Building ties: driven by rising trade, foreign investors pile on distribution projects in Mexico.

Attracted by big returns, tax incentives and spiraling demand, foreign pension funds are heading to Mexico to invest big in industrial, commercial and residential properties. According to Mexico's Association of Industrial Parks, more than US$1.5 billion will be invested in such projects this year alone.

"The basic idea is that pension funds have to diversify investments, so they put 5% to 20% in real estate and then they earmark a percentage of that for overseas investments, to seek more attractive returns," says Jorge Girault Facha, vice president of finance for G.Accion, a real-estate company that finances, leases and manages office buildings and industrial properties. What institutional funds seek, real estate analysts say, are opportunities and returns that are harder to come by or just not available in their home countries.

Funds like Calpers, the largest public pension fund in the United States, and Prudential Real Estate Investors, among others, have made large investments in Mexican real estate as a result. This year, Calpers and Hines, a global real-estate company, created a $100 million fund to invest in shopping centers and residential projects. There are currently about 15 foreign institutional investors operating in Mexico, among them Peabody and Met Life.

They're not alone. GIC Real Estate, an investment fund run by the Singapore government, and AMB Property Corporation, a U.S. industrial real-estate developer and manager, at the beginning of 2005 began a joint venture to invest $700 million in Mexican industrial properties. The aim is to acquire industrial distribution properties about to be finished by AMB and its local associate, G.Accion, although buying assets from third parties is also part of the strategy.

"In this case, GIC Real Estate wants to invest in Mexico and in the United States, but because it has no operator it's seeking out companies like AMB to represent it so that it can come into the country," says Girault Facha. "The funds put up most of the money, from 50% to 95%, and a marketing plan is established so that the operator's and the fund's interests are aligned and that they work together for the common good."

The president of GIC Real Estate, Seek Ngee Huat, said in a statement that his company's decision to invest in Mexico's industrial real-estate market was prompted by increasing trade with the United States; as a result of Mexico's own growing consumer population; and due to strong demand for distribution centers from multinational companies investing in the country.

A catalyst that first brought these funds to Mexico occurred in 1998, when Mexico's government modified the capital gains tax law, exempting foreign pension-fund investments from the tax. It has helped that Mexico has a stable economy and an investment-grade credit rating. "The funds are realizing there are opportunities here," says Rafael McCadden, director of the industrial parks association. While investing in a typical fund in the United States generates a return of between 7% and 8%, in Mexico that figure rises to as much as 13%. In addition, it's cheaper to get in. An investor spends much less money to buy real estate in Mexico compared to countries like the United States, Canada and Spain.

Mexico could do more. For instance, the country should offer incentives for these kinds of investments, those in the business say, and it should benefit from its privileged location next to the biggest economy in the world. "One of the reasons for the rise in the industrial real estate market is globalization itself," says McCadden. "Products now travel thousands of kilometers and more distribution centers are needed to distribute the merchandise. Our geographic location puts us in an excellent position, assuming we can capitalize on it."

In fact, industry leaders see only a promising future, one driven by expected population growth over the coming two decades: Higher incomes mean more housing, more shopping centers and more corporate and industrial parks. "All these people have basic needs to be met, from eating to brushing their teeth, so in the long run we're going to see more capable and experienced institutional investors trying to come to Mexico," says Jose Maria Zertuche, the head of acquisitions and business development for Mexico Retail Properties, a Mexican company dedicated to investing the resources of U.S. and Asian institutional investors.

Only three years old, the company manages a $250 million fund which, counting credit lines, allows it to invest $800 million. It focuses on commercial properties across the country, especially retail shops, which are later offered for lease. Among its clients are chains like Wal-Mart, Gigante, Comercial Mexicana and Soriana. The company has three areas of business: joint ventures, building, and acquisitions. It currently has 12 projects in the pipeline, but it hopes to develop 50 more in coming years and invest US$100 million annually.

Basic services. "The outlook is positive: We can say that retailers like Wal-Mart are seeking to add 80 outlets per year; establishments like Chedraui have already made a great leap. It's in the development of shopping centers that we see the biggest opportunity to reach areas of Mexico that lack these kinds of basic services today," says Carlos Real, Mexico Retail's director of development.

According to consulting firm AC-Nielsen, department stores are the heart of the biggest consumer market in Mexico. The International Council of Shopping Centers forecasts that between 2004 and 2005 Mexico will draw investments of $1.4 billion in shopping centers. Forty percent of that total will come from U.S. funding sources.

While investment in distribution centers and industrial, commercial and residential real estate is clearly growing, experts say that growth should be carefully supervised and organized, lest secondary cities like Guadalajara, Monterrey, Puebla and the capital, Mexico City, become saturated. "We should try to create centers where people don't have to go too far to meet their basic needs, where shopping, housing, entertainment and education are together in the same place," says Tania Toledo, a planner for Construcciones, a medium-sized Mexico City builder. "These are things that many cities and areas on the outskirts of cities don't have."

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MARISOL RUEDA * MEXICO CITY