US NEWS: Dry powder

Colombia is slowly and steadily shedding its guerrilla past and becoming an increasingly appealing place to invest for private equity real estate firms. Although the South American country still has room for further economic improvement, some firms believe it has come far enough to warrant investment.
Indeed, an avant-garde has reached Colombia recently, and some believe more firms will follow suit. In September, Avenida Capital launched its first institutional opportunistic fund targeting retail, commercial, residential and industrial properties located in the major cities of Bogota, Barranquilla and Cali. The New York-based real estate investment firm expects its $125 million vehicle, Avenida Colombia Real Estate Fund I, to hold a first close in the fourth quarter of this year and a final close by summer 2012.
Also in September, Equity International made its maiden investment in Colombia: a $75 million stake in Bogota-based developer and manager Terranum Development. Terranum is the first company in Colombia to provide ‘top-tier’ real estate to accommodate the needs of domestic and international corporations.

“Colombia represents one of the most compelling new investment frontiers,” said Gary Garrabrant, chief executive officer of Equity International, in a statement. Indeed, the Chicago-based firm cited Colombia’s business-friendly policies and strong GDP growth – the World Bank is projecting average annual GDP growth of more than 5 percent each year until 2014 – as prime reasons for it becoming an attractive investment destination.

A shift in perception
According to those firms that recently have conducted business there, the clichéd image of Colombia being a crime-ridden haven for drug kingpins is becoming increasingly u  nfair and inaccurate. Its cities are safer and more secure, its economy is growing and its financial institutions are eager to do business with foreign investors. Furthermore, the World Bank has ranked the country as sixth in the world in protecting investors – three spots ahead of the US.

“[Colombia is] definitely on people’s radar a lot more,” said Michael Teich, managing director at Avenida. “We’re going to continue seeing improvement there.” Although this is the firm’s first fund, Avenida has been investing in Latin America with its own money since its formation in 2006.

In addition to the continued improvement in its government and economy, there appears to be several other factors causing Colombia to become increasingly attractive to foreign investors. Among them is the fact that the nation’s banks are becoming more supportive of foreign collaboration.

Avenida, for example, is launching its maiden fund in conjunction with a local bank Grupo Interbolsa, which will provide fund administration and raise capital from its network of high-net-worth investors. Alex Chalmers, managing director at Avenida, added that several Colombian banking and real estate professionals are working overtime to do business with investors outside of the region.
Others point out less obvious reasons why Colombia should be on the investment map. “Colombia is not only attractive because of the multiple markets it offers, but it also is attractive because it can serve as a beachhead for a regional platform to follow core clients in region,” said Thomas McDonald, chief strategic officer at Equity International. “The integration of the Chile, Peru and Colombia stock markets will be another positive step for Colombia.”

Avenida’s Teich added: “We are emerging market investors; we were early into Mexico and we were early in Brazil. The timing for us to go into Colombia makes sense.”

On the property level, the demand for quality office and industrial space has increased, and the local real estate market has been shifting from tenant-owned to institutional-owned. Still, with the nation’s real estate markets being relatively new and the country currently seeing a dearth of Class A office properties, Colombia is regarded by many as a high-risk environment. However, to some foreign investors, this just means that the South American nation is a land of lucrative opportunity. After all, high risks often lead to high rewards.

“We want to open people’s eyes to Colombia being just as good, if not better, in terms of returns as Brazil or other South American countries,” said Chalmers.

Despite these early positive signs, Colombia still has a long way to go before catching up with Brazil in terms of investment activity. Indeed, for the time being, private equity real estate firms still are quite eager to do business in Brazil.

In mid-September, PERE learned that the New York-based private equity giant Tishman Speyer closed on $350 million in equity for its third Brazil fund and a related feeder vehicle. Not only that, but Pennsylvania-based investment manager Hamilton Lane announced its plans to open an office in Brazil after adding a real estate practice this year.

Those are just two recent examples of Brazilian investment activity still going strong. That said, expect Colombia to play an increasing part in the Latin American real estate picture.

“You feel a general enthusiasm for the market there,” Teich said. “Across the board, things are looking up.”