With former powerhouse Brazil becoming riskier both politically and economically, Peru and Colombia have emerged as attractive options to diversify Latin American portfolios. In Cushman & Wakefield’s “Navigating Emerging Markets” white paper published in July, the global real estate services firm awarded Peru its top ranking for economic growth among Latin American countries, partially determined by its 6.3 percent increase in GDP. Colombia earned the fourth spot with a 4 percent GDP increase, while Brazil was ranked last with just a 0.9 percent bump.
In addition to analyzing economic indicators such as GDP and population growth, the white paper ranked risk factors including impact on total occupancy costs; quality of ownership; transparency of property rights and land use; investment in infrastructure; healthy and safety of employees; and level of corruption. The final results of the study showed Peru and Colombia clearly are pulling ahead.
“If you add up the factors—foreign money coming in, the major changes in the way companies do business in these countries and demographics of the populations—you get a winning horse here,” says Marcelo da Costa Santos, vice president of capital markets for South America at Cushman & Wakefield.
Transparency and stability
Managing director Fred Gortner and the team at Paladin Realty Partners studied Peru and Colombia thoroughly before making initial investments in both countries – Peru in 2005 and Colombia in 2011. Prior to investing, the firm determined each country must meet five criteria: a rule of law with a level of transparency (where property rights are protected and contracts are enforced); a stable currency, prudent monetary policy and control of inflation; prudent fiscal balance with multi-year revenue and spending control; open and liberal policies in terms of free trade; and at least a growing attention towards deregulation and reducing red tape. “On all of these fronts, Colombia and Peru have scored very well,” Gortner says.
With all of these appealing traits for international investors, Gortner says one of the best ways to get into the private real estate markets in both Peru and Colombia is through for-sale housing for low- and middle-income residents. Both countries are experiencing severe housing deficits with a shortfall of approximately 2 million units of housing in each country. Backed by an emerging mortgage market with a very low base, the countries are prime markets for Paladin, which is focusing on metropolitan areas like Lima and Bogotá.
Paladin isn’t the only firm with its sights set on housing in Peru and Colombia. “In each place, we’re leading with the homebuilding platform,” says Bret Rosen of Jamestown Latin America. The firm’s managing director of research states that the countries require a similar approach when it comes to housing because they share high unmet demand, a growing mortgage market and low penetration of mortgages, as well as government support for the housing market.
After forming as a subsidiary of Jamestown America in March, Jamestown Latin America has begun developing relationships with local joint venture partners throughout Peru, Colombia and Brazil. Rosen says the firm currently is speaking to institutional investors in the hopes that it can raise capital in the near future. The firm also will look into the office, retail and hotel sectors.
Both Gortner and Rosen agree that Peruvian and Colombian assets provide regional diversification in investor portfolios, with the added bonus that there isn’t nearly as much competition as in other Latin American hot spots. “A lot of institutional investors have gotten into Brazil and Mexico,” adds Rosen. “They haven’t yet gotten into countries like Peru, so the market won’t be quite as crowded.”
Indeed, Peru is a country on the rise. According to the Cushman & Wakefield report, the nation of 30 million is expected to achieve GDP growth of 6.5 percent in 2013, on top of the 6.3 percent it reached in 2012. Peru’s popularity also is increasing due to the government’s openness with foreign businesses, as shown in statistics like the World Bank’s Ease of Doing Business Report (EODB), in which Peru ranks 43 out of 185 (compared to Colombia at 45, Mexico at 48 and Brazil at 130).
“It goes a long way, especially when Brazil is viewed as not being as open, transparent and business friendly,” says Cushman & Wakefield’s managing director of research and strategies Rick Cleveland. “It’s very challenging to get things done in Brazil. Peru has taken strides to be better at that, and Colombia to a certain extent has followed suit.”
The hottest area in the Andean country is by far its capital. Lima’s real estate market, serving 8.4 million people, progressively is becoming more popular and more expensive, and therefore much less accessible. The stock of Class A office space in the financial center of Lima will increase by 50 percent this year and next, according to Rosen. Currently, the demand for office space is incredibly high, with a vacancy rate of just 1 percent.
Limited availability correlates to two other challenges facing the Peruvian market—space and quality. Unlike Colombia’s diverse market – with six cities breaking the million-person population mark – Peruvian investments are based around Lima, the country’s only city with more than one million people. In addition, the limited space currently available often is old and dated.
Although Peru has become more attractive to investors, its growing popularity comes with a level of risk. “If you want to invest in Peru, you have to be careful because you could easily flood the market,” says da Costa Santos.
Although Peru has a slightly higher rating on the World Bank’s EODB scale, Colombia has size and location on its side when it comes to attracting international investors. In the country of 45 million, there are six cities with a population over one million, the largest and most popular being Bogotá. Colombia also boasts an optimal locale, with access to both the Atlantic and Pacific oceans and US-facing cities like Baranquilla along the Caribbean. Additionally, the Colombia-US Trade Agreement has been increasing the interest of American companies in the local economy.
Bogotá has become a hub for Paladin and Jamestown, both of which have established offices there. Still, many investors are hesitant to jump onboard, associating the country with drug violence. Rosen, Gortner and Cleveland all say the first hurdle in Colombia is dissuading investors of this notion. The second is convincing them that Colombia has the scale worthy of institutional investing.
Infrastructure problems have presented another difficulty in Colombia, as the lack of roadways between major cities and links between the two oceans have impeded developers and prevented the transportation of construction materials. However, Cleveland explains that these infrastructure setbacks are easier to overcome with the transparent and business friendly environment the Colombian government has fostered.
Brazilian déjà vu
As Peru and Colombia emerge as viable private real estate markets, both countries are experiencing a period of growth similar to the one Brazil experienced 10 years ago—the emergence of a homebuilding market, the development of mortgage financing and an environment with very little private equity competition. The similarities have encouraged Paladin to expand its investments in Peru and Colombia with its next commingled fund, Paladin Realty Latin America Investors IV, which currently is in the market raising capital.
“It’s one of the reasons why we expect Colombia and Peru will be the two top target markets for our next fund, alongside Brazil,” says Gortner. “Brazil still is the best combination of scale and opportunity in the region, but collectively Peru and Colombia bring a similar amount of scale with much less competition.”
Indeed, Paladin plans to invest 30 percent to 40 percent of Fund IV in Peru and Colombia and already is set to close on a joint venture with a longstanding local partner. The firm worked with the undisclosed Peruvian developer on investments for its second and third Latin America funds and plans to employ the same strategy this time around, focusing on high-income housing in the Lima area.
Jamestown similarly hopes to establish joint ventures with local partners in Colombia and Peru for housing projects. Rosen, however, does not like to compare the two countries to Brazil. “They don’t have to be the new Brazil,” he says. “They’re giving investors a new opportunity within Latin America.”
What executives at Paladin, Jamestown and Cushman & Wakefield can all agree on is the necessity of establishing local partnerships and a local presence in order to succeed in both the Peruvian and Colombian markets. “It’s going to be a very long-term ride and it’s going to be a very good one, but you have to understand the market,” says da Costa Santos. “You have to be local and understand the players.”