In Brazil, a slowing economy has some investors questioning the country’s longtime status as the most sought-after market in Latin America. The sluggish pace of economic development over the last few years is likely to continue, as GDP growth is expected to hit just 2.6 percent this year and decelerate to 2 percent in 2014, according to Citi Research’s Emerging Markets Macro and Strategy Outlook published in September.
“I don’t think that Brazil is out of favor, but I think that real estate players in the country, including us and the investors that back us, are asking questions about what a slower growth environment really means,” said Fred Gortner, managing director of Paladin Realty Partners. The Los Angeles-based firm, which has been active in Brazil for the past 15 years, has invested more than $2 billion in assets in the country.
Gortner attributed some of the skepticism surrounding Brazilian real estate to the overdevelopment of office space in São Paulo. Indeed, much of the institutional capital entering Brazil over the last few years has gone into developing Class A office space in that city. In addition, Gortner estimated that around 10 million square feet will be opening up in the next two to three years, having a negative effect on vacancy and rental rates.
“A lot of that high-rise development was backed by Brazil-focused institutional funds, so there are many investors looking at that with understandable caution and concern,” Gortner said. Paladin, however, has not pursued a high-rise development strategy, preferring to focus on the country’s undersupplied residential market, where Gortner believes opportunity still abounds.
In October, the Canada Pension Plan Investment Board (CPPIB) made its first foray into the Brazilian residential market with a $240 million investment through a joint venture with local bank BTG Pactual. At the time of the investment, CPPIB’s head of real estate investments for the Americas Peter Ballon called the country’s residential sector a “compelling” opportunity due to the “growing middle class” and “favorable demographic shifts” driving increased demand.
Going into 2014, Paladin will make more investments in Brazil on behalf of its Paladin Realty Latin America Investors IV fund, expecting to deploy as much as half of that vehicle’s $400 million equity target into the country. Despite the state of the economy, Gortner said he sees plenty of opportunity in Brazil’s housing market over the next few years. “You don’t need a 5 percent to 6 percent growth environment to have a successful low- to middle-income housing development,” he said. “The economy is at full employment and the real estate economics for housing are incredibly attractive compared to the developed world.”