Mexican REITs have weathered interest rate increases

Today, December 15, the Bank of Mexico announced the final interest rate hike of the year, which was 50 basis points, bringing the rate to 10.5%, the highest level since 2008 when interest rates were used as the main monetary policy tool. This is the thirteenth consecutive increase since June 2021 when the interest rate was at 4%.

These hikes have impacted the commercial real estate sector, which was recovering from the pandemic months. To understand this, we need to examine the performance of Mexican Real Estate Investment Trusts (FIBRAs) since the rate hikes began. However, it's important to note that a higher interest rate makes government securities (CETES, Bonds, etc.) more attractive, reducing the spread between the two. Therefore, it is expected that some investors will demand more government debt instruments and fewer securities in the stock market.

If we compare the performance of two REIT performance indices (the S&P/BMV FIBRA and the S&P BMV IPC) with the interest rate hikes that measure economic performance, we see that there has been a slowdown in the commercial real estate sector's recovery. However, it's important to mention that the effect has not been immediate or in the short term; it takes time before the stock market reflects it. It's also worth noting that REITs have outperformed other economic sectors.

Looking at the last two years, we observe less pronounced variations and a positive trend of REIT values increasing compared to the IPC. In other words, REITs have fared better against the Central Bank's rate hikes and other events. The IPC has increased by 2%, while REITs have seen an 8% increase during this period.

One reason for this better performance is the nature of REITs themselves. In addition to their market value increase, investors continue to receive at least 95% of pre-tax earnings, making these assets more attractive.

One last thing to note is that dividends have remained relatively constant (although they vary among different REITs) due to the occupancy levels and rental prices of the properties, partly because of the contracts signed between REITs and their tenants. If we compare the performance of dividend yield and the implied cap rate of REITs alongside the interest rate, we see that the former two have outperformed government securities for most of the period from 2018 to 2022.

In conclusion, despite expectations of a greater impact of interest rates on the stock market, it has had a lesser effect on REITs, which have been able to take advantage of this situation. However, it's important to monitor other indicators, such as debt, as the cost of borrowing has increased, making financing more expensive.

SiiLA is the leading real estate company based in the United States, providing a cloud-based suite of solutions that offer information, analysis, and intelligence for the commercial real estate market in Latin America, with offices in Brazil, Colombia, and Mexico.