FEATURE: Real estate samba

Brazil apparently has it all: strong demographics, consistently good growth rates and low levels of sovereign debt, combined with an increasingly affluent population keen to exercise their new spending power. However, as investment dollars continue to target the Latin American country, there are mounting concerns a bubble is in the making, not least in the real estate markets of Brazil’s largest cities, São Paulo and Rio de Janeiro.

Speaking to seven real estate players in Brazil about their strategies, hopes and concerns, PERE was cautioned by all to balance fears of a bubble against the real estate realities on the ground. While pricing for select development land and core assets in Sao Paulo and Rio was “rich” by some standards, Brazil is about more than just these property sectors and cities, they stressed. With 84 percent of the country’s population of 200 million living in urban areas and 15 cities boasting populations greater than one million people, compared to just nine in the US, there are plenty of other tales to be told about Brazil’s real estate opportunity.

Of course, Brazil is no easy win for any GP or LP hoping to pop down to South America for a quick return or a spot of diversification. Like other emerging markets, Brazil has its own idiosyncrasies that can make deals, joint ventures and equity investments as risky as they are financially rewarding. As one GP put it, there are as many tailwinds as there are headwinds when it comes to Brazil’s real estate markets. Here we compare the experiences of seven players in the market.

Ken Wainer
VBI Real Estate

Much has been made of the Brazilian real estate bubble, but for Ken Wainer, co-founder of VBI Real Estate, the term is “inappropriate.” Yes, land prices are high in the gateway cities of São Paulo and Rio de Janeiro, but the same can certainly be said of certain real estate sectors in New York, Washington DC, London and several key cities in China.


“Land prices are high in São Paulo and Rio,” Wainer concedes. “But for the housing and office sectors, in particular, the development opportunities are of a national scope and repricing is a much more gradual process the further one gets from those locations,” he explains, noting that a bubble is speculation in expectation of a capital gain without the fundamentals to back it up.

Of course, when it comes to fundamentals in Brazil, there is plenty of good news to point to. Rising incomes, particularly among the Class B and Class C populations with monthly household incomes of between $2,000 reais and $4,000 reais, is helping fuel demand for all real estate sectors, not least of all retail – a sector expected to play a much larger role in VBI Real Estate’s 2011 pipeline.

Founded in 2006 with a focus on office developments and retrofits, as well as affordable housing and retail, VBI Real Estate is expected to target retail opportunities that boast roughly four to six anchor tenants, but where the total tenant base could range anywhere from between 60 and 200 tenants, including in-line stores, cinemas and food courts. One of VBI Real Estate’s latest deals included a 50 percent partnership in the Shopping Barueri project, located in the Barueri district west of São Paulo’s financial area.

However, VBI Real Estate won’t just concentrate on retail this year, with affordable housing also expected to make up a third of the firm’s investment activity. Driven by rising incomes and more widely available mortgages, Wainer says: “Residential is a broad opportunity that will exist for a while.”

Edgar Alvarado
Allstate Investments

Institutional investors understand only too well that ignoring the emerging market growth story could mean sacrificing returns and diversification. However, for most LPs, the practical implications of trying to develop a global property portfolio are simply too great to overcome. The time, resources and skills needed to conduct due diligence not only on potential GPs but also on the target country’s real estate sectors and its macro-economic story are steep by any standards.


Allstate Investments is one US investor that has committed to Brazil in the past year, but it was a journey that took the insurance company’s head of real estate equity Edgar Alvarado roughly two and a half years to complete. After first travelling to Brazil in early 2009, he and his real estate fund team, led by Joy Winterfield, spent another six months working with Allstate’s global strategist and emerging market specialists to get a thorough understanding of the macro risks involved in their making their first real estate commitments outside the US.

“We made the decision to start investing in Brazil in late 2009, but we wanted to ensure that whatever process we developed for this allocation could be replicated for other countries,” Alvarado says. “Brazil became our test case.”
As such, Allstate weighed the risks involved in targeting each real estate sector. In creating a bottom-up model, which was overlaid with the macro analysis, Winterfield and her team started identifying “the most attractive property types at this point in Brazil’s real estate cycle,” Alvarado says.

Of course, investing in an emerging economy implies that development will be a key component of any fund managers’ strategy. But when it came to office and retail, the sectors felt “too risky” for Allstate. Residential was a more “natural place to play”, but the question for the insurance group was which segment to target. “The lower-income end of residential is heavily supported by the government, and there is a political risk attached to that,” Alvarado says. “At the higher income end, the market is just too small.” By targeting the emerging middle class, he says it’s almost like a re-play of the US in the 1950s and 1960s, when home ownership started to rise significantly.
In choosing a manager to commit to, Winterfield and the real estate team reviewed 12 GPs targeting Brazil, including three local sponsors and nine US-based platforms established in the country. “The investment management universe is small and you know from the outset the track records will be limited, so you need to be prepared to look at the operating track record as well,” Alvarado says. Allstate ultimately invested with the three local GPs – one targeting residential, another for logistics and the third for a mix of the two – committing $75 million among the trio.

Allstate is now looking to take its Brazil investment template to the Asia-Pacific region – with India as a possible focus – where it is targeting total commitments of between $125 million to $150 million. However, Alvarado notes that this isn’t the end for Brazil. “Our global portfolio construction continues to evolve, and we will loop back to Brazil in one or two years’ time and re-evaluate the real estate markets and respective property cycles.”

Christian Charre
BridgeRock Capital Management

When it comes to hotel investment in Brazil, it’s not all about creating five-star luxury with views of Rio de Janeiro’s Christ the Redeemer statue. Indeed, as the country’s middle class continues to expand, it is the domestic market that many investors, including international firms, are targeting.


BridgeRock Capital Management is one such firm, looking to invest up to $180 million over the next couple of years on developing mid-market hotels across Brazil, particularly in secondary cities. According to BridgeRock principal Christian Charre, this shift in attention to developing hotels for domestic users, rather than primarily for international visitors, is fairly recent. “It all ties into the growth of the economy,” he says. “Brazilians are having to travel more for business and wanting to travel for pleasure, but the country doesn’t have the quality of supply.”

As with all hotel investors, however, Miami-based BridgeRock faces stiff competition from office and retail developers when it comes to sourcing sites for projects. After all, there is a cap to what the domestic middle market will pay for a hotel room each night. “Being able to penetrate a market with the right site and on terms that actually make sense is a big concern for all hospitality firms today,” says Charre.

Part of BridgeRock’s strategy, therefore, is to target secondary as well as core locations, with the possibility of an equity share with the seller. “With the pressure on land prices, letting the seller share some of the upside can be beneficial,” Charre says. BridgeRock is also launching a new local brand, Modo Hotels, under which to manage the properties. With options on 21 development sites, the firm expects to start construction of five Modo hotels this year, with completion due at the end of 2012.

Charre cautions though that flexibility is needed when working with Brazilian operating partners. “You shouldn’t be surprised when plans change along the way,” he says. “You have to choose your partner wisely and have faith in them but be flexible.”

Gary Garrabrant
Equity International

Patience is key to doing any real estate deal in Brazil, according to Equity International co-founder Gary Garrabrant. Take the latest acquisition of a mall by one of Equity International’s portfolio companies, BR Malls. In acquiring the 35,413-square-metre centre, Shopping Tijuca, BR Malls spent two years lining up the disparate owners of the mall and positioning itself to take over the asset. “It’s like trying to put humpty dumpty back together again,” Garrabrant explains of the broken ownership structure common to much of Brazil’s retail and office sector.


Financed largely by equity rather than debt, it’s rare to find ownership in the hands of one individual or entity. As a result, acquiring 100 percent of an asset such as Tijuca can take time. “We did this in two tranches, but it could take seven or eight depending on the age of the property and the myriad number of partners involved,” Garrabrant says, noting that the deal eventually closed in November for $800 million reais (€351.7 million; $480 million). In doing so, BR Malls positioned itself to become the “buyer of first choice” – a strategy the firm is employing elsewhere in Brazil as it looks to expand its portfolio of 39 malls.

Equity International, of course, isn’t your typical private equity real estate firm investing directly in assets. Rather the Chicago-based firm creates and invests in real estate operating companies and developers, helping them build their firm, as was seen with industrial developer Bracor Investimentos, and often taking them public, as with homebuilder Gafisa. After first entering Brazil with its Fund II in 2006, Garrabrant admits there is one benefit to the surge of equity now targeting the country: the ability to monetise deals. Indeed, Equity International has sold all but to 2 percent to 3 percent of its stakes in BR Malls and Gafisa.

However, as the firm eyes new opportunities, Garrabrant says there is plenty to look forward to, particularly in Brazil’s secondary cities. “We are exploring relationships and adding portfolio companies that are more regional in their focus,” he adds. “There’s no grand plan, but it’s about finding the second generation of opportunities in Brazil.”
As well as a focus on residential and retail, Equity International also is eyeing debt origination and securitisation. “The consumer angle in providing loans for home improvements, bridge loans and commercial and residential securitisations are very exciting,” Garrabrant adds.

Doug Munro

When Hines first arrived in Brazil in 1998, there was only one major competitor it had to face: the country itself. Suffering from the aftermath of the Asian and Russian crises, Brazil literally was a “basket case” of economic problems that culminated in a currency crisis in 1999 and a subsequent massive devaluation of the real. It was a tough time to be an institutional real estate investor, according to Hines’ managing director Doug Munro, who revealed the firm did just three equity projects between 1998 and 2005.


The turnaround came in 2003, when Luiz Inácio Lula da Silva took office as president and the markets and international investment community realised Brazil was beginning to act more rationally. By 2005, Hines had won the backing of the California Public Employees’ Retirement System – a massive vote of confidence in a country that up until that time international investors had been fleeing in droves. “Brazil was crying out for real estate development, but it simply didn’t have any petrol in the tank,” Munro says.

That relationship with CalPERS, in which the pension plan has committed $1.1 billion through three separate accounts to date, has seen Hines develop nine distribution parks comprising 29 separate buildings, as well as numerous affordable housing and office projects and three other warehousing acquisitions. Taken with Hines’ other emerging market and Brazil-focused funds, the firm has developed more than 17 million square feet of industrial, office and residential space in Brazil since 1998, with 13 housing projects comprising some 7,000 units delivered or under construction as well as some logistics and office deals.

The latest CalPERS vehicle, the $190 million HCB III, is now fully invested, but Munro points to one trend that has emerged over the past two years – the move away from São Paulo and Rio de Janeiro to Brazil’s secondary cities. “The competition has now become other fund managers and investors, which is concerning, but we still remain bullish on Brazil,” he says. “There is significant employment in the country, which is driving demand for real estate products. We tend to select locations that are complex and that have high barriers to entry, which means less competition.”

Such strong fundamentals, the Brazilian-born Munro says, also is driving a sense of optimism in the country. “The amount of English being spoken now is remarkable,” he adds. “Brazil is being discovered by international people as well as by locals.”

Maximo Lima

In January, Prosperitas closed one of the largest real estate deals Brazil has seen in four years when it acquired almost three-quarters of Bracor Investimentos’ assets for $2.2 billion reais (€967 million; $1.3 billion). In closing the deal, the São Paulo-based private equity real estate firm took over 30 of Bracor’s 42 industrial projects, comprising roughly one million square metres of space. Coupled with its own industrial development pipeline, Prosperitas now has an estimated two million square metres of logistics and distribution space across the country.


With consumer spending set to be a major driver of real estate demand, particularly for retail and industrial assets, the underlying fundamentals of the deal are clear to see. For Prosperitas’ head of acquisitions Maximo Lima, however, there is more to industrial than simple demand-side economics. The sector also suffers from a lack of institutional-quality supply, something that is helping push vacancy rates in many urban centres close to zero.

Prosperitas, though, isn’t just an industrial player. The firm, founded in 2003, will pick and choose real estate sectors where it sees the opportunities. Several years ago, Lima notes, the firm’s portfolio was heavily weighted to office. Today, those offices have gone as competition for development sites from office developers and investors, as well as homebuilders, have helped push prices ever higher, making yields “unviable” for the risks involved. A similar situation exists in the middle to upper-middle income residential sector, he adds, thanks to “very stiff competition.”

Instead, Prosperitas is looking to retail for its returns, with two retail properties comprising around 300,000 square feet of space in operation and three more under construction. While the firm’s industrial assets are primarily concentrated in the greater São Paulo and Rio de Janeiro areas, Lima says Prosperitas – which expects to invest up to $800 million of equity between late 2010 and the end of this year – is looking to secondary and tertiary cities for retail opportunities.

Targeting underserved markets with 500,000 people or more in a set city or area of a city, Lima cited as an example one mall in Rio Branco, a city in the Amazon in the northwest of the country. “The closest mall is 1,000 kilometres away in Peru, so it’s a captive audience,” he says.

While Lima accepts there are “definite challenges” in terms of logistics and construction to investing in such locations, local populations have the income and desire to support the deals. “Local government also can be friendlier than that in São Paulo and Rio because they want the development and jobs that come with it,” he says. “In the bigger cities, it’s often about what you can do for the city or municipality before you’ll even see a permit.”

Josh Pristaw
GTIS Partners

In the six years since it was founded, GTIS Partners has invested roughly $750 million in Brazil. In 2011, the firm expects to invest a further $250 million to $350 million of equity, much of it targeting in-fill affordable housing, for-sale condominium, warehouse/logistics and office projects in São Paulo and Rio de Janeiro. Although the two core markets are much more competitive than in 2005, when the firm was founded, senior managing director Josh Pristaw says there still are some “tremendous opportunities” when it comes to in-fill deals, particularly related to affordable housing. “We are seeing some of the best margins we’ve seen in five years,” he adds, noting that demand from residential buyers continues to rise.


With roughly 50 percent of GTIS’ portfolio focused on residential, Pristaw says the firm has increased its affordable housing assets from approximately 4,000 units to 6,000 units in the past month alone. In trying to overcome the competition, the firm and its joint venture operating partners will look to put their own equity capital to work as opposed to the increasing trend of permuta or land swaps, in which sellers share in the upside of a development and reduce developer equity exposure as the land is not paid for upfront.

As the investment landscape continues to evolve in Brazil, GTIS is hoping to expand its deal flow to include more industrial assets. After closing a partnership with development firm Ager Incorporacoes in December to acquire and develop office, some residential and industrial warehouse assets in and around Rio, Pristaw says the firm is set to close its first JV with an industrial developer.

Perhaps one of the greatest challenges in targeting development and retrofit deals, though, has to be Brazil’s title laws. With title insurance difficult to come by, it’s down to each firm to ensure a property’s title is in order before closing on the acquisition. But as Pristaw notes, things are not as easy as they first seem.

“You literally have to go back 20 years to see who owned the property and check whether all the debts were paid at the time of transfer. We won’t spend any time or money negotiating a partnership until we’ve done a flash due diligence,” says Pristaw. “The number one reason why you’ll see great sites empty in São Paulo and Rio is because of title problems that can’t easily be solved without spending years in court.”