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Spicy Markets:
Emerging Opportunities in Latin America

While global investors and developers have plowed money in Mexico's commercial real estate markets for several years, they're now moving deeper into the Latin America region.

Both U.S. and European real estate investors are showing growing interest in acquiring assets and developing new projects in Latin America, a region where property prices have generally been lower and yields higher than in their home markets, according to experts. Moreover, the investment arena in Latin America isn't as crowded as more established markets.

"Not only does the region offer an opportunity to realize higher yields, but for the small- and medium-sized foreign investor, Latin America allows participation in transactions that, in their home markets, are usually dominated by larger, better capitalized competitors," says Alinio Azevedo, a senior associate with Ernst & Young's real estate transaction group in Miami.

The largest countries in Latin America — Brazil and Argentina — are attracting most investor attention because of the sheer size of their economies and large populations. While Brazil's commercial real estate sector grows hotter by the day, growing political risks in Argentina have dampened investment in the country recently. Meanwhile, Chile continues to boast a stable and growing economy, creating a new avenue for investment dollars.

Here GREM provides an overview of three emerging markets in Latin America.

Brazil
As the largest economy in Latin America and the ninth largest economy in the world, Brazil is quickly emerging as the dominant investment market in Latin America. In fact, Brazil is the B in the BRIC nations that investors talk about when they discuss emerging markets.

During the last quarter of 2007, Brazil's GDP grew at an annualized rate of 6.4 percent, while foreign direct investment last year increased 84 percent to a record $35 billion, according to the United Nations Economic Commission for Latin America. The country's population is expanding as well — 13 cities in Brazil have more than 1 million people.

"Brazil is a story of tremendous growth with stability," says Diego Semper, managing director, equity for GE Real Estate Mexico. "It is experiencing favorable demand economics and will continue to present very interesting opportunities."

Just recently, the U.S. ratings agencies Fitch Ratings and Standard & Poor's boosted Brazil to investment grade, giving investors greater security and confidence in the market. Additionally, the country continues to improve its transparency, according to Jones Lang LaSalle's Global Transparency Index (see Foreign Exchange for full story on the Index).

"We have seen many new foreign investors in Brazil," says Fabio Maceira, CEO of Jones Lang LaSalle Brazil. "Many are still trying to understand taxes and legislation and have not yet invested directly in the real estate sector, but most of them have invested in securities by buying into our stock market."

More than a few U.S.-based real estate investors are taking a stake in Brazilian soil. Hines, for example, recently implemented a nationwide investment program. The program will acquire or develop strategically located logistics parks on major highway intersections in various Brazilian cities to serve the needs of logistics and transportation clients.

Currently, the firm has five logistics parks underway or completed in Louveira, Araucaria, Rio, Embu and Manaus. Hines plans to develop an additional 14 parks over the course of the next three years. It already has two speculative modular warehousing projects under development in Louveira Swans Industrial Park and Cajamar Distribution Park.

Like all emerging markets, Brazil is not without risk. For example, this October the country will hold municipal elections for mayorships and 2010 heralds a presidential election. Additionally, inflation is an ever present threat. While interest rates have come down, they are still high at about 14 percent.

Argentina
Beyond Brazil, Argentina is positioned as the next best place for investors who are interested in Latin America. But, the country's political climate is increasingly worrisome, according to many experts, and that's putting a damper on commercial real estate investments.

"Argentina seemed to be stabilizing in the last three to four years, but unfortunately things have taken a turn for the worse lately," Semper says.

After a severe and debilitating financial crisis seven years ago when GDP growth was negative for 18 months and local currency lost two-thirds of its value, the Argentine economy rebounded, posting GDP growth of 8.7 percent in 2007. In fact, Argentina's economy is growing three times faster than the U.S. economy. This year, the country expects to record GDP growth of more than 6 percent.

Large institutional investors including Morgan Stanley, Merrill Lynch and Australia-based Macquarie Bank have been exploring investment opportunities in Argentina's largest city, Buenos Aires.

"The real estate fundamentals in Argentina are fantastic, but the current president [54-year old Cristina Fernandez de Kirchner] and her policies make the country unstable," says Shannon Robertson, managing director of Jones Lang LaSalle's Latin America region.

Robertson points out that Argentina's government, under Fernandez de Kirchner's leadership, has placed new taxes on farmers, contributing to local disturbances and employment strikes. "The three riskiest places in Latin America today are Argentina, Ecuador and Venezuela," he contends.

In addition to Argentina's political instability, there are growing fears regarding energy. In fact, some experts have predicted that the country could be heading toward an energy crisis as residents worry about energy shortages and blackouts.

"Argentina clearly has political issues it will need to resolve, but assuming that these are worked out effectively in the short term, this is a country of great overall potential in a world economy where commodity and food prices are on the rise," says GE Real Estate's Semper. "Argentina is a resource rich country and one of the 'breadbaskets' of the world."

Chile
While Argentina suffers from political upheaval, Chile has maintained an orderly political environment and stable economy for more than 15 years. In fact, many experts consider Chile to be the hidden jewel of Latin America that is ripe for commercial real estate investment.

"Chile has enjoyed political and economic stability with more mature markets for a decade now, and it will maintain a favorable investment climate in line with what you would expect for a country like Mexico," Semper says.

In 2007, Chile's GDP increased 5.3 percent, following 4.8 percent growth in 2006. Moreover, the country ranked eleventh — one spot behind Canada — in terms of the country's degree of economic freedom, according to the 2007 Index of Economic Freedom by The Heritage Foundation and the Wall Street Journal.

Local experts report that a number of foreign investors are taking notice of the country's economic growth, with a number of institutional investors including German-based Deka Group and Credit Suisse investing in Chile. At this point, however, investors are not looking outside of Santiago, Chile's largest city. They're primarily focusing on class A office product in the city, according to Robertson.

Some U.S. investors have recently made their first foray into the country. For example, Pramerica Real Estate Investors, the real estate management business of Prudential Financial Inc., recently acquired an office building in the Las Condes district in Santiago on behalf of its fund TMW Immobilien Weltfonds.

"In Chile, the race is on to find good development partners or the human resources to head up an acquisition program," Robertson says. "Suddenly Chile is a hot investment market."

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