Mexico City — The trend for nearshoring injected optimism into the Mexican market in light of the projected reconfiguration of the economy, and one of the sectors that has benefited the most is real estate, particularly real estate investment trusts (REITs).
And the Mexican peso has also benefited from the expected arrival of foreign investment, but this element may negatively impact the performance of REITs in the first quarter of 2023, according to Actinver analysts.
During the first quarter, the peso appreciated 8.06% and positioned itself as the emerging market currency with the best performance against the US dollar. Industrial REITs mainly manage their incomes in dollars, in three to five-year contracts, so a strong peso could have a negative effect when converting to local currency.
This factor was described as “the nearshoring paradox” by Valentín Mendoza, associate director of equity research at Actinver.
“In dollar terms, they will continue to grow due to the nearshoring effect, which is reflected in higher rents and higher occupancies, but in peso terms, there will be a 9% exchange rate conversion effect, which will make the results less attractive this quarter,” Mendoza told Bloomberg Línea.
The most-affected companies will be those with industrial exposure and some office space, he added.
“However, underlying performance would continue to perform well, as the positive tailwind from nearshoring would keep the Mexican industrial market tightly constrained, regardless of the construction rebound, and would be reflected on a currency neutral basis,” the analyst wrote in a paper.
Despite the downside of the Mexican peso appreciation for REITs in the first quarter of the year, Mendoza explains that, at a general level, there are in fact more benefits.
“You will see a favorable effect on employment, new companies that were not there before demand labor, and normally wages in the manufacturing sector are better paid, and these are fundamentals that underpin consumption.”
Other analysts have pointed to REITs as one of the segments that could perform positively during 2023 and are beginning to see the evidence of that.
“Everything seems to indicate that this start to the year confirms our view on the favorable environment for the industrial real estate sector,” wrote Roberto Solano and Brian Rodriguez, analysts at Monex, in a note on REIT Fibra Prologis’ financial results.
Fibra Prologis, which specializes in industrial real estate, reported first quarter revenue growth of 2.5%, with an occupancy rate of 98.4%.
“Prologis delivered better-than-expected results, driven by a strong rental and renovation turnaround, followed by year-over-year increases and a strong exchange rate,” Prologis CFO Jorge Girault said during a conference call with analysts and investors on April 19.
The company’s dollar-denominated revenue growth was 5.6%, according to Monex. At the end of the quarter, Prologis’ dollar-denominated income represented 65.8% of annualized effective net income.
REITs are investment vehicles focused on the acquisition and construction of real estate. Investors derive a double benefit from investing in this type of asset. On the one hand, they obtain profits from the appreciation of the real estate and the rents charged and, if they also invest in the certificates listed on the stock market, they obtain the return on the securities.
REITs cover real estate assets such as apartments, shopping centers, industrial buildings and hotels.
Eleven such trusts are listed on the Mexican Stock Exchange, which also make up the S&P/BMV Fibras Index, including Fibra Uno, Prologis, Terrafina and Fibra MTY.
FIBRA is the Spanish acronym for REIT.
First-quarter expectations
One of the trusts to feel a negative effect from the exchange rate will be Fibra Macquarie (FIBRAMQ); however, Actinver strategists estimate that a greater recovery of the fund in the retail segment and the contribution of recently delivered developments may minimize the impact.
“In terms of neutral currency, Fibra Macquarie will continue to present very solid results as nearshoring keeps the Mexican industrial market strongly restricted, despite the rebound in construction,” they said in a report.
The outlook for REIT Fibra Plus considers a positive period in dollar terms as the nearshoring effect underpinned a favorable scenario for industrial assets, but will also present the negative effect of foreign exchange translation.
“We estimate that revenues will fall by -5.6% quarter-on-quarter, with occupancy at a very high 98.5%e. In the same vein, NOI generation would decline by 4.7% vs. 4Q22, while EBITDA could drop by 5.6%,” Actinver strategists wrote.
Terrafina will also show a positive quarter in dollar terms due to the benefit from the manufacturing of commodities for export markets in light of the relocation and the greenfield projects that were recently delivered, but the strong peso will impact the trust’s figures.
To a lesser extent, Fibra Uno will feel the effects amid the diversification in its revenues as it also has exposure to the retail and office segment.
“The first contribution of Mitikah’s retail, along with a greater recovery of offices, would partially offset the impact of the ‘super peso’ in Fibra Uno’s logistics and light manufacturing segments,” Actinver analysts explained in the report.
Fibra Mty has yet to show the effect of recent deals. Although the trust has already incorporated the acquisition of the industrial portfolio of Zeus, but only for two days of the last quarter, so the significant effect will only materialize from the second quarter of 2023.
The exchange rate conversion will not only affect REITs.
Telecom giant América Móvil will feel the effect of the exchange rate conversion against other emerging currencies. The company owned by billionaire Mexican magnate Carlos Slim not only has exposure to dollars, but also to the Brazilian real and the Colombian peso.
Other companies affected will be Grupo Bimbo, Alfa and Orbia Adnvace Corporation.
