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Mexico: Private equity circles real estate

Sales of distressed real estate assets in Mexico could total more than $10 billion this year. “Mexico is very interesting at the moment,” says a local portfolio manager. “There are four big companies that are struggling that have big real estate portfolios in the country. Now there is an expectation that they will have to sell some of these assets.”

He adds: "Just these four companies could create deals worth a total of $10 billion."

One of these companies is Comercial Mexicana, the third-biggest retailer in Mexico, commonly known as Comerci. It filed for bankruptcy in October 2008 when the global economic slowdown, combined with a plummeting peso, triggered losses of more than $2 billion from its currency derivative positions.

Last month, the retailer was reported to have signed agreements with some of its creditors – JPMorgan, Barclays, Goldman Sachs, Banco Santander, Merrill Lynch and Citi – protecting the Mexican group from any new lawsuits until March 2. "Before the crisis Comerci had real estate assets worth $2.5 billion. Now its current liabilities amount to $2.2 billion and so it is likely that it will have to sell the majority of its real estate to finance these debts in the coming months," says a real estate portfolio manager.

"I’m pretty sure some of these real estate portfolio managers are salivating over the commercial assets that could come up soon," adds a senior Mexican banker.

"Developers know how to develop a project, they will
not know how to structure a financial deal. This year the expertise of fund managers will be essential"

Specialist funds such as Prudential Real Estate, O’Connor Capital Partners and Apollo Real Estate Property Partners are rumoured to be considering buying assets on the cheap. One strategy could involve the funds buying Comerci’s real estate assets and then leasing them back to the company. This arrangement would give the investor a known tenant in its properties, and Comerci would receive much-needed capital at a time when other sources of financing are extremely hard to come by. "Today, credit is restricted and so companies that need to refinance their liabilities are going to look to private equity funds for help. We are optimistic there will be a lot of private equity business this year in Mexico," says Diego Serebrisky, managing director at Advent International and chairman of the Mexican Private Equity Association.

Other opportunities include the local portfolios of GE Real Estate and ProLogis. GE, which reportedly has a larger real estate portfolio in Mexico than in the US, has more than $3 billion of Mexican real estate loans, with up to another $1 billion in equity investments. Investors will be watching to see if GE Real Estate decides to sell, given the problems at its parent, whose share price has fallen 62% over the past year.

ProLogis, the world’s biggest owner of warehouses and distribution facilities, could also be forced to sell its properties in Mexico. Last November, the Colorado company was on the brink of collapsing under the weight of its $11.1 billion of debt as its share price collapsed to $2.28. Even though it has managed to bounce back since then – by cutting its 2009 dividend in half and selling properties it held in Japan and China – some analysts believe that a sale of its $1 billion Mexico portfolio is probable. "ProLogis’s US problems mean it is almost certainly going to have to sell some of its Mexican portfolio," says a source.

The fourth company is Gicsa, a local real estate developer. Gicsa projects include shopping centres, residential developments and hotels. But as US tourist numbers drop off and the economy slows, Gicsa’s outlook seems bleak. "I think Gicsa has up to $3.5 billion in real estate assets and right now it is still not clear whether it will have to sell some, or even all, of this portfolio," says a private equity manager.

A banker adds: "Developers know how to develop a project on the ground and how to lease out property but they will not know how to structure a financial deal in the present markets. This year the expertise of fund managers will be essential."

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