Retail Sector is Expanding, Changing the Look of Mexico

Over the past five years, retail investors and developers have added a new imprint to the familiar terrain of cheek-by-jowl, mom-and-pop stores across Mexico, building U.S.-style strip and destination malls with brand name tenants.

The trend is growing across Mexico. And, at the U.S.-Mexico border, the creation of a special border economic zone that will halve the VAT sales tax, as well as cut corporate taxes, and double the minimum wage is expected by some to spur even faster expansion.

“This city is seeing right now an explosion in mixed-use projects”

said Harold Hoekstra, the Tijuana-based director of mixed-use development at consulting firm NAI Mexico.

“You’ll see it across the country, too, say in Guadalajara, Monterrey, Juarez. Companies are seeing the potential to invest in these sectors,” he said.

The increase of retail projects, often combined with offices, hotels, and residences, is exactly the opposite of what is happening in the United States, where traditional customers have largely shunned malls for online shopping. According to various articles, the number of store closings in the United States was expected to be more than 10,000 in 2018. Malls are either closing completely or have become collections of empty stores.

Horton Plaza, a San Diego project that opened in 1985 and was credited with revitalizing the city’s downtown, has become something of an eyesore. It recently was sold to Los Angeles commercial real estate company Stockade Capital, which plans to turn the shopping center into a mix of retail and office space that could appeal to Silicon Valley technology companies.

In Mexico, there has been 5% annual growth in the gross leasable area of commercial centers and an increase of 7.5% in retail sales.

“We’re still 10 to 20 years away from online operations decimating mall store operations” Hoekstra said.

“Mexicans like to go shopping. The malls are very strong. The numbers are good.”

Most of the mall developers are Mexican or South American, he said.

Plaza Sendero has built and operates 19 malls across Mexico—in addition to Tijuana and Mexicali, in Culiacan, Los Mochis and Ciudad Obregon, among other cities.

Mexican company Planigrupo, with 43 years of experience, develops, designs, builds, markets, and administers shopping centers throughout Mexico.

In Tijuana, some of the projects are in a revitalizing city center or in far-reaching areas of the city where spreading populations have become concentrated.

The Alameda Otay Town Center, located near the airport and the Otay Mesa border crossing has 163 shops, six residential towers, two hotels, and a medical center with 90 offices. Green areas are pet friendly. The mall also offers cultural events, Wi-Fi, parking and valet parking, as well as an outdoor auditorium.

Closer to downtown, the two-story Paseo Chapultepec, in addition to shops, restaurants and beer pubs, includes walkways, terraces and galleries.

Tenants at the malls include well-known brand names such as Best Buy, Costco, Applebee’s and Home Depot. Apple has stores in malls in Tijuana, Mexico City, Guadalajara and Monterrey.

South American brands also are becoming important mall tenants. Sodimac, a Chilean home improvement warehouse chain, is popping up. And Argentinian, Colombian and Peruvian stores are gaining a presence in Mexico, Hoekstra said.

Even though Mexican upscale department stores such as Liverpool and Palacio del Hierro are expanding to malls in the interior, he said, they are reluctant to establish operations in the border region because of the competition of their higher-end merchandise with U.S. retailers.

Many expect President Andres Manuel Lopez Obrador’s creation of incentives for the border economic zone to spur even further development.

“It’s a nice windfall for retailers; it will provide an incentive to the area”

said Jose “Pepe” Larroque, a Baker & McKenzie partner who chairs the law firm’s global real estate practice group.

Still, he said, the special program is scheduled to last for only two years and then be reevaluated, “so it’s hard to do long-term planning.”

Many details of the new zone are still unknown, but companies must register to gain the economic perks, companies or their branches must already be established in the zone and new companies are supposed to have new equipment in the zone for the first time.

“It might generate more investment in the border zone, but it’s still unclear,” Larroque said.

For U.S. landlords, investors and operators of retail centers, shopping malls, lifestyle centers and similar projects investing in Mexico it’s different than in the United States, said NAI’s Hoekstra.

One criterion is the same on both sides of the border, however: “location, location, location.”

But the capitalization rate (or cap rate), the most popular measure through which real estate investments are assessed for their profitability and return potential, is not the same.

“The retail sector in the United States averages a 7% cap rate,” Hoekstra said. “On the Mexican side, you have to look at 9% or higher … The interesting thing is that those deals are there.”

When acquiring a retail property in Mexico, he said, investors should want to know who the tenants are—especially the anchor tenants, what the lease terms are and their reliability to remain as tenants and keep paying rent.

With many Mexican shopping centers including brands seen in the United States and Canada, investors could start with clients they have north of the border. “Walmart has been a driver,” Hoekstra said.

Lastly, he said, is there a market?

For a landlord, there are retail centers for sale in appropriate locations with the right set of criteria and there is land for sale to develop malls or mixed-used projects, he said.

For retailers wanting to make the decision to increase their presence or undertake a project in Mexico, he added, the Mexican middle class is growing and has increased purchasing power and infrastructure has improved.

At the border, noted Larroque, the special economic zone could move more wealth to the region. With the doubling of the minimum wage, he said,

“More people will be making more money and will have cash to spend—on housing, retail, trade and commerce.”

Plus, it is more difficult to cross the border to shop in the United States, he noted.

“What newcomers are going to be investing?” he asked. “That’s where the questions lie.”

 

This article was originally written by Diane Linquist and published in the February 2019 edition of the Border Now

 

For Wall Street, Mexico Is Great Again

By Kenneth Rapoza

Mexico has a lot of well-known problems. Drugs. Poverty. Corruption. And on the corporate side, low-levels of production outside of the major multinational owned manufacturing firms. But despite the campaign rhetoric to build a wall and to knock Mexico down a peg in a NAFTA do-over, there is one problem our neighbor does not have: beating every single equity market in the Americas to a pulp.

For investors, Mexico is great…again. After a slight lull in affection back in April, the market has rediscovered Mexico now for the past two months. The trend is seen continuing until the fourth quarter.

Mexico was already great at the end of last year on into January for bond investors. They bought local currency Mexican government bonds when the peso fell to its lowest level on record, around 22 to the dollar. It’s now 17.17 to the dollar.  Those investors have gained at least 14.8% since January on the currency alone. The second-place currency in terms of strength against the dollar this year is the Brazilian real and that’s only gained 3.5%.

Morgan Stanley says the Mexico bull run is not over.

Economist Luis Arcentales of Morgan Stanley in New York says the mood has markedly changed since Trump first won the White House. “Besides the great food and the awful traffic, I did sense a shift among local investors who seemed much more constructive about Mexico after having been quite cautious because of a whole host of factors ranging from domestic politics to concerns about protectionism,” he says.

Last week’s news on upcoming NAFTA revisions helped strengthen Mexican markets seven more.  Many of the elements added, such as beefing up local content rules for manufacturers, protecting intellectual property rights and labor provisions were included in President Obama’s failed Trans-Pacific Partnership negotiations, and both Mexico and Canada agreed to make those concessions out of concern that the U.S. would bail and turn to Asia instead. NAFTA renegotiations begin on Aug. 16.

For Arcentales, barring the proposal to scrap the Chapter 19 rule in NAFTA on anti-dumping and trade duty matters in favor of the U.S., most Mexico watchers today think NAFTA just gets better, not worse.

Mexico has benefited from better coordination between the federal government’s two most important entities: oil firm Pemex and the central bank of Mexico, Banxico. Fiscal and monetary policies are tighter, energy reform that allows for greater foreign participation (meaning less spending for Pemex) has been a success thus far, and the central bank managed to protect the currency well, with ample reserves in a severe downturn.

Morgan Stanley strategists say they see “a window of opportunity to express a bullish view” on Mexico at least until their presidential elections next summer. Morgan analysts expect volatility to pick up in the first quarter.

“The story for the Mexican peso will be different in 2018,” says Andres Jaime, a strategist at Morgan.

The peso is unlikely to move closer to the dollar than 17 pesos. It’s already up from 18.12 when FORBES ran its portfolio manager profile on BlackRock’s Gerardo Rodriguez in June. Next year, political uncertainty will have a bigger influence on the currency and on Mexico in general, with volatility kicking into high gear by March. “Some cheapness in the currency is a near certainty in my view, particularly in the second quarter of 2018,” Jaime says.

For now, Mexico is still in the sweet spot. There’s potential for more upside.

Mexico seems to be in the midst of a period of relative calm. Investors have decided to shelve politics for now, possibly until NAFTA negotiations are well under way. Or in early 2018, when party alliances and candidates are defined. The economy is facing a full employment scenario similar to that of the United States. The official unemployment rate as of June is just 3.3%, down from 3.5% for much of the year. The net labor force participation rate rose to 59.3% from 59.2% in May.

Industrial production remains tepid, but that is because the statistical element is heavily weighted towards Mexico’s energy sector and construction.

Mexico continues to face downside risks from public spending cuts, higher gasoline prices and slightly higher interest rates, but it has since avoided the most adverse scenarios trumped up by the media, with the help of the president himself.

To date, there has been no mass deportations of Mexico’s illegal U.S. residents. Such a move would have put undue strain on Mexican public services. Many Mexicans in the United States, included undocumented workers, send money to their families in poor cities and towns across the country. That’s less money the Mexican government has to spend on social welfare, having counted on money from Mexican-Americans now for generations.

NAFTA meanwhile is still firing on all four cylinders, wiping out fears that Trump would sign an executive order calling for the immediate withdrawal from the trade treaty signed in 1995 under President Bill Clinton. They’ve dodged two bullets, helping, for investors anyway, to make Mexico great again.

“Mexico’s better than expected economic performance adds to 2017’s resurgence of emerging markets which is lifting global GDP growth back to potential,” says PNC Financial’s senior international economist Bill Adams in Pittsburgh. “The global economy has reached the sweet spot of the economic expansion,” he says, and within Latin America at least, Mexico is smack dab in the middle of that sweet spot.

 

Source: https://www.forbes.com/sites/kenrapoza/2017/07/24/for-wall-street-mexico-is-great-again/#125eaba576cd

 

Mexico welcomes U.S. NAFTA objectives, eyes stronger North America

By Anthony Esposito

MEXICO CITY (Reuters) – Mexico’s government on Monday said it would work to strengthen the North American economy after the United States published its objectives for the renegotiation of the NAFTA trade deal, which one Mexican official described as “not as bad” as feared.

In a statement, the Mexican economy ministry said it expected talks between the United States, Mexico and Canada on renegotiating the North American Free Trade Agreement (NAFTA) to be able to get under way from Aug. 16.

For now, Mexico would continue with domestic consultations on the revamp of the accord until early August, it added.

The ministry said it would work “to achieve a constructive negotiation process that will allow trade and investment flows to increase and consolidates cooperation and economic integration to strengthen North American competitiveness.”

The United States said its top priority for the talks was shrinking the U.S. trade deficit with Mexico and Canada, a recurring complaint of U.S. President Donald Trump. [L1N1K8149]

In a highly anticipated document sent to lawmakers, U.S. Trade Representative Robert Lighthizer said he would seek to reduce the trade imbalance by improving access for U.S. goods exported to Canada and Mexico under the three-nation pact.

Speaking under condition of anonymity, a senior Mexican official said the list of priorities was “not as bad as I was expecting” and welcomed that the United States was not pushing to impose punitive tariffs, as Trump has threatened.

The official also noted the U.S. wish to ditch the Chapter 19 dispute settlement mechanism that has hindered the United States from pursuing anti-dumping and anti-subsidy cases against Mexican and Canadian firms would be resisted firmly by Canada.

“Canada will fight to (the) death on Chapter 19,” the official said.

 

Source: https://www.reuters.com/article/us-usa-trade-nafta-mexico-idUSKBN1A301D

 

NAFTA Demise Fears Fade as U.S. Firms Committed to Mexico: Lobby

By Dave Graham and Ana Isabel Martinez

MEXICO CITY (Reuters) – Companies no longer fear the North American Trade Agreement (NAFTA) will collapse and top U.S. multinationals in Mexico are committed to investing in the country going forward, the head of a global business lobby said on Wednesday.

Frederic Garcia, President of Mexico’s Executive Council of Global Companies (CEEG), said preparations to renegotiate NAFTA and growing awareness of the accord’s economic benefits had all but put an end to fears that the deal would be scrapped.

“There was a moment where the probability, or the perception that NAFTA would end, was very strong,” Garcia said in an interview in Mexico City. “But today I think there’s an awareness that it will continue. The big worry that the deal could come to an end is an issue that’s behind us.”

The CEEG represents a host of multinationals in Mexico including AT&T Inc , Coca-Cola Co , General Motors Co , Microsoft Corp , Exxon Mobil Corp , Nestle, HSBC, Siemens and IBM Corp , which it says account for around 40 percent of total foreign direct investment.

It and other business associations have been active in extolling the benefits of NAFTA to Americans to counter threats by U.S. President Donald Trump to dump the 23 year-old accord that binds the United States, Mexico and Canada.

Mexico’s Economy Minister Ildefonso Guajardo said on Tuesday he expected the U.S. government to notify Congress early next week of plans to rework the accord, yielding talks by late August.

It was not yet clear how NAFTA would be revamped, but if Mexico’s efforts to update its free trade deal with the European Union proved instructive, it could include provisions to boost corporate compliance and adherence to the law, Garcia said.

Trump said last month he was ready to renegotiate NAFTA with Mexico and Canada, though since taking the presidency in January he also has maintained that the United States could withdraw from the agreement if talks did not work in favor of his homeland.

Arguing the accord has destroyed U.S. jobs, Trump has menaced multinationals manufacturing in Mexico with punitive tariffs, and his threats to quit NAFTA. This sent the peso to a record low in January.

Earlier that month Ford abruptly canceled a $1.6 billion plant in central Mexico following verbal attacks by Trump. But as the rhetoric from the White House began to moderate, the peso has recovered somewhat, and fears for NAFTA’s future have eased.

Last week, a Mexican business lobby said it expected investment to drop slightly this year due to uncertainty over Trump, but Garcia said the CEEG would make no forecasts over projected outlays to avoid drawing attention to the matter.

“As far as the U.S. firms in the CEEG go, from the first day of the new U.S. administration they’ve stated their great interest to continue operating in Mexico (and) their great interest to continue investing in Mexico,” he said.

However, they had done so in such a way as to preserve their interests with the U.S. administration, Garcia added.

 

Source: http://money.usnews.com/investing/news/articles/2017-05-17/nafta-demise-fears-fade-as-us-firms-committed-to-mexico-lobby