It's said confidence is a turn-on. U.S. and Canadian investors drawn to Brazil's retail real estate certainly bears that out.

Despite the worldwide economic slowdown and Brazil's history of economic instability, Brazilians are confident their country's boom will continue. That assurance is proving to be a powerful aphrodisiac for U.S. retail real estate developers, including CBL & Associates Properties, Developers Diversified Realty Corp., General Growth Properties Inc. and Kimco Realty Corp., as well as Canadian developers Brascan/Brookfield Asset Management, Cadillac Fairview and Ivanhoe Cambridge.

Since 2005, foreign investment in Brazilian shopping centers has reached $3.7 billion, according to ABRASCE, Brazil's shopping center industry association.

“We were looking at [Brazil, Russia, India and China (BRIC)] for investment opportunities that would give us returns that were in excess of what we could get in the U.S., and Brazil was the most attractive to us,” says Richard Brown, executive vice president of international for Developers Diversified. The Beachwood, Ohio-based developer entered Brazil in 2006 through a joint venture with Sonae Sierra, a Portuguese-based firm that made its foray into the Brazilian market back in 1999. The firm committed $300 million in equity to the joint venture.

Today the partnership owns and operates nine shopping centers, another is under construction and three are in the pipeline. “Brazil has been everything that we thought it would be and more,” Brown says. “We're definitely looking to grow our business there.”

Retail real estate experts contend that Brazil, with its large population, stable economy and natural resources, offers more growth opportunities than other emerging markets. Brazil's economy grew 5.8 percent in the first quarter of 2008, slowing from 6.2 percent in the last three months of 2007. It outperformed every country in the world except for China and India — and there are concerns that these two countries are becoming overheated.

Brazil's inflation rate — something that has paralyzed its economy previously — is under control. It is, however, expected to increase to 6.3 percent by the end of 2008 from 4.5 percent in 2007, according to economists at the Brazil's central bank. But, that gain is modest compared to the inflation Brazil saw in 2005 when the rate was 22.4 percent.

Brazil's inflation concerns will likely be mitigated by large offshore oil deposits discovered there within the last year. In March, the company uncovered the Carioca oil field off the shore of Rio de Janeiro. The head of Brazil's National Petroleum Agency, Haroldo Lima, said the strike could be the world's biggest oil discovery in decades, containing as much as 33 billion barrels.

Like many oil-rich countries, Brazil's government has signaled its intent to launch a sovereign wealth fund containing as much as $300 billion that will be used to control inflation. In the midst of all the oil discoveries, Brazil earned an investment-grade rating from both Fitch Ratings and Standard & Poor's — an achievement that gave investors greater security and confidence in the market and opened up the country to investment from pension funds and other institutional investors that had been hamstrung by Brazil's non-investment-grade rating.

“They're quite interested in coming to Brazil, and I am sure that very soon we will hear about them investing here,” says João Pessoa Jorge, CEO of Sonae Sierra Brazil. He adds, a number of institutional investors have been talking with his company about investing in Brazil.

And, while Brazil is not immune to the risks seen in other emerging markets, many experts also believe that Brazil is less risky than the other BRIC nations. “I believe it's easier to invest in Brazil because of the political structure and stability,” says David Jacobstein, a senior advisor with Deloitte's real estate practice and a former executive at Developers Diversified who was involved with the REIT's Brazil investments.

Moreover, Brazil has become far more transparent over the past several years, especially when it comes to development. “The permitting and entitlement process is very straightforward in Brazil,” Brown says. “In some respects, it's easier to develop in Brazil than in some jurisdictions in the United States.” And, he notes that Russia, where Developers Diversifed is also actively investing, is more challenging than Brazil because it's not as transparent.

That is a growth driver for the Brazilian retail market, says Armando d'Almeida Neto, vice president and investor relations officer of Multiplan, one of seven retail property companies that went public on Brazil's stock exchange last year. In 2006, Multiplan established a joint venture with Toronto-based Cadillac Fairview.

Increasing revenue streams

With a population of almost 189 million people, Brazil is the world's fifth most populous country and the seventh largest consumer market. Across the country, unemployment is down, wages are up and a growing number of Brazilians have access to credit. These factors are all working together to create more buying power that translates into increased retail sales.

During the first quarter 2008, household consumption rose 6.6 percent, compared to the same quarter the previous year, its eighteenth consecutive quarterly gain, according to Brazil's National Statistics Agency. Robust consumption pushed retail sales growth up 16 percent in 2007 to $300 billion, says Celso Durazzo, a principal in global consulting firm A.T. Kearney's São Paulo office.

This year, retail sales are expected to decrease slightly but still remain strong. In fact, 26 of 27 states in Brazil posted retail sales growth during the first quarter, according to Andre Costa, director of leasing for Jones Lang LaSalle Brazil. Eight states are experiencing growth of more than 10 percent, while five states are seeing growth of more than 13 percent. Brown says retailers at Developers Diversified's centers in Brazil have seen sales growth in the mid-teens — about 300 percent to 400 percent greater than what the REIT is seeing in the United States.

With the lowest unemployment rate since 1997 (7.4 percent), Brazilians are also seeing their average wages increase along with their disposable income. Average real incomes in Brazil's six largest metropolitan regions jumped 12.7 percent, to 1,208 reais ($758) in May 2008, and disposable income has increased 15 percent since 2003.

Since then, the lower middle class grew from 32 percent to 46 percent of the population. Additionally, Brazilians are building wealth through personal investments. Brazil's stock exchange, BOVESPA, is the second largest equity exchange in the world and has posted impressive returns over the past couple of years. Last year, for example, the exchange generated returns of 43.6 percent.

Aside from stable employment and bigger paychecks, Brazilians are developing a growing appetite for credit. Not only have interest rates decreased steadily over the past several years, dropping to 14.25 percent today from 18 percent in 2005, more banks are making consumer loans and retailers are issuing credit cards by the millions. The National Association of Credit, Financing and Investment Institutions reports consumer loans, excluding credit cards, are expected to grow by 25 percent this year.

“With this access to credit, tens of millions of consumers that were not part of the market before are now buying goods,” says Henrique Cordeiro Guerra, CEO of Aliansce Shopping Centers, one of Brazil's largest shopping center owners and developers and a partner with Chicago-based General Growth Properties. “We have the wind at our back.”

Increasing access to credit is not only benefiting consumers but businesses as well, particularly retailers, who were previously forced to fund their expansions organically through cash from operations. Today, these retailers are tapping banks for capital to expand, according to Alexandre Dias, marketing and retail director for General Shopping Brazil, an owner of retail real estate that went public in 2007 and owns 1.9 million square feet of space.

“Because Brazilian retailers have had to fund their own expansions, they're smaller and more regional,” notes CBL's vice president of acquisitions Jay Wiseman. Across Brazil, retailers, including C&A, Renner, Americanas and Marisa have almost doubled their projections for new store openings over last year, while Casas Bahia, Magazine Luiza, Ponto Frio, Fast Shop and Ricardo Eletro are doing the same. Meanwhile, a number of international retailers are expanding in Brazil, including Elektra (Mexico), Condesud (Chile), Zara (Spain), Decathlon (France) and Burger King (U.S.).

As these retailers proliferate, they create more demand in a market where retail space is scarce. Multiplan's Neto, for example, says its portfolio, consisting of 11 malls, is 98 percent occupied. To meet the increasing demand, Multiplan has two malls under construction and is undergoing expansion at five of its properties.

Development boom

In addition to Multiplan's new projects, there are some 30 greenfield development projects under construction in Brazil, with 11 scheduled to come on-line beginning in 2010. This year alone, the number of shopping centers in Brazil is expected to increase 4 percent to 382; whereas in 2000 there were just 281 centers.

Aliansce's Guerra says Brazil's shopping center industry is definitely seeing a development boom. Despite the increase in retail space coming on-line and in the pipeline Brazil is still under-retailed. Today, there are 430.5 square feet of retail space for every 1,000 Brazilians. In Brazil, there's about 89.3 million square feet of shopping centers — the second largest amount in Latin America after Mexico, which has about 120.6 million square feet, according to ABRASCE.

Unlike the U.S. where the majority of malls were built by a single developer and owned by one firm, most of the existing shopping centers in Brazil are owned by partnerships. In fact, it's not uncommon for a retail asset in Brazil to have 10 owners/investors, Wiseman notes.

In the past, interest rates in Brazil made it too expensive for developers to use debt so malls were built with cash. Developers would partner with several investors to create structured ownership for the assets. “When you go to buy a mall, you have to go and buy out the mall partners,” Wiseman says. “It's very cumbersome and difficult given the competitive nature of the markets.”

That's why CBL has stayed out of the acquisition market, focusing solely on developments. However, other retail property investors such as ANCAR and Aliansce are actively seeking acquisition opportunities. ANCAR, which partnered with Ivanhoe Cambridge two years ago, recently closed a deal to acquire stakes in four properties: Shopping Interlagos and Center Vale Shopping Center (both in São Paulo) and Botafogo Praia Shopping and the Downtown Complex (both in Rio de Janeiro). In total, the company has acquired stakes in 10 properties since the joint venture began, says president Marcelo Carvalho. With the acquisition, the company owns interest in 15 shopping centers.

“If there is a good mall and someone wants to sell a piece, there are five buyers for it,” says Carvalho, who also serves as president of ABRASCE. Aliansce has an ownership stake in 18 malls across Brazil, and beyond its acquisition strategy, it plans to develop five malls by 2009. Federico Vidargas, senior director of planning and design for GGP International says, “we've gone from [being] acquisition-minded to include development.” In the past two years, the company has opened three malls in São Paulo and Rio de Janeiro and is developing another in Brasilia, the capital of Brazil.

Beyond Rio and São Paulo

Approximately 75 percent of Brazil's retail space is located in the south and southeast region where Rio de Janeiro and São Paulo are. While those areas are experiencing the most development activity, many developers have ventured into secondary and tertiary markets within those regions. There are 13 cities in Brazil that have more than one million residents. Many of those metro areas are underserved from a retail standpoint, Jacobstein says.

For example, BR Malls, based in Rio de Janeiro, is the largest shopping center company in Brazil, with a portfolio of 30 malls. The company went public in 2007 and built its first greenfield development in the secondary market of Juiz de Fora in the state of Minas. The city, located about 100 miles from Rio de Janeiro, has a population of 500,000.

In Macaé, a former fishing village located about three hours from Rio de Janeiro, Chattanooga, Tenn.-based CBL is developing a 215,000-square-foot mall. The $25 million project, Plaza Macaé, is the REIT's first development with its Brazilian partner Tenco Realty, says CBL's Wiseman. It is scheduled to open next month.

In addition to Macaé, Wiseman says CBL, which entered Brazil in late 2007, and its partner are looking north to the states of Amazonas, ParEá and Alagoas. They are among the areas primed for development and fast becoming attractive to developers.

Sonae Sierra Brazil is developing a shopping center in the city of Manaus located in Amazonas. The 463,000-square-foot project, Manauara Shopping, boasting 262 shops, including 11 small to medium-sized anchors, is scheduled to be completed in the spring of 2009.

Additionally, Multiplan recently announced its first project outside São Paulo. Located in the city of Maceió in Alagoas, the 387,500-square-foot project dubbed Shopping Maceió, is being built in partnership with Aliansce. It is scheduled to open in 2010 and is projected to generate a 20 percent return on its investment.

Meanwhile, Aliansce is currently developing a 312,000-square-foot mall in Belém, a city of 1.5 million people in the state of Pará. Guerra, who heads up the Aliansce and General Growth joint venture, says the new project is the first mall to be built there in more than 12 years.

Guerra says, “There are a lot of opportunities for shopping center development and acquisitions because our country is in very good shape. We did our homework and prepared the country for growth in a way that has built some insulation against this global crisis.”