In Baja, Builders Banking on Baby Boomers

The number of U.S. retirees is growing, and small U.S. developers hope to succeed where their larger counterparts have failed, writes Kemba J. Dunham in the Wall Street Journal.

The Loreto Bay Co., is a real estate developer in Scottsdale, Ariz., a magnet for retirees from all over the U.S. You might expect the company to be working on a project in, say, Arizona. Not the case. Instead, the small firm has its sights trained south… about 700 miles south of the U.S. border, in Baja California, Mexico (click map to enlarge).

In conjunction with FONATUR, Mexico’s tourism development agency, Loreto Bay is developing its own seaside town, with 6,000 units planned. Rranging from $280,000 condos to $1 million-plus custom beach houses, the firm has already received orders for 554 homes and has 200 more under construction. Most buyers are Americans and Canadians.

As U.S. home sales start to taper off, some builders are casting a hopeful eye on Mexico in hopes that retirees will want to buy mid- and high-end homes there, just has they have gobbled up Arizona and Florida real estate. There are plenty of hurdles and risks, but the the idea is compelling to smaller developers.

The National Association of Home Builders (NAHB), the largest trade group in the United States, has a a membership comprised mainly of small companies and is encouraging the trade. At its recent International Builders Show in Orlando, the NAHB ran an event explaining to members how to acquire land in Mexico, find partners there and finance ventures.

A BUDDING OPPORTUNITY
The NAHB sees Mexico as a place for small companies to escape increasingly competitive U.S. builders. The nation’s 10 biggest home builders have 21 percent of the market for all new homes built in the U.S., a figure NAHB economists think will grow to 35-40 percent in the next decade because of continued growth and acquisitions.

“It might be easier and more efficient for our smaller builders to go to Mexico,” said Jerry Howard, the NAHB chief executive.

According to a study conducted by Cemex, a Mexican cement company, and Active Living International, a retirement and active-adult community builder, about a million Americans already live in Mexico, including 157,000 age 55 and above. The study also found that more Americans are attracted to Mexico — by the weather, the proximity to the U.S., cost of living that’s more affordable, and access to quality healthcare.

BREAKING DOWN THE BARRIERS / PROBLEMATIC LAWS
Changes made under the North American Free Trade Agreement (NAFTA), have also fueled this trend. Jeffrey Schott, a senior fellow at the Institute for International Economics, a Washington think tank, says that there are new incentives to builders to make this happen, and without past risks.

“A decade ago, this would have been a riskier venture because you wouldn’t have had the mortgage market, you would have had an uncertain policy regime… There are still problems, but a lot has improved,” he said.

There are still obstacles, however. A law that forbids non-Mexicans from owning land in close proximity to international borders or the ocean is a significant one. Interpreting such laws can be tricky. A few years ago, scores of U.S. retirees in Baja learned that the deeds on their beachfront properties didn’t meet national security requirements that, technically, permit only Mexicans to own land on the country’s two coasts.

Mexico does allow foreigners to acquire property through a trust, or Fideicomiso. Withing this arrangement, non-Mexicans can obtain the rights of property ownership in Mexico, but the title is held by a trustee (which must be a Mexican bank). The trust operates the same way as a family trust in the U.S., but exists for a maximum of 50 years and must be renewed, according to Jorge A. Vargas, an expert in Mexican law at the University of San Diego School of Law.

Corporations don’t need to work through the Fideicomiso if they buy property for commercial purposes, but the legal complexities prompt many American builders to seek local partners.

THE FUTURE
Some analysts wonder why Mexico is a draw at all, as real estate investments have always yielded higher returns here in the U.S. One would certainly expect the beauty of the Baja Peninsula to hold great allure for many retirees, particularly those of Mexican and Latin American descent. But don’t expect demand for South Florida real estate to shrivel up anytime soon. Especially not with a growing economy, 30-year Florida home loan rates that are below 7 percent… and some pretty nice weather this time of year,