person in 2004, according to the International Council of Shopping Centers (ICSC). Of course, Mexico's recent growth can't compare to 20 square feet of retail space per person in the United States.

"I believe we're going to reach 3.3 square feet of retail space per person very soon, which means that we've almost doubled our retail space," Lachica Bravo says. "The reality is that we were extremely under-retailed, and even with the new retail, there is still a need."

Consumer spending increases

Consumer spending in Mexico rose by 12 percent in 2005, according to Jones Lang LaSalle, while the Mexican Association of Department Stores reported that sales of its members grew by 14.3 percent in 2006.

Much of the long-term growth in Mexico's retail sector can be attributed to the increasing population and expanding residential market. In fact, the largest housing developers such as Urbi and ARA are increasingly integrating a retail component in their large housing developments to increase the overall value of their projects.

With 107 million people, Mexico is the world's 11th largest country in terms of population. While there are around 38 million people between 25 and 49 - the age that is typically associated with household formation - this number will grow by 21 percent to 46 million by 2030.

"Over the past eight years the Mexican government has restructured the housing programs, which has led to significant residential growth," explains Elliot Bross, principal of Planigrupo, a Mexico City-based developer that specializes in grocery-anchored shopping centers.

Mexico's housing development commission says the country has a shortfall of 3 million homes; others estimate the shortfall to be as high as 7 million even though the construction sector is building 750,000 homes a year. At the current speed of construction, it is estimated that the deficit could be met somewhere between 2015 and 2020, but ongoing demographic trends indicate that another 800,000 homes per year are needed to satisfy new household formation.

Additionally, consumer credit is growing at double digit rates in the new environment of reduced interest rates and tamed inflation, meaning that Mexicans have more access to personal credit than ever before. In the last few years, mostly foreign-owned banks have dramatically expanded their Mexican credit card debt portfolios. In 2006, banks approved 8.7 million new credit cards, awarding 40 percent of the new accounts to customers with no previous credit history. Credit card consumer spending reached about $37 billion in 2006, according to LatinReport.

"Personal credit is a relatively new thing in Mexico," says Luis Sada, managing director of equity for GE Real Estate Mexico. In addition to its real estate investment activities, GE also underwrites private label credit cards. "We see this line of business as an opportunity."

Beyond population growth and consumer credit, remittances from Mexico's 10 million migrant workers have also stimulated private consumption. In 2006, remittances from the United States exceeded $20 billion - the biggest flow in Latin America and the third biggest in the world after India and China. Experts estimate that 80 percent of all remittances end up being spent on consumables.

All of these factors have encouraged retailers to embark on aggressive expansion strategies in Mexico, which in turn has encouraged retail developers to invest in Mexico, Bross says. ANTAD's members, for example, increased their footprint by 10.5 percent in 2006, all due to the construction of new stores.

Discount specialty retailers and grocery chains are particularly active. Mexico's number two grocery retailer Soriana, for example, plans to double its store footprint by 2010. International retailers are growing too: Walmex (owned by Wal-Mart) accounts for almost 25 percent of retail sales and has more than 700 stores. The retailer plans to invest $1 billion and open 127 new stores in 2007.

Beyond discount and grocery chains, many prestigious fashion retailers have Mexico on their radars. Brands such as Louis Vuitton, Carolina Herrera, Donna Karan, Armani, Hermes, Salvatore Ferragamo, and Ermenegildo Zegna have successfully entered a number of Mexican markets. And Saks Fifth Avenue will soon open its first store in the country in Mexico City.

Retail development boom

There are currently 30 shopping centers under development in Mexico, according to Prudential Real Estate Investors. A number of institutional investors such as O'Connor Capital Partners, LaSalle Investment Management and Sam Zell's Equity International Partners all have retail projects under development.

GE Real Estate, in partnership with Kimco, entered Mexico's retail market four years ago with an initial investment of $250 million in equity, Sada says. "We're set to max that out in a few months, so we're going back to the investment committee to get another $250 million," he adds.

Additionally, GE Real Estate also has partnered with Planigrupo, which has about $160 million worth of retail projects under development, most of them grocery-anchored centers. However, these centers are dissimilar to the grocery-anchored centers that are common in the U.S.; these Mexican grocery-anchored centers, which range from 250,000 square feet to 300,000 square feet, are usually enclosed and boast a large number of inline shops, as well as several sub-anchors including a cinema, Bross says.

Houston-based Hines also is actively developing retail projects in Mexico. Specifically, the company is focused on neighborhood centers for middle-income Mexicans, says Pierre Arriz, general manager of Hines Mexico. These centers are much smaller than Planigrupo's projects, yet they are still anchored by grocery chains including Walmex and Soriana. "We expect the Mexican middle class will continue to grow, which will fuel demand for more retail," he says.

Most of the new development has occurred in Mexico's larger cities including Mexico City, Guadalajara and Monterrey, Lachica Bravo says. Mexico City's suburbs such as Queretaro have also attracted retail development.

However, much of the future opportunity lies in smaller cities and rural areas, he notes. Many developers have already claimed land in these smaller markets as Walmex increasingly targets consumers in suburban and rural areas. But, retail development in these smaller markets is complicated by the limited number of financially sound anchor tenants, as well as smaller inline tenants.

"We have a systemic issue with that fact that we don't have many non big-box retailers," Bross says. "Trying to bring retailers into new markets has been difficult because they have limited sources of capital."

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