Bridge Loans: Less than 5% is Allocated to the Industrial Real Estate Market in Mexico

Bridge loans are surprisingly scarce in Mexico's industrial real estate market, where SiiLA, Latin America's leading real estate data provider, reports over 100 million square meters of gross leasable area (GLA). The National Banking and Securities Commission (CNBV) reveals that only 3% to 5% of these construction loans are allocated to this market. The rest, about 91%, goes to the residential sector and between 4% and 6% to other commercial assets.

A bridge loan is a short-term loan that provides immediate liquidity for project development. It's called a "bridge loan" because it covers the urgent need for funds until permanent financing or sufficient income is obtained to sustain the investment and repay the debt.

In the real estate sector, developers use bridge loans to cover operational expenses and working capital, such as land purchases, permits, and construction costs. These loans finance between 65% and 85% of the project, disbursing funds in stages based on verifiable progress. Staggered financing, aligned with productivity, and flexible payments adjusted to companies' capitalization capacity prevent developers from decapitalizing, reducing financial risks and construction delays.

According to Dr. Nitzia Vazquez Carrillo, a specialist in financial development and public economics at UNAM's Faculty of Economics, the limited use of bridge loans in Mexico's industrial real estate market is due to several factors:

a) The complexity, cost, and duration of industrial projects, which increase financial risks compared to other sectors like residential.

b) The use of alternative financing sources, such as investment funds, crowdfunding institutions, and loans from multiple-purpose financial companies, which reduce the need for bridge loans.

c) The strict requirements that make access to these loans difficult, especially for new companies, such as having two to three years of operation, a positive credit history, and a detailed estimate of the loan's use and cost.

d) The lack of financial inclusion and education, which prevents many micro and small businesses from knowing and using these financing options, as many do not know how they work, think they do not need them, or consider them too costly.

Bridge Loans Impact on the Industrial Market

As of the first quarter of 2024, the balance of bridge loans for real estate construction exceeded 114 billion pesos (over $6.7 billion). This includes data from multiple banks, development banks, and SOFOMES and represents 4% of the credit portfolio in Mexico, according to the CNBV. Of this amount, 8% was allocated to the industrial and commercial real estate sector.

Most industrial and commercial projects financed with bridge loans were located in the northern and central states of the country, which concentrated 35% and 31% of the balance, respectively. In contrast, Mexico's Bajio and southern zones received 28% and 6% of the non-residential credit portfolio. These figures reflect the development of the industrial and commercial real estate market in the country, where, according to SiiLA Market Analytics, the north, Bajio, center, and south regions, in that order, concentrate the highest proportion of GLA.

In Dr. Nitzia Vazquez Carrillo's opinion, although bridge loans are limited, they significantly impact the development of the industrial real estate market. They enable the creation of the necessary infrastructure to increase business demand and expand productive capacity. This requires labor, generating many direct and indirect jobs, and promotes the development of services such as hospitality, entertainment, communications, and transportation, which energize the market and increase its competitiveness.

Consequently, bridge loans create productive linkages that foster sustainable economic growth. However, the results of this financing are not immediate, as they can take two to five years to materialize.

The specialist in financial development and public economics suggests collaboration between the public and private sectors to boost the potential growth of the industrial real estate sector through bridge loans.

An effective form of collaboration is through public-private partnerships. In these models, the private sector and development banks jointly finance projects. For example, the private sector can provide materials and construct, while development banks release funds based on project progress in stages. This mechanism is especially useful for initial investments and allows credit line adjustments as project advances are verified.

However, to encourage their use in the industrial sector, it would be necessary to implement tax incentives and promote financial innovation, especially in infrastructure projects with ESG (environmental, social, and governance) principles. These efforts could expand the use of bridge loans and significantly contribute to the country's sustainable economic development.

For more information on the performance and development of Mexico's industrial real estate market, explore SiiLA REsource or contact us at contacto@siila.com.mx.