Updated: Nov 27
Going against the common perception that substantial funds are required to purchase property, new options have emerged to make real estate investment accessible to a wider range of investors in Mexico.
Real Estate Investment Trusts (REITs): A Novel Approach
This novel approach centers on real estate investment trusts (REITs), financial instruments that manage a portfolio of multiple properties and trade on the stock exchange. REITs enable investors to buy shares in a trust holding a diverse real estate portfolio including residential, commercial, and more.
In addition to short-term payouts, investors can also benefit from potential long-term share appreciation as the underlying real estate increases in value along with market growth and development.
Consequently, the purchasing process is remarkably straightforward, and the threshold for entry is quite low, enabling you to venture into a sizable real estate portfolio with minimal capital.
According to the National Association of Real Estate Investment Trusts, the global REIT market reached a market capitalization of $2.7 trillion in 2020, and is expected to grow further in 2024. Mexico is one of the countries that have a developed and dynamic REIT market, known as FIBRAs (Fideicomisos de Inversión en Bienes Raíces). As of June 2020, there were 16 FIBRAs listed on the Mexican Stock Exchange, with a market capitalization of $11.8 billion
This shift is transforming how real estate investment is viewed in Mexico. The prospect of participating with minimal capital democratizes access, allowing a wider segment of investors to tap into this traditionally stable asset class.
However, as with any investment, thorough research and understanding risk is essential. Below some of the key risks to consider when investing in REITs (Real Estate Investment Trusts):
Interest rate risk - Rising interest rates can negatively impact REIT valuations and share prices. This is because higher rates increase their cost of capital.
Liquidity risk - REIT shares are not as liquid as regular stocks. It may be harder to sell your shares at short notice.
Management risk - Poor management can lead to lower occupancy rates and returns. As an investor, you rely on the management's capabilities.
Leverage risk - REITs often use debt to finance projects. While this can boost returns in good times, leverage also increases losses in downturns.
Economic risk - A recession can lower occupancy levels and rental incomes, hurting REIT performance.
Real Estate Crowdfunding : A new way to invest
Real estate crowdfunding is a relatively new way for investors to pool their money to invest in real estate projects. This can be a great way for small investors to get involved in the real estate market, as it allows them to invest in larger projects with smaller minimums.
Crowdfunding platforms vet projects and manage funds, so investors can be confident that their money is being invested in sound projects. Projects that are funded through crowdfunding can include a variety of types of real estate, such as luxury condos, eco-resorts, and mixed-use developments.
Investors can earn returns from cash flow, appreciation, and interest payments. Real estate crowdfunding can provide access and diversification for non-accredited investors, who may not otherwise be able to invest in real estate.
Still, this is not a risk free business, here are some key points to consider before investing with a crowdfunding platform:
Fraud risk - Some platforms may not adequately vet sponsors or deals. Lack of transparency can hide potential fraud.
Platform failure - If the platform goes out of business, investments could be jeopardized if not properly secured with a third-party custodian.
Illiquidity risk - Reselling your shares in a property can be challenging compared to stocks or bonds. You may lose out on gains.
Diversification issues - With high minimums, you may end up concentrating too much in one deal versus a REIT's diversified portfolio.
Loss of investment - There's a potential to lose some or all of your investment if a project fails or defaults on debt.
Speculative investments - Many deals are speculative in nature with high risks. Conservative investors may want to avoid such opportunities.
In summary, REITs and crowdfunding allow smaller-scale investors to tap into Riviera Maya's high-growth real estate market in a simpler, more diversified manner. The steady cash flows and growth potential remain appealing.
But there are some key risks to consider, they can be mitigated by researching platforms, understanding deal terms, and diversifying appropriately. Consulting a financial advisor is also recommended, as they can help assess the suitability and the risk/reward related to these investments for your portfolio.