by Dan Shirai

As US real estate wallows in the doldrums, a number of American investors are looking abroad to satisfy investor expectations. Some US-based REITs and real estate-focused private equity (PE) vehicles are convinced they have located a shimmering oasis of untapped returns in Brazil.


Compared with the gloom at home, the world’s fifth-most populous country – with sound macroeconomic policies and an investment grade rating – certainly looks attractive. But there are plenty of pitfalls for the uninitiated.

Real estate investment trusts (REITs) are for the most part listed tax-efficient vehicles and the main channel for institutional capital into all kinds of US developments and properties. With the exception of a handful of globalized entities, REITs tend to be largely domestic, with headquarters in places like Denver, Indianapolis and Atlanta. Some have begun to eye opportunities in Brazil. Many have already set up shop in Mexico.

“The development opportunities in the US are extremely limited for a couple of reasons,” says John Blumberg, founding partner of Black Creek Capital, a holding company with a number of US REITs and Mexican housing vehicles worth some $6.3 billion. “Trying to get a construction loan today is very different than it was even four months ago. It’s so much more difficult. And everything in the US is slowing down,” he adds, referring to buying and construction activity. Blumberg is looking to raise a new fund for investment in Brazil.

Another REIT eyeing LatAm is Weingarten Realty Investors, based in Houston with over 335 commercial shopping centers and 80 industrial properties in the US. The company recently took a trip to Brazil, but has yet to commit capital.
“If I could grow in the US at rates that would satisfy our investors, we probably wouldn’t be going down to Brazil,” says Johnny Hendrix, executive vice president of asset management at Weingarten. Hendrix, whose company has recently moved into Mexico, says he sees attractive spreads on both acquisitions and development projects in Brazil.

Partnering Up
A handful of REITs and other kinds of buyers have already made headway in Brazil. Equity International (EI), with $1.2 billion under management, $900 million of which is in LatAm, has been one of the pioneers. It approached Gafisa and BR Malls pre-IPO to make a killing as each rose to the top of their respective niches. EI’s first investments in Mexico began in 2000 alongside Black Creek Capital, while it kicked off Brazil ventures in 2005 with developer Gafisa.

Inspired by these stories, US players hope to replicate that success. But they face increasingly difficult conditions in Brazil, according to established players.

“Some investors may find it difficult to meet their returns expectations down here,” says Max Lima, head of Prosperitas, a $1.2 billion real estate investment fund based in São Paulo. Lima estimates a 400 basis point differential between the returns on a US project and a comparable Brazil project. An average commercial development in the US can yield around 7% while in Brazil it can provide annual returns of up to 11%, he notes. Lima, an investor and developer himself competing in a market being flooded with new entrants, says he is building up internal development capabilities.

Absolute spreads aside, new investors unaccustomed to the Brazilian legal and tax system will be met with a host of new problems that could not only affect their timetables, but also threaten returns. This is true even for experienced local investors who constantly run into changing regulation and additional environmental and municipal government oversight.

Lima notes global credit conditions have had a real impact on local banks’ willingness to lend for projects. And partnering with local firms can prove to be somewhat of a gamble, as the current model usually involves the investor assuming near full risk for the project but paying developer fees up front.

Despite this, there are still alliances being forged with local developers to mitigate the risks inherent in Brazil. In August, AMB Property Corporation, a San Francisco-based REIT with over $10 billion worth of commercial and industrial properties in 15 countries, signed an agreement with Brazil’s Cyrela Commercial Properties (CCP) to jointly invest in commercial and industrial properties in São Paulo and Rio de Janeiro – the company’s first non-Mexican investment in the region. AMB is among the largest US developers, with a $4.6 billion market cap.

“AMB has a big global presence in the sector and we know the local market and have land acquisition capability,” Bruno Laskowsky, CEO of CCP, tells LatinFinance. AMB’s existing relationship with large multinational corporations, known as tenants in the industrial real estate market, adds impetus to the new venture, he adds.

US REIT Kimco Realty, which has a $9.4 billion market capitalization, teamed up with local shop Real Estate Partners (REP) in the Fall of 2007 to develop a number of small, outdoor shopping malls in urban areas outside major cities, much in the same way it has done in the US for some 50 years and in Mexico for the past four, where it has developed some 60 shopping centers.

Mike Melson, Kimco managing director for LatAm, says he is already involved in developing one such facility in Valinhos, in the interior of the state of São Paulo, and has five more coming. “We are targeting returns in the mid-teens after fees,” says Melson. In the typical joint venture model, the local developer, in this case REP, collects a fee for developing the project on the ground, counting on capital and expertise from a foreign partner.

Kimco sees enough opportunity to justify a special vehicle for Brazil and surrounding countries. Earlier this year it began to raise a $500 million South America fund, in which it will be a lead investor. Other private investors such as pension funds, endowments and high net worth individuals will join as limited partners. The fund will direct cash into Brazil, Chile and Peru.

Simon Properties, General Growth Properties and Duke Realty, with market caps $21 billion, $6.8 billion and $3.6 billion, respectively, are rumored among the other REITs eyeing opportunities. Prologis, an $11 billion REIT which specializes in industrial properties in the US, Mexico, Europe and Asia, is also heard lining up investment in Brazil.

Hedge Funds Circle
US REITs entering Brazil lack the tax-exempt status they enjoy at home. They arrive with no competitive advantage beyond expertise, track record and investor base. As such they compete head to head with a number of opportunistic EM-focused hedge funds.

Among this mixed group of land grabbers are Och-Ziff and Eton Park, the New York-based hedge funds. Och-Ziff, which has over $30 billion under management, announced in August that it is partnering up with Votorantim Finanças to invest 500 million reais initially, and likely more down the road, in Brazilian real estate. Eton Park, meanwhile, is heard joining forces with another investor to deploy up to $200 million across two transactions, one industrial and the other residential.

One veteran participant in Brazil is Autonomy Capital, a New York hedge fund with close to $1 billion under management which took a 17% stake in low-income homebuilder MRV when it was still private in January of 2007.

Today its 9.1% stake, reduced through secondary share selling in MRV’s July 2007 IPO, is worth roughly $190 million.
MRV stock was trading around 28 reais in early September, little changed versus its IPO price in July 2007. The performance is better than 90% of Brazilian real estate stocks, according to Dealogic, and MRV has so far avoided the fate of its chief competitor in the low-income segment Tenda, which agreed to be acquired by Gafisa in September.

Meanwhile, Buenos Aires-based fund Explorador with some $100 million under management, is looking at raising its own $500 million vehicle for LatAm real estate, much of which of is directed at Brazil, says Andrew Cummins, a Buenos Aires-based managing partner.

Elsewhere, JER Partners, with over $11.2 billion under management globally, is heard raising a fund, though company officials decline to comment. A handful of other investors, including Palo Alto based Broadreach Capital Partners, with two funds totaling $1 billion, Prudential, whose parent Prudential Financial has some $700 billion in assets under management, and New York-based HCP Real Estate Investors, have yet to make their first splash.

Regulars and Newcomers
Meanwhile, Brazil’s heavyweight real estate investors continue aggressive deployment of capital. Hines, which historically has invested CalPERS money in the local market across two funds, is heard close to announcing an $800 million vehicle for Brazil with a new group of investors. The global firm, which sports a large São Paulo office, has had particular success in developing industrial and logistics centers, taking the lead in tapping into that growing sector.


Tishman Speyer, with a $20 billion global portfolio, has been active for years in Brazil but only raised its first dedicated $600 million Brazil fund in 2007. It is expected to announce a new follow-up fund worth at least $1 billion. Tishman’s Brazil head Daniel Citron acknowledges interest in a new vehicle but declines to specify size, saying only that the forthcoming pool would be larger than Tishman’s first.

Rio-based Brascan is meanwhile heard raising a new $2 billion vehicle for its various real estate ventures that includes malls, industrial and residential. Others like Morgan Stanley’s real estate arm have sought ways to capitalize on developers’ need for cash. The US firm, which has been investing quietly over the past two years, set up a joint venture with Brazilian Securities in July called Brazilian Capital to provide alternative financing products, such as mezzanine debt and preferred equity for real estate.

“This will be a new product for Brazilian real estate,” says Alfonso Munk, executive director at the shop’s Brazil merchant banking office, noting only a handful of subordinated debt deals have been done in Brazil to date. The venture will invest from a fund worth up to $100 million, with 90% or so of the capital coming from Morgan Stanley.

Brazil’s vast expanse of land, growing urban middle class and the expectation of declining interest rates over the coming years make it a strong contender for the mountains of cash chasing real estate. But the country is not immune to worsening global credit conditions and seasoned Brazilian developers including the big local PE firms are finding that scoring easy returns is much more of a challenge than it was even a year ago because of a rise in the cost of financing and, more recently, rising short term interest rates.

“When they see an economy like Brazil and they know what’s going to happen over time, these REITs want to establish a footprint in development and a pipeline down here,” says Blumberg. “It’s going to be hard for some of them to establish roots in Brazil, partly because your typical REIT executive just hasn’t had to go international [before,]” he notes, adding that understanding tax and economic structures is among the many hurdles new investors should face.

“But that flood of capital is clearly coming. I’d like to own stock in an airline because you’re going to see a lot of REITs coming down,” says Blumberg. LF

Homebuilders Consolidate
A fierce wave of consolidation has swept through Brazil’s homebuilding sector. The process was somewhat expected when it became clear last year that public markets could not support the 26 homebuilding and construction companies that came to the market in the 18 months between mid 2006 and the end of 2007.

With ambitious forecasts to meet and dwindling supplies of cash both in the bank and public equity markets, a number of the smaller franchises have conceded defeat and partnered up with larger competitors or sold out entirely.

So far this year, five major deals have been clinched, the most recent being Brascan Residential Properties’ September 10 acquisition of Company. Brascan Residential, publicly traded but majority owned by Brookfield Asset Management which has $40 billion in global real estate holdings, is spending 220 million reais plus 77 million of its own shares to acquire all of Company at an undisclosed value.

While Company’s shares were last quoted at 10.07 reais prior to the announcement, executives at Brascan say they valued them at a much higher multiple, arguing that limited liquidity has depressed the stock significantly, while the business and its assets are healthy and lucrative.

Nicholas Reade, CEO of Brascan Residential tells LatinFinance the deal will help boost his company into the top five listed developers by market cap and within the top three in terms of assets and revenues. In April, Brascan Residential acquired MB Engenharia for an open-ended price tag that could range from 160-500 million reais or more, depending on future earnings. Citi advised Brascan and UBS advised Company.

Elsewhere, Gafisa agreed to puchase in September a 60% stake in Tenda, the low-income homebuilder. Tenda will continue to be a listed entity but be merged with Gafisa’s much younger low-income model FIT. Rothschild advised Gafisa while Banco Modal advised Tenda on the deal, expected to be worth some 405 million reais.

In June, Cyrela paid 1.54 billion reais for fellow developer Agra, while in August, Brasil Brokers took a 51% stake in Abyara’s brokerage business for 250 million reais. Among the more vulnerable Brazilian developers in early September were Inpar, down 82% from its IPO, EZ Tec, down 73%, CR2, down 59% and Helbor, down 46% from its IPO price. — Dan Shirai