Analysts Got It Wrong With Mexico REIT Rally That Never Occurred


September 8, 2015 — 12:00 AM CDT Updated on September 8, 2015 — 10:26 AM CDT

Analysts from Credit Suisse Group AG to Itau BBA who rode a wave of optimism over Mexico’s real-estate investment trusts are now facing the sector’s first potential annual decline.

A pending increase in U.S. interest rates, sluggish domestic economic growth and an oil-price rout are stripping real-estate trusts of their luster, forcing analysts to pare their target prices for the investments once designated as top picks.

“Investors are cautious about participating in the sector because of a nervousness over rates,” Marco Medina, a Mexico City-based analyst at Ve Por Mas, said in a telephone interview. In addition, “many REITs raised capital and haven’t used it. The square footage could get more expensive, bringing down returns on acquisitions.”

Known as Fibras in Mexico, REITs package real-estate portfolios for sale on the stock market and pay out dividends based on rents they collect. At current levels, shares for Fibra Uno Administracion SA, the largest REIT on the index, deliver a so-called dividend yield of 5.63 percent, compared with 6.14 percent for Mexican bonds due December 2024.

REITs were popular last year as Mexico’s economy looked set to rebound and an opening of oil fields to private drilling heralded a boom for commercial property.

An index of nine REITs has fallen 6.6 percent in the past 12 months, after gaining 162 percent since the first Mexican REIT hit the market in 2011. The FRMEX Index hasn’t had a full-year drop since then. Fibra Uno fell 19 percent this year compared with a drop of 0.9 percent in the IPC Index.

Medina is one of 16 analysts who recommend buying Fibra Uno, although he says he may suspend coverage of the stock until the Federal Reserve raises rates. Another eight analysts have a hold recommendation on the shares and only one rates it a sell. That’s still a lower rating than a year ago, when Fibra Uno had 16 buys, four holds and one sell. Target prices have also dropped to 46.76 pesos from 52.97 pesos over the same period. It was trading at 35.27 pesos at 10:01 a.m. in Mexico City Tuesday.

Fed Anticipation

Real-estate securities like Fibhios, Fibra Shop and Fibra Sendero that have filed for public offerings since at least 2014 have yet to go to market, impeded by sentiment that’s vulnerable to a Fed rate hike. Since the investments are considered like fixed income because of their large dividend yields, they are now less attractive when compared with rising government bond yields in Mexico, according to Signum Research.

"With the higher returns of long-term public debt, they aren’t able to maintain competitive dividends," said Signum analyst Armando Rodriguez, who recommends holding Fibra Uno and Monday lowered his rating to hold from buy for another REIT -- Fibra Hotelera. “Institutional investors prefer the bonds to Fibras.”

Favorable Position

Itau, whose top Mexico property pick is Fibra Uno, may lower its target price as the stock takes a beating from concerns about the Fed’s decision and an overcrowded REIT market. However, it may not change its outperform rating, according to Enrico Trotta, the bank’s Latin American real estate sector head.

“The market was quite heated and now it’s quite normal to see a stabilization or decrease in growth levels,” Trotta said in a telephone interview from Sao Paulo. Nevertheless, “Mexico is still in a pretty favorable position. Of course the reforms are taking a bit longer to happen, but on a relative basis when we look in the Latam space it’s still doing well.”

Itau’s leading Mexico analyst in the sector, Ariel Amar, was not available to talk for this story.

Credit Suisse, which reiterated Fibra Uno as its top real estate pick in February, declined to comment for this article.

One Outlier

One Fibra at least is holding up well. PLA Administradora Industrial, the only one on the index posting positive returns this year as of last week, develops industrial real estate in Mexico, which is a more successful area than office space and shopping malls because rent is collected in strengthening dollars, according to Corp. Actinver SAB. The announcement of several new automotive plants in Mexico over the past year is also helping industrial property REITs, according to Actinver analyst Pablo Duarte.

Rodriguez of Signum doesn’t see the REIT sector rebounding in the short term.

"I think analysts tried to change the mentality of investors," Rodriguez said. REITs "are going to take their time to come around."

A previous version of this story was corrected to reflect an analyst’s intention for a potential target price for Fibra Uno.