Real Estate Investment Trusts (REITs) are funds that use pooled money to invest in various forms of real estate. They generate revenue through rent on their holdings, interest payments from holding the mortgage debt on properties, or some combination of the two.
One reason REIT’s are desirable is because they are required to distribute at least 90% of their annual taxable income to their investors. They have been one of the best-performing asset classes through the years, and they are expected to continue to do well in 2015. Economists with Citigroup expect REIT’s to return between 5-15% next year.
An interesting new REIT appeared on the scene in 2014 – the first residential mortgage REIT to be based in Mexico and trade on the Mexican Stock Exchange (BMV, for Bolsa Mexicana de Valores). The REIT is known as FHipo (Fideicomiso Hipotecario) and is managed by Concentradora Hipotecaria SAPI in Mexico City.
FHipo intends to return 14% as a dividend yield, which beats the average return of the Bloomberg NA REIT index by a factor of four. How can they do it? There are a few unique aspects of FHipo that gives it an advantage.
- Interest Rate – FHipo is a mortgage-based REIT, with an exclusive deal as the only non-bank buyer of loans backed by the National Workers Housing Fund (known as Infonavit) as part of the Infonavit Total program. The relatively high interest rate makes these loans desirable income streams for REIT investors.
For the mortgages that FHipo has purchased as of mid-December of 2014 (approximately 1.6 billion pesos worth), the average interest rate is approximately 9%.
- Inflation-Adjusted Mortgages – Many of these loans are indirectly inflation-adjusted. The interest rate is linked to the minimum wage, which is annually adjusted for inflation by the government. Infonavit established loans of this nature in the late 1980s as inflation protection when the inflation rate reached triple digits.
- Low Default Risk – Infonavit loans are generally not paid back in the same way as in the U.S. market. The borrower’s employers subtract the loan payments from the borrower’s income as payroll deductions, which are then submitted by the employer to Infonavit.
The payroll deduction method understandably keeps default rates low despite a relatively high interest rate and the inflation-adjusted nature of the loans. Infonavit cites failure rates below 2%. Meanwhile, mortgages through banks have over twice the default rate.
These factors add up to a relatively stable cash flow position for an REIT, and allows FHipo to offer an atypically high return with lower than usual risk. They have a suitably large pool of investor cash, and a situation where their loan interest rates are considerably above their costs of financing debts. It makes a compelling case to pitch to investors.
Investors agreed, snapping up the initial IPO shares.The November IPO sold 300 million shares at 25 pesos each, raising 7.5 billion pesos (approximately $553 million) for investing purposes. Since that time, FHipo has raised another 1.125 billion pesos in follow-up share sales.
By the time you read this, there may not be any investment opportunities left in FHipo – but should it prove as successful as advertised, there will be other REITs with similar advantages, especially after FHipo’s exclusivity on the indexed mortgages expires.
In the meantime, there are plenty of American REITs that are likely to meet your needs. Outline your goals for an REIT (steady income, inflation hedging, etc.), then do your homework and consider a broad range of REITs to find the one that best fits your portfolio.