Friday Letter Trekking through South America

The city of Quito, Ecuador—population approximately two million—is probably not near the top of the list when it comes to international cities attracting private equity real estate investors. 

But in a recent visit to the South American capital—one of our editors was there on vacation—the imprint of the asset class on even this faraway city was impossible to ignore. One of the nicest hotels in town, the Swissotel Quito, is owned by the Los Angeles-based private equity real estate firm Colony Capital via its acquisition of the Raffles and Swissotel hotel chains last year. Not far away from the Swissotel Quito, another Colony investment can be found on the main drag of Via Amazonas: Accor Hotels, which received a €1 billion investment from Colony last year, owns the Grand Hotel Mercure Quito, site of one of the city’s most popular casinos.

Despite its (relative) popularity as a tourist destination, however, Ecuador is not about to become the next gold mine in private equity real estate. The population of the country, approximately 13 million, is relatively insignificant compared to other countries in South America. The economy, though strengthening, is primarily dependent on exports such as bananas, shrimp and flowers. And with elections taking place over the weekend, all signs point to a leftist president in the mold of Hugo Chavez taking power.

Nevertheless, while private equity real estate activity may not be heating up in Ecuador, there has certainly been increased interest in two countries very close to Ecuador´s borders.

To the east, of course, lies Brazil, which may not be drawing the press of other BRIC countries, but which is certainly drawing the interest of private equity real estate investors. Last week, for example, Paladin Realty Partners raised $200 million (€156 million) for its second opportunity fund targeting Latin America. Although Paladin will focus its efforts throughout Latin America, one of the primary areas of emphasis will be Brazil.

Other investors active in the region include Hines, GIC and Equity International, the private equity real estate firm affiliated with Sam Zell. In one of the largest deals thus far in the country, Equity International acquired a $50 million stake in Gafisa SA, a Sao Paolo-based homebuilder, last year.

To the south of Ecuador, just past Peru, lies Chile. Though Chile, the small sliver of a country running along the western border of South America, does not have the size of Brazil, it does have a relatively strong economy and a stable government, two necessities when investing in the region. Just last month, Equity International made its first investment in the country, acquiring a significant stake in a Santiago-based retail developer.

As private equity real estate firms continue to scour the globe for profitable investments, South America is increasingly appearing on their radar—and not just in the major economy of Brazil. For example, in addition to its offices in the US and Brazil, Paladin also maintains offices in Chile and Argentina.

The way the asset class is growing, who knows, one day soon they could set up shop in Quito as well.