The investment attributes of Mexico REITs as a listed property investment vehicle

Abstract

PurposeMexico REITs are a significant and important REIT market, both in a regional and in emerging property market context. As one of the few emerging economies in the world with an active REIT market, Mexico REITs are specifically designed to provide an effective pathway to participate in the investment opportunities offered by the Mexico commercial property market for both domestic and international investors. Importantly, Mexico REITs provide additional property investment benefits such as a high degree of transparency, governance and liquidity. The main focus of this research is to highlight the significance of Mexico REITs and assess their performance dynamics, as well as the added-value benefits of Mexico REITs in mixed-asset investment portfolios.Design/methodology/approachUsing monthly total returns, the risk-adjusted performance and portfolio diversification potential of Mexico REITs over April 2011–December 2019 were assessed. A constrained mean-variance portfolio optimisation framework was used to develop a three-asset portfolio scenario using the historical returns, risk and correlation of Mexico REITs and the other two major financial assets.FindingsDespite being more volatile than the mainstream asset classes, Mexico REITs delivered the strongest risk-adjusted performance versus stocks and bonds over April 2011–December 2019, which was made possible by the high premium of their total return performance. Notably, Mexico REITs offered excellent diversification potential with bonds, whilst demonstrating a marginal positive correlation with the stock market. These investment attributes of Mexico REITs have brought immediate benefits towards their ability to add value to the Mexico mixed-asset portfolio fabric across a wide portfolio risk–return spectrum.Practical implicationsWhilst their initial establishment in 2004 was considered unsuccessful, the ongoing regulatory improvements have been pivotal in providing a supportive investment environment to nurture the organic growth of Mexico REITs. This now sees the Mexico REIT market as an exemplar of success for REIT establishments amongst its peers in the Latin American region, as well as for emerging economies worldwide. Mexico REITs are now an important REIT market, as the second largest emerging REIT market in the world. The empirical investigation of this research has established the investment attributes of Mexico REITs as a listed property investment vehicle. The strong risk-adjusted performance of Mexico REITs compared to stocks and bonds sees Mexico REITs contributing to the mixed-asset portfolio across the portfolio risk–return spectrum. This is particularly important as it provides insights into the broader strategic implications of Mexico REITs as an effective, transparent and tax-efficient conduit for high-quality Latin American property exposure in a liquid format.Originality/valueThis paper is the first published empirical research that elucidates the investment attributes of Mexico REITs, highlighting their significance, risk-adjusted and portfolio performance enhancement role as an emerging REIT market. The main outcome of this research enables empirically validated, more informed and practical property investment decision-making regarding the strategic role of Mexico REITs in an investment portfolio.

Evolution of REITs in the Nigerian real estate market

“…One of the major markets is Mexican REIT market. It has about 14 active REITs and a capitalisation amounting to US$18bn, which accounted for about 17.4% of emerging REIT markets (Marzuki and Newell, 2020). In Asia, Malaysia was seen to have 17 REITs with a market capitalisation of about US$7.2bn, contributing to about 7.2% of the emerging REITs markets (EPRA, 2020).…”

“…There are about 225 REITs in global emerging markets (Dabara and Ogunba, 2020; Marzuki and Newell, 2020). In a study involving 20 emerging markets, including Zimbabwe, Brazil and India, about 1.4 % of market capitalisation increased after the liberalisation of the markets.…”

“…The largest global REIT markets are the USA, Japan and Australia. The emerging REIT markets account for about 5% of the global REIT market (Marzuki and Newell, 2020). In emerging markets of particularly Africa, it was observed that its REIT market is lagging behind other regions of the world.…”

“…Real estate investment trusts (REITs) are increasingly becoming an attractive investment vehicle in the global real estate market. The advantages it presents, such as ease of investment, favourable regulatory framework, inflation-hedging capability, superior return–risk characteristics and a good liquidity source, make it a unique investment asset vehicle (Dabara and Ogunba, 2020; Marzuki and Newell, 2020). REIT was introduced in the USA in 1960; its acceptability in the global real estate markets has led to its introduction in about 35 countries.…”

Do REITs Hedge against Inflation? Evidence from an African Emerging Market

“…From a global perspective, about 35 countries have adopted the REIT regime (having over 800 REITs) and over $2 trillion in market capitalisation (EPRA, 2020;Parker, 2020). According to Marzuki and Newell (2020), about 5% of the global REIT is accounted for by REITs in emerging markets. Nations in developed economies (notably the US, Japan, and Australia) have significantly developed their REIT markets to matured and established stages over the past decades.…”