International Business: Mexico
PAUL REICHMANN: IS ANOTHER DREAM DYING?
The project was classic Reichmann: highly ambitious, highly aggressive, and high-risk. Elaborate scale models laid out the design: $1.35 billion worth of real estate developments in and around Mexico City. The plans, which included one of the world's grandest urban developments, were the product of a partnership between beleaguered Canadian developer Paul Reichmann and investor George Soros.
To Soros, the models represented a chance to make a lot of money. But to the 64-year-old Reichmann, they meant far more. The three proj-
ects were a bold bid to regain his family's status as one of the world's greatest developers. Their real estate empire, Olympia & York Developments Ltd., once spanned the U.S., Canada, and Britain. But much of that empire was forced into bankruptcy in 1992 after its Canary Wharf office complex in London ran into financial problems.
Just two months ago, Reichmann International, headed by Paul, was expecting its real estate ventures to benefit from the rapid growth that the North American Free Trade Agreement would generate in Mexico. But that expectation has been dashed by the sudden devaluation of the peso that savaged Mexico's economy. Progress on Reichmann's three Mexican projects has ground to a halt (table).
The devalued peso hits Reichmann on a number of fronts. Interbank interest rates have shot up to 45%, making the local financing that the projects counted on far too expensive. Mexican banks are loath to lend when their own balance sheets are shaky. Meanwhile, foreign capital has stopped flooding the country. And the sudden recession hurts demand for all types of real estate.
Even when demand picks up, Reichmann and others will have to charge more modestly for space. Prime office space in Mexico City went for $55 to $65 a square foot in 1994--the highest prices in the hemisphere. Henry McDonald, a director in Cushman & Wakefield Inc.'s Mexico City effice, expects prices to fall around 20% in 1995. Ronald Soskolne, director of development for
Reichmann International, says the developer plans to forge ahead, but sources say all three projects will be postponed.
LAUNCHING PAD. Even if the projects inch forward, Reichmann's dream of using Mexico as a launching pad to rebuild an empire has been dealt a brutal blow. Reichmann had won a role in a consortium that will draft possible urban-development schemes for the Panama Canal Zone. And he has started an Asian division to scout for opportunities. "Nothing has actually jelled yet" with that, says Soskolne. "It's a very different market....Mexico has a much greater tradition of property rights than China and a culture we're closer to and can work with more comfortably."
But the squeeze in Mexico will cause some financial pain. The projects are an equal partnership between Reichmann International and Soros. The partners have bought six acres of prime downtown real estate for the Alameda project, 20 acres in the Santa Fe district, two acres of top-dollar land in Mexico City for an office tower, and two floors in a posh district for the company's offices.
Apart from saying the amount is "substantial," Soskolne will not say how much the Reichmanns have invested. A Soros spokesman declined to comment. Since the venture is a private partnership, there is no public information on how much money has been invested by Reichmann or Soros. Real estate analysts say the investment in land and office space could reach $50 million.
Bulldozers were preparing terrain at the Santa Fe project in December, when the Mexican peso was devalued. The complex is to serve as a city center for a huge corporate and commercial development on the outskirts of Mexico City. But local financing problems are slowing the development. Instead of being built on speculation, it will now be built in stages, as demand and financing allow.
Reichmann and joint-venture partner ICA, Mexico's largest construction company, are also seeking committed tenants and another equity partner before building the office towers. But efforts to have a Mexican bank join in as a financing and equity partner have been complicated by the devaluation. "The few resources banks have must be used to restructure loans or finance liabilities," says Pedro A. Azcue, general director of La Salle Partners, real estate agents in Mexico City.
STATE CUTBACKS. Reichmann's 52-story luxury office building also faces big hurdles. With local financing all but nonexistent, Reichmann must sign up blue-chip tenants, preferably foreign companies, before even seeking international financing. Work was supposed to start in February but has been indefinitely delayed.
The future of the Alameda urban-redevelopment plan is perhaps the most uncertain. It will only proceed if government agencies commit to taking big chunks of space. But spending cuts may prevent that.
The projects are unlikely to go into total meltdown. Real estate analysts expect demand for top-class office space to pick up once the Mexican economy starts to recover. "We think there is going to be a market for office space in three years, when the buildings will be finished," says Soskolne. "We're working very hard to make it work."
Hard work alone won't do the job. Neither Reichmann nor Soros can control world currencies or economies. And those factors will decide the fate of Paul
Reichmann's comeback bid.
The Reichmanns' Setbacks In Mexico
The $500 million redevelopment of downtown Mexico City is stalled until cash-short government agencies can sign leases
The $500 million, 30-building office, hotel, and condo complex will be built in increments once new equity investors and lessees are found
The $350 million luxury office building is on hold until a major tenant and international financing are lined up
DATA: BUSINESS WEEK
rendering of the Santa Fe site-once a garbage dump-on the western outskirts of Mexico CityBy Geri Smith in Mexico City, with Suzanne Woolley in New York