Investors attracted by investment grade rating and robust demand

(NEW YORK) Bricks in one BRIC country could soon be a hot commodity.

Brazil – one of the four core BRIC emerging markets, along with Russia, India and China – is a future host of the World Cup and the Olympics, and is drawing global investor interest to its real estate sector, which could see a record year in 2010.

Investors are drawn to the country’s investment grade rating and robust demand for everything from housing to hotel rooms. Brazil needs new retail space, warehouse and distribution centres and offices to support an economy whose growth is second only to China’s, analysts and investors said.

Equity International, a specialist in emerging markets, was among the early Brazil boosters, drawn by the upgrade of Brazil’s sovereign debt.

‘The waves of capital come and go,’ said Gary Garrabrant, chief executive officer and a co-founder, with Sam Zell, of Equity International. Mr Garrabrant was racing to the airport for his monthly trip to Brazil. ‘We’re now in a wave,’ he said. ‘Brazil has earned the opportunity.’

Though current enthusiasm, especially visible among North American investors, could still fizzle, Brazil’s economic growth is increasingly seen as sustainable, while inflation is down to levels more typical of developed markets.

Equity International, the largest owner of retail properties in Brazil, is looking at logistics and warehouse space to support expected growth and to serve multinationals such as Colgate- Palmolive Co, Procter & Gamble Co and Baxter International Inc.

The investor owns stakes in two private and three public names; the three public ones are developer Gafisa, entry-level homebuilder Tenda and retail property company BR Malls.

It is looking for stakes in three to five more companies in the next few years, calling Brazil a 10 to 20-year opportunity.

One of the world’s largest infrastructure buildouts is under way in Brazil that will ‘open up new territory to economic activity and commodity extraction’, said Goldman Sachs analysts in an Oct 23 note. That positions Brazil to meet global demand, especially China’s, they said.

Deal flow will pick up by the middle of the first quarter, said Steve Collins, managing director of Jones Lang LaSalle’s International Capital Group, a global broker.

‘You’ll see traction, as some of the international funds who have been raising money start to buy there,’ Mr Collins said.

Other big players in Brazil are private equity firm Tishman Speyer Properties, Hines Real Estate Investments, investment manager TCW Group Inc and Canada’s Brookfield Asset Management, Mr Collins said.

Brookfield’s Brazilian real estate unit, with interests in 15 shopping and office properties in Rio and Sao Paulo, recently raised US$272 million. Private equity group GoldenTree InSite has also been active.

Still, prospective deals may not be finalised. An earlier wave of hot money cooled abruptly amid the global economic crisis as investors preferred home markets.

Analysts have noted that European investors are focused more on China and India and their own markets than on potential Latin American treasures.

But the cornerstones for a healthy real estate sector are in place: a growing, educated population, consumers who are conservative users of credit, high projected rents and low vacancy rates. Sao Paulo’s vacancy rate of 9.5 per cent for office buildings is below Beijing’s vacancy rate of 27 per cent, Moscow’s 23 per cent, and Mumbai’s 10.4 per cent.

Meanwhile, the government has made mortgages more accessible; deals and pricing are more transparent; and reforms make it easier to move capital in and out of the country.

Redevelopment of Rio’s crucial port could also drive investment, as will construction of infrastructure and hotels needed for the 2016 Olympics.

‘The Olympics showed they got their act together,’ Mr Collins said. He added that Brazil is perceived as more stable than Mexico, and deals are more likely to close there than in Chile.

Among recent deals, Portuguese hotel group Porto Bay acquired the boutique L’Hotel in Sao Paulo. BR Malls, formed by GP Investimentos and Equity International, bought a shopping mall.

The interest in Brazil comes amid a global downturn in commercial real estate investments, caused by a credit crisis to which Brazil has not been immune.

Cross-border investments there added up to less than US$1 billion in the first half of 2009, with private equity funds accounting for almost half of all deals. That compares with US$1.5 billion in all of 2008 and US$3.4 billion in all of 2007.

Amid looser credit markets, the next investment wave is building. But investors still face risks from currency and lease terms.

Short-term leases are the norm, making it hard to gauge future returns. Also, the dearth of recent deals means that there is little comparable data on which to base prices.

Equity International’s Mr Garrabrant, instead, worries about too much money showing up too quickly.

‘When large institutions arrive, they often arrive at the exact same moment,’ Mr Garrabrant said. ‘Too much public equity or private equity can be disruptive.’ – Reuters

Source: Business Times, 5 Nov 2009