MEXICO: An introduction to Real Estate

A Dynamic Real Estate Market

Understanding the real estate market in Mexico is crucial due to its dynamic nature and the varying legal frameworks across the country. Knowledge of these factors is essential for making informed investment decisions and navigating the regulatory environment effectively. The Mexican real estate market is characterised by its diversity and regional variations, stemming from the country's federal structure. With 31 states and Mexico City, the legal framework governing property ownership and transactions is shaped by both federal and state laws, requiring a nuanced understanding of local regulations. Key features of the market include a mix of residential, commercial, and industrial properties, with notable differences in property values and demand across regions. The different markets’ unique aspects include varying property registration processes and diverse cultural influences that impact real estate trends and buyer preferences. Understanding these factors is essential for anyone looking to participate in the Mexican real estate sector.

Shifting Dynamics: The Mixed Realities of Mexico's Real Estate Market

Over the past 12 months, the real estate market in Mexico has experienced mixed dynamics. A strong peso, rising inflation, and increased interest rates have caused a slowdown in some transactions, particularly in leasing, commercial and office space acquisitions, mortgage transactions, and the construction industry. However, residential and industrial real estate acquisitions and rentals have seen significant growth. Despite these challenges, the real estate sector remains a safe investment opportunity. Reports generally indicate resilience in the market, with experts predicting growth, particularly in industrial and tourism real estate.

Key Sectors

Residential: The residential sector has seen notable growth, driven by increased demand for housing. The shift towards remote work has also influenced this trend, with more people seeking homes that can accommodate workspaces and many remote workers from the US and Europe settling in Mexico post-pandemic. According to data the number of residence permits issued to US nationals has doubled from those issued in 2019. Additionally, short term rental properties commercialised in websites such as Airbnb have become a popular investment between Mexicans and foreign investors alike. Long term rentals have equally become an attractive opportunity since the high influx of remote workers have resulted in average monthly rents increasing, especially in upscale neighbourhoods.

Office: The office sector is facing challenges due to economic conditions and changes in work habits. Many companies have adopted remote or hybrid work models, reducing its demand for traditional office spaces.

Industrial: The industrial sector is experiencing significant expansion, driven by nearshoring trends. International businesses are looking to relocate operations to improve supply chain control and proximity with the US market. This sector is expected to continue growing, with major investments contributing to its development. Industrial space vacancies are estimated to be less than 1% of the total inventory, highlighting increased demand for such spaces.

Retail: The retail sector is adapting to changing consumer behaviours and economic conditions. While some areas have seen slowdowns, others, particularly in emerging markets and popular tourist destinations, are experiencing growth.

Geographical Hotspots and Investment Climate

Mexico City, Guadalajara, and Monterrey continue to be major hubs for real estate activity. These cities offer diverse opportunities across residential, commercial, and industrial sectors. Other regions within Mexico are also becoming attractive for investment. Areas near the US border and those benefiting from infrastructure developments are seeing increased interest from both domestic and foreign investors. Additionally, the Cabo, Riviera Maya, Nayarit Riviera, and San Miguel de Allende all continue to be attractive areas for those seeking to invest in opportunities relating to tourism and hospitality, with an ever-growing number of tourists coming to Mexico each year. New attractive area where we expect to see developments in the next five years is the Costa Alegre. The Secretary of Tourism, reported that based on the 2022 INEGI report, the Tourism GDP had an estimated contribution of 8.5% to the national economy.

Despite economic challenges, the investment climate remains positive. The real estate sector is considered a stable and lucrative investment, attracting both domestic and foreign investors.. Additionally, the tourism sector is attracting investment, with expectations of continued growth in this area, complementing in many cases the business result with the construction and sale of branded residences.

2024 Outlook: Opportunities and Obstacles

Economic Factors

Mexico's economy is expected to see moderate growth in 2024. While global economic conditions and domestic policies will influence these projections, sectors such as industrial and tourism are anticipated to drive significant economic activity. Rising inflation and increased interest rates continue to challenge the real estate market. Higher costs of borrowing could suppress transaction volumes and affect property values, particularly in commercial and office spaces.

Sustainability and Environmental Concerns

There is increasing emphasis on sustainability within the real estate sector, driven by both regulatory requirements at the state and municipal levels as well as due to market demand. Initiatives include the development of green buildings, energy-efficient construction practices, and the adoption of renewable energy sources. These efforts aim to reduce the environmental impact of real estate projects and meet the growing consumer preference for sustainable living and working environments. Additionally, Mexico's status as a leading tourism destination continues to attract significant interest from investors. The country's rich cultural heritage, diverse products, US/Canada proximity, and favourable climate make it an attractive location for tourism-related real estate investments. Potential investors must remember to familiarize themselves with local regulations regarding the protection of natural reserves and other environmental protections per Mexican law. Proper due diligence into real estate opportunities of all types ensures compliance, however those looking into real estate in natural, protected and/or undeveloped areas should be particularly diligent and ensure their project supports sustainable development to avoid future issues.

Nearshoring

Nearshoring involves relocating business operations to nearby countries to improve supply chain efficiencies and reduce costs. For Mexico, this means attracting businesses looking to move operations closer to the U.S. Proximity to the U.S., favourable trade agreements, and cost advantages are key drivers for international investment. Nearshoring has been a significant driver, with foreign companies investing heavily in industrial spaces. The trend is further supported by Mexico's skilled labour force and improving infrastructure. Nearshoring is expected to bolster the industrial and commercial real estate sectors as companies establish regional headquarters and distribution centres in Mexico.

Key Challenges

The real estate market faces volatility due to fluctuating economic conditions, both globally and domestically. Investors must navigate these uncertainties to make informed decisions. Additionally, it must be noted that the upcoming change in presidential leadership in the three North American countries (US, Mexico, and Canada) stands to make investors cautious. Furthermore, despite technological advancements, Mexico's legal requirements for property transactions remain stringent, requiring notary public involvement and formal procedures. These regulations tend to slow down the adoption of new technologies and create barriers for seamless property transfers. Additionally, while nearshoring presents opportunities, it also highlights the need for robust and sustainable infrastructure to support increased industrial activity, as it is important to recognise that this growth could exacerbate existing water and energy crises in certain regions of Mexico, particularly as nearshoring intensifies industrial activity. Additionally, the concentration of the labour workforce in the northern border regions and the Bajío area may strain local resources, underscoring the need for sustainable infrastructure development. Addressing infrastructure gaps and ensuring efficient development processes will be crucial for sustaining growth in the real estate sector.

For further reference see the Real Estate 2024 Practice Guide by Chambers and Partners.