When you’re one of the largest real estate investment managers and have ambitions to build up a regional business, the conventional wisdom would be to expand your geographic footprint in that area.
Alfonso Munk, however, has taken the opposite approach since joining Prudential Real Estate Investors (PREI) in July, first as chief investment officer, and then as chief executive, for Latin America.
At the time, PREI, the New Jersey-based real estate investment management business of Prudential Financial, was pursuing a pan-Latin American strategy. Heavily focused on Mexico, the firm also had holdings in Brazil, Chile and Argentina and was evaluating investments in other markets such as Colombia.
Yet Munk, who previously served as head of southern Europe at Morgan Stanley Real Estate Investing, has overhauled that strategy to focus on just two Latin American markets, Mexico and Brazil. “In emerging markets, you really have to be very close to your assets and to your partners, and really have a presence in those markets and know them well,” he said in an interview.
Mexico and Brazil are the two main countries in the region where a manager can make real estate investments on a large scale, Munk explained. From an efficiency and resources perspective, it is hard to justify in the smaller markets, he said, adding that the firm will be monetising its investments in Chile and Argentina over the long term.
Mexico was one of PREI’s first Latin American markets when it began investing in the region in 2000, and the firm is today one of the largest investment managers in the country. However, PREI plans to exit many of its Mexican investments including industrial, retail, office and mixed-use assets in order to recycle capital. “Buyers are out there, and it’s the right time to sell because there’s a good amount of interest,” said Munk.
The Mexican public markets are expected to be a major driver of portfolio acquisitions, especially as more REITs, known as Fibras (Fideicomisos de Inversión de Bienes Raíces), come to market. Local institutional investors such as pension funds also have become increasingly active in real estate and are likely to be another significant buyer of assets. Additionally, Mexico has generated interest among foreign investors looking at Latin American real estate markets beyond Brazil.
PREI plans to reinvest the proceeds from the exits into new development, particularly in industrial and residential. For the most part, however, Munk doesn’t expect any major changes for the firm’s business in Mexico.
Where he anticipates a greater shift is with the manager’s activities in Brazil. Although PREI had reduced its investments in the country in recent years because of escalating prices, Munk is seeing opportunities on the horizon, particularly from cash-strapped homebuilders that had expanded too aggressively during the real estate boom several years ago. “I think the opportunity in Brazil is huge,” he said. “In fact, it’s bigger than in Mexico over the long term.”
In response, PREI will be bulking up its platform in the country, hiring additional staff at the firm’s São Paulo office and concentrating in the short-term on the residential sector.
“Residential is our main priority, recapitalising projects and investing in projects with local partners that are in need of liquidity,” said Munk. In such investments, PREI would take majority ownership stakes in the projects to maintain control, and typically structure investments with some layer of protection, such as having priority over the developer in collecting returns. The firm also is considering buying residential land, since land values are often the first to decline during times of very high asset valuations.
As part of the new residential initiative, PREI will be moving away from working with numerous developers, as it had in the past, and focusing on partnerships with just two or three. “Partner selection is key in places like Latin America, particularly in Brazil,” said Munk. “Partners are not very well trained or don’t have the experience to work institutionally with people like Prudential, so it takes a while to get them on board.”
A second focus in Brazil will be industrial development. “I’m concerned about the fact that land prices are high and the rents are high in industrial, but there’s also a significant lack of stock,” said Munk, noting that Brazil has the lowest density of industrial space in Latin America. While a lot of industrial real estate currently is being developed, “it hasn’t kept up with the pace of the growth of the middle class.”
PREI’s increased focus on Brazil also will be reflected in the firm’s funds platform. Whereas the manager has raised country-specific, sector-specific funds for its investments in Mexico, it historically has invested in Brazil and other Latin American markets through regional funds that cut across all sectors. Going forward, however, PREI also will utilise country-specific and sector-specific vehicles for Brazil, Munk said.
Clients have favoured such funds because they have performed well, he explained, adding: “Track record is everything in this business.”