When The Blackstone Group agreed to buy a 70 percent stake in Brazilian urban community developer Alphaville Urbanismo last month, it marked one of the New York-based firm’s first property investments in Latin America’s largest country. It also was one of the most high-profile distressed real estate investments in the region, as the stake was acquired from Gafisa, a Brazilian homebuilder that ran into trouble following an aggressive post-IPO expansion in the mid-2000s.
Despite the attractiveness of the Alphaville business – the most profitable of Gafisa’s units – the acquisition drew relatively few bids. Other bidders reportedly included Equity International, Hemisfério Sul Investimentos and VBI Real Estate.
“I’m surprised how few non-Brazilian bidders went after this,” said John Tsui, principal at Peninsula House, a family office that makes investments across alternative assets in Brazil and Asia. “This was a tremendous opportunity for a private equity firm in a market where liquidity is king.”
Meanwhile, other distressed opportunities similar to Alpha-ville may be on the horizon. “There could be another consolidation wave,” said an industry insider who plans to invest in the space. Potential candidates for future acquisitions include Scopel, the private developer that is majority-owned by The Carlyle Group, and Companhia City. Moreover, the distressed opportunities aren’t limited to just Brazil, as many Mexican homebuilders also are being squeezed as a result of runaway growth in recent years.
“On one hand, we’re talking about opportunities where there’s deep value in distress,” the insider said. “On the other, there are not a lot of players. It doesn’t happen very often.”
The dearth of distressed investors is the result of multiple factors. The real estate investment arms of Wall Street banks Morgan Stanley and Goldman Sachs, which had once been among the most dominant property players in Latin America, are now gone from the region. Other firms, meanwhile, have not performed well in Brazil, which have made investors wary of riskier real estate plays in the market.
However, the time to take advantage of distressed opportunities in Brazil is limited. “It’s a smaller window than people think, maybe six to 12 months,” Tsui said, believing Brazilian homebuilders will be seeking to divest assets sooner rather than later. “You may not live another day if you don’t realize cash today.”