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Brazil Attracts International Investment

While Portugal discovered and left an indelible European stamp on Brazil over the past half millennium, in more recent years some of North America’s most powerful developer and investment interests —  Hines, Sam Zell, Tishman Speyer, Cadillac Fairview and Ivanhoe Cambridge among them —  have been pouring  billions into the country’s commercial real estate.

These real estate players are part of the global investing community that has come to recognize Brazil as a promising destination for capital. Since its most recent economic downturn in 2000, when it came close to defaulting on its foreign debt, Brazil has demonstrated political stability and fiscal progress. Global investors have placed it alongside Russia, India and China in the so-called BRIC economies, which are often lumped together in international portfolios.

Why Brazil? The nation boasts the largest and most diverse economy in South America, with a population of 188 million. The International Monetary Fund expects real GDP growth to nudge forward to 4% in 2007 from 3.6% in 2006. Inflation, which raged out of control in the early 1990s, dipped to 3% in 2006, according to The Economist magazine’s Intelligence Unit. The central bank has wrestled interest rates down to an historically low 5.7%. Direct foreign invsetment, which averaged $12 billion annually in the early years of this decade, jumped to $18 billion in 2004, and fell to $15 billion in 2005, according to the United Nations Conference on Trade and Development. The final numbers for 2006 are not yet available.

Indeed, Brazilian real estate suddenly looks extremely attractive—especially in relation to pricey North American and European markets. Martin Andrés Jaco, director of investment and asset management for CB Richard Ellis, Ltd. Sao Paulo, says that foreign investors had been steadily placing about $200 million a year in Brazilian properties, but that figure skyrocketed last year to a record $2.5 billion, CBRE says.

One of the first North American real estate groups to recognize that Brazil was turning a corner was Houston-based Hines Interests Limited Partnership. Back in 1998, it embarked on development of 3 million-sq.-ft. of office and industrial space and management of another 4.5 million-sq.-ft. in Brazil’s principal markets. Moreover, last September, Hines and the California Public Employees’ Retirement System announced a new $200 million HCB Interests LP fund. Steve Dolman, who managers the fund in Sao Paulo, says 70% of the portfolio will be industrial, 20% office and the rest in low-income housing. He says that $170 million has been deployed already.

Sam Zell’s privately-held Equity International Properties Ltd., helped notch the record. The company, which is not connected to Zell’s publicly-held Equity Office Properties, bought a 14.4% stake in Brazil's ECISA, which owns seven malls and operates another 13. The $44.5 million deal closed last November. In June, 2005, the company had bought a 32% stake in home builder/commercial developer Gafisa SA, Sao Paulo, for about $50 million in June, 2005. GP Investimentos (GP), a Brazilian private equity firm, took a 60% share.  

Another major U.S. player in Brazil is Tishman Speyer Properties L.P. In 1996, it  formed a joint venture with Método Engenharia S.A., a construction company, to build three office towers in São Paulo, linked by retail space and parking.

Portugal remains a major player in Brazil. In 2005, according to the Bank of Portugal, Brazilian investors spent €196 million, more than half of it in real estate, and most of that in shopping centers. Sonae Sierra, Lisbon, for example, co-owns seven centers in Brazil with Cleveland­­­-based shopping center REIT Developers Diversified,which last October acquired a 50% interest in Sonae Sierra Brazil, Sao Paulo for $150 million. 

 “Based on relative pricing for alternative investments, this investment offers outstanding potential value-creation on a risk-adjusted basis,” Scott Wolstein, Developers Diversified's chairman and CEO, said in a statement.“Moreover, we find the opportunity to double the size of our investment in Brazil over the next few years highly compelling, considering current unleveraged development IRRs in Brazil are around 20% and cap rate compression on existing assets is expected to accelerate."

Across commercial real estate in Brazil, cap rates on prime assets are about 12%, estimates investment banker Moise Politi, CEO, Brazilian Finance & Real Estate Participacoes, S.A. in Sao Paulo. But prices are rising quickly and he expects cap rates to fall to 10% over the next two years.

Canadian investors have also been increasing their commitments in Brazil, investing CAD$3 billion between September 2005 and November 2006. In 2006, Cadillac Fairview Corp. Ltd, the Toronto-based real estate unit of Ontario Teachers’ Pension Plan acquired a 46%t stake in privately-held Multiplan Empreendimentos Imobiliários S/A (Multiplan), Brazil’s largest shopping center company. 

Andrea Stephen, CF’s executive vice-president, investments, says that CF looked at the other BRIC markets and concluded the conditions were better in Brazil to generate good returns without taking on extraordinary risk. “We studied Brazil, Russia, India and China as potential investment markets,” she says. “There already was a lot of capital flowing into India and China, and Russia was a little too unknown.”

In September 2006, Ivanhoe Cambridge, Montreal, a subsidiary of the Caisse de dépôt et placement du Québec, Canada’s largest institutional fund manager, invested nearly CAD$100 million in three regional shopping centers with more than 2 million-sq.-ft. owned by family-run Ancar Empreendimentos Comerciais, Rio.

Investors from the U.K., Germany, Spain, Italy are also active in Brazil.

Politi, the investment banker, says that conditions are better than he has ever seen. “In the past, financing real estate was challenging, because interest rates were 20 to 25 % higher than the cap rates. Today cap rates of 12% to 15 % for real estate acquisitions makes it possible to leverage 10, 15 or 20-year terms, at 9 % to 10 % interest rates,” he says. “For the first time in 500 years of Brazil’s history, investors are able to leverage real estate assets for interest rates that are lower than the cap rates.”