The Surprising 54% Discount on Mexican REITs’ Net Asset Value: An Investment Opportunity in Mexico

According to SiiLA, Mexican REITs (or FIBRAs) are trading at an average market price 54% lower than their average net asset value. This phenomenon is known as Net Asset Value Discount (NAV Discount), indicating that the FIBRAs' shares (or CBFIs) value is below the FIBRAs' book asset value.

There are various reasons behind the NAV Discount, such as perceived risks in the real estate market or regarding FIBRAs themselves, as well as economic or supply-demand factors. For some investors, NAV Discount can represent an attractive investment opportunity since they could acquire CBFIs at a relatively low price, potentially leading to long-term gains if the certificate values increase. However, this can also create price volatility in CBFIs due to risks of price correction based on speculative market transactions.

For instance, Mexico's most significant fluctuation in NAV Discount occurred in 2020. In the second quarter of that year, the FIBRAs' book value was 672.7 billion pesos (USD 37.4 billion). In comparison, their market value was 240.4 billion pesos (USD 13.3 billion), resulting in a 64% difference or discount.

Significant transactions and investments influence the Discount VN in FIBRAs in Mexico. Notably, the Titan Real Estate Portfolio's purchase by FIBRA Uno in November 2019 and the acquisition of 71% of FIBRA HD by FIBRA Plus in October 2021 led to relative stability in NAV Discount, as the market value of FIBRAs rose, according to SiiLA FIBRA Analytics data.

Which FIBRAs experience the highest and lowest discounts?

During the first quarter of 2023, FIBRAs' NAV Discount in Mexico was 49%, 4.4 percentage points lower than observed at the end of 2022. This reduction was due to a decline in the net asset value of the FIBRAs from 803.4 to 798.6 billion pesos (USD 44.6 to 44.3 billion), coupled with an increase in the CBFIs' average market price from 373.6 to 407 billion pesos (USD 20.7 to 22.6 billion).

The reduction in asset value might be related to sales readjustments or even divestment of some FIBRAs, especially in the retail and hotel sectors. On the other hand, the rise in book value occurred amidst significant investments, such as FIBRA Monterrey's acquisition of the Zeus Real Estate Portfolio in March 2023 and the increased Pension Fund Managers (Afores) investments since early 2023.

Among the FIBRAs with the lowest NAV Discounts are FIBRA Prologis (11%), FIBRA Nova (25%), FIBRA Soma (27%), FIBRA Monterrey (37%), and FIBRA Storage (46%). In contrast, FIBRA Shop (89%), FIBRA HD (83%), FIBRA Inn (75%), FIBRA Uno (71%), and FIBRA Up (59%) have a higher NAV Discount.

A FIBRA with a higher NAV Discount can be an attractive investment opportunity with the potential for higher returns and increased interest from investors. Nonetheless, it may be associated with higher risks. On the other hand, FIBRAs with a lower NAV Discount might offer greater stability and investment security, but their profit potential could be more limited. However, this assessment depends on each FIBRA's circumstances and the risk factors individual investors consider.

It's also worth noting that in Mexico, FIBRAs with higher discounts are often focused on the retail and hotel sectors, while those targeting the industrial sector tend to have lower discounts. This disparity may be attributed to greater stability and predictable long-term lease income from solid tenants for industrial FIBRAs. These FIBRAs also exhibit higher resilience during economic downturns due to their essential role in the supply chain, with potential for growth in e-commerce and logistics. In contrast, FIBRAs in the hospitality and retail sectors face higher discounts due to their sensitivity to economic cycles and changes in consumer demand.

However, there is an exceptional case: FIBRA Educa. Unlike other FIBRAs, the market value of this trust is 79% higher than its book value. This indicates that the value of FIBRA Educa's CBFIs is overvalued due to factors influencing the company's performance and value, including better-than-expected asset performance, growth prospects, asset quality, efficient management, and confidence in the education sector.

For more information on this and other topics related to Mexico's commercial real estate market, visit SiiLA's REsource or contact us at contacto@siila.com.mx.