Property investors have begun to calculate the profit they could reap from building and buying homes, offices, factories, shops and hotels.

But they have quickly realised that Mexico is a complicated market, with select opportunities.

'As it becomes more tied to the US economy, everyone is looking to Mexico as one of the safer places to invest,' says David Young, director of Latin American real estate for AIG's property group.

'It is still a risky play. The information is not as free-flowing as it is in the US,' he says.

So far, investors have concentrated their efforts in the hotel and industrial sectors. US companies, including Marriott and Starwood, accounted for more than half of Mexican hotel acquisition activity in the late 1990s, building a presence in Cancun, Cabo San Lucas as well as other resorts.

However, the industrial facilities in Tijuana, Monterey and Guadalajara have drawn the interest of dedicated property funds.

'You get US or strong multinational tenants, dollar leases, and the infrastructure is good,' says Gary Garrabrant, chief investment officer of Equity International Properties.

Since the passage of the North American free trade agreement, Mexico has become 'an extension of the US (with) a stable currency, stable interest rates, stable capital markets, (and) changes in political party without any serious conflict'.

Victor Lachica, president of Cushman & Wakefield Mexico, says property groups have developed factories and completed sale-leaseback deals for 10% to 12% less than they would pay for comparable properties in the US.

Equity International, which manages $400m for institutional investors, has invested half its Latin American portfolio in Mexico, and expects to generate an overall annual return of 17% to 20%.

Garrabrant says: 'The yields are higher, returns are higher, but we don't see an appreciable difference in the risk.'

There may, however, be problems ahead for the industrial market. Although many US and European companies have stayed in Mexico to preserve their North American distribution capabilities, a number have moved manufacturing businesses to emerging markets with currencies weaker than the peso.

Rivalry among property investors is also stiffening, making capitalisation rates less attractive.

The next sectors to turn seem to be retail and residential. Chelsea Property Group, a US real estate investment trust that owns and operates shopping centres, recently joined Mexican partners to launch Premium Outlets de Mexico, a retail space developer. Another trust, Kimco Realty Corporation, is also planning to enter the market soon.

The Mexican government is expected to spark a housing boom with incentives designed to bolster the country's mortgage financing system.

The backlog in demand is estimated at between 6-million and 8million homes, and the annual production is about 300000.

Garrabrant's company has invested in Homex a Mexican developer of homes for first-time buyers. US builders and developers of flats have also begun to consider Mexican ventures, says Lachica.

The one sector that international investors have avoided is office development. The primary market, Mexico City, has been overbuilt, primarily by wealthy individuals content to erect skyscrapers before they sign up tenants. Even in the face of declining occupancy rates and rents, Reichmann International has gone ahead with the construction of Torre Mayor, which will be Mexico City's tallest structure.

'They prefer to build buildings instead of having their money in the bank, and they do it with cash not loans, so they can wait,' Lachica says. He estimates that it will be 18-20 months before the imbalance in supply and demand corrects and US investors even consider the office market.

Distressed assets are also in abundant supply. The Institute for the Protection of Savings Banks is liquidating bank portfolios that include thousands of buildings and land parcels.

The real estate, which includes everything from chicken farms to blocks of flats, will sell for cents on the dollar, but most of it is too risky for institutions, says Pam Meisel, director of Deutsche Bank's real estate group.

Mexican property investors agree that local partners are essential. Ownership and tax laws are different from those in the US and basic information, such as sale prices, is difficult to obtain. Individual investors looking to buy holiday property should be particularly cautious.

Business Day