All eyes on Brazil

The country has generated much interest as private equity real estate firms look to expand in Latin America. By Eva Poon

Over the past year, Brazil has been the target market for many investors looking at Latin America.

The Carlyle Group, having established a Latin American real estate team, made its first Brazilian investment in real estate developer Scopel.

Three weeks after The Carlyle Group's announcement, New Jersey-based Prudential Real Estate Investors, the real estate investment and advisory business of Prudential Financial, announced it had formed a joint venture with Racional Engenharia to target investments in Brazil's industrial property market. The joint venture is focusing on the development of distribution centers, light manufacturing facilities and industrial parks in the country.

With an estimated GDP growth rate of 4.4 percent this year, and with projected 4.0 percent growth in 2008, according to the IMF, investors are looking at strategic opportunities to take advantage of the country's rapidly expanding economy.

“Brazil's real estate market is still in a more primitive stage than other markets that were tapped already by international investors, like Mexico, Chile [and others],” Eduardo Machado, head of Carlyle's Latin America real estate team, said in last month's issue of PERE.

Machado added that many opportunities exist to take advantage of the country's financial stability, demographics such as a young population and rising middle class, and the increasing availability of financing.

The list goes on – over the summer, the California Public Employees' Retirement System joined with Hines to buy the BankBoston building in Sao Paulo. CalPERS' involvement will no doubt give confidence to other large institutional investors that Brazil represents an acceptable and understandable risk/ return opportunity.

“It's a very different kind of market than it was ten years ago,” said James Worms, president of Los Angeles-based Paladin Realty Partners, speaking at the 2007 PERE Forum in New York in November. “When we started there, there were really no funds like ours.”

“It's getting ultra-competitive for deals in Brazil,” adds David Germond, a director at Tishman Speyer, and another participant at the PERE Forum, “due in large measure to the diverse group of capital sources now pursuing acquisitions in the country – local real estate players, US real estate funds, hedge funds and off-shore investors.”

With growing economics leading to growing consumerism, the retail sector in Brazil is seeing its fair share of activity. Last year, Advent International made waves with its $500 million buyout of Brazilian retailer Brasif.

Heads turned again in October this year when the firm agreed to buy Brazilian restaurant chain Viena—Advent's third acquisition in the Latin American restaurant sector in the past year. The casual dining chain operates a total of 60 restaurants in Sao Paulo and Rio de Janeiro. “The company has significant growth potential, especially since it focuses on shopping-mall locations, a booming sector in Brazil,” Advent partner Patrice Etlin, said in a statement at the time. The firm is planning to grow the chain through new restaurant openings and acquisitions.

Amid growing interest from foreign investors, local players have also upped their game. Late this year, Brazilian private equity firm GP Investments closed on a $1.3 billion private equity fund targeting Brazil and Latin America. Other record-breakers are sure to follow in Latin America's biggest market by far.