All these metrics are driven by the performance of the properties that make up the different portfolios of the REITs, and there is little information about this type of assets in the market.

The importance of knowing the source of what feeds the financial indicators reported by the different trusts lies in the fact that the performance of the properties has a direct relationship with the value of the stock certificate. Analyzing the aforementioned metrics without considering the performance of the assets in the market is like buying a product online based on good images but without the product details and consumer ratings. 

This analogy may sound simplistic, but the challenge is greater when it comes to transparency. Until recently, it was utopian to know the properties that make up the portfolios of trusts like FUNO, one of the most diversified REITs, or to be aware of the occupancy rate, location, and fundamentals of each office building in the CDMX market for FIBRA HD. 

This information was not only difficult for the general investing public to obtain, but also for specialized players in the real estate industry. The executives of the trusts responsible for investor relations are well acquainted with the financial indicators; however, obtaining details such as occupancy, rent per square meter, gross and net absorption of the current portfolio, and how it compares to the rest of the market is challenging. 

It is true that REITs have been agents of change towards a semi-mature and institutional real estate market, and it is also true that, after the first eight years of reporting experience, some trusts have opted for better practices, driven by associations such as AMEFIBRA, which has done an excellent job in the last year. From our perspective, the challenge is uphill when it comes to standardizing the calculation of certain metrics and, above all, relating the value of the certificate to the performance of the properties. 

At SiiLA, we seek transparency in the real estate industry, and under that purpose, we have managed to obtain key indicators for the total A+ and A office inventory, A and B for industrial properties, and six formats for the retail sector, including properties of the REITs. 

Taking into consideration the Mexico City market (metropolitan area) for the industrial sector, as of the fourth quarter of 2019, the total inventory for A and B properties amounts to 9.5 million square meters, of which 35% corresponds to REITs. 

The submarkets with the highest presence of properties from these trusts are CTT (Cuautitlán - Tultitlán - Tepotzotlán) with 38% and Tlalnepantla with 47%. In terms of fundamentals and specifically speaking about the availability rate, the market registers 2.14%, while the REITs' assets are at 1.16%. In other words, the latter have a better occupancy performance than the rest of the properties.

As for the average weighted rent per square meter, the REITs are $0.40 USD/m2/month below the total market. SiiLA Mexico's analysis during the last quarter of 2019 determined that the overall market (CDMX) had a gross absorption of almost half a million square meters, while the REITs' properties absorbed close to 100,000 square meters (18%). 

The office sector in Mexico City has been a highly attractive market for real estate investment trusts since they began operations in 2011, particularly FUNO, which included two office properties in its initial portfolio: Corporativo Prisma and Reforma 99.

Over time, several REITs joined this trend and saw the corporate market as a business opportunity for various reasons, including absorptions capable of absorbing new square meters, few players with reliable financial backing to carry out institutional-quality developments, AAA tenants, and long-term contracts denominated in dollars. It wasn't until late 2018 when the real estate cycle in the CDMX office market started to turn. 

We went from an availability rate of 11.5% in the first quarter of 2019 to almost 15% in the last quarter of the year. This behavior has turned this sector into what is known as a "tenant's market," where tenants have greater negotiating power given the unattractive fundamentals, such as compressing prices, high availability rates, negative net absorptions, and pending supply. Just to reinforce this last point, there are currently 1.5 million square meters of A+ and A offices under construction in CDMX, tentatively ready to be delivered over the next two years. Now, the properties owned by the REITs have also been affected by variations in the real estate cycle. 

For example, of the total inventory of A+ and A offices in CDMX, the assets of public trusts represent 13.5%, with nearly one million square meters. The availability rate for this portion of the inventory is 19.3%, while the rest of the market is at 14.6%. Regarding the average weighted asking price per square meter, the total inventory is $23.33 USD/m2, while the REIT assets are at $20.54 USD/m2. On the other hand, assuming a stabilization rate of 85% for this type of asset, currently, the "vacancy loss" for the REITs amounts to $21 million annually, which represents 13% of the total loss in the rest of the market. Clearly, the performance of the REIT assets has been less favorable in the case of offices. Today, there are 16 buildings owned by the REITs (CDMX) below 85% occupancy, meaning below the stabilization rate. 

The reasons for the behavior of the fundamentals in these properties are diverse; the most relevant, from our perspective, is the economic slowdown, as this asset is directly linked to public, private, and foreign investment. This has resulted in a tenant's market where lease terms and grace periods are negotiated more rigorously. All of this directly influences the price per square meter and, therefore, the operating income of the assets. 

With this in mind and knowing that, unlike in the industrial sector, REITs have a smaller proportion of offices in their acquired portfolios, the impact of asset performance on the value of the certificate has also historically been lower.

REITs have proven to be an excellent alternative investment vehicle with the potential to evolve in their administrative and reporting systems. In the medium term, a system for calculating standardized metrics, both financial and market-related, is imperative. 

In this regard, regulatory entities will need to make an effort to strike a balance between not over-regulating and understanding that transparency not only benefits the REITs themselves but also the economy in terms of opening up to foreign investment flows. In terms of asset diversification, new investment theses focused on properties such as data centers, last-mile distribution centers, healthcare facilities or hospitals, cell towers, among others, will continue to be generated. 

Furthermore, the sector is inclined to adapt to the digital era, both with solutions for daily operations and for capital and debt structuring, as seen with the so-called e-REITs in the United States.

1.It is equally important to periodically review the market fundamentals of REIT assets as it is to analyze the financial reports issued by the REITs themselves or qualified analysts. 

2.There is a relationship between the performance of the properties belonging to REITs and the value of the listed certificates. Therefore, it is extremely important to measure the behavior of the real estate cycle in comparison to the immediate historical context. 

3. REITs with greater diversification are less volatile in terms of certificate value when their assets have not performed optimally within a specific sector, such as the office market. 

4. In the medium term, REITs will need to align metrics by sector in order to provide transparency and a better understanding to the general investing public. 

5. Investment theses of the trusts will evolve towards the acquisition or development of new assets, either in a specialized or diversified manner. 

Note: To calculate the vacancy loss, we identify the square meters needed for each property to reach the stabilization point (85% for offices, 90% for industrial) and multiply those square meters by the market price of that particular property. 

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