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AMERICAS NEWS: Early mover advantage

Máximo Lima likes arriving early. For the founding partner of São Paulo-based private equity real estate firm HSI, formerly known as Hémisferio Sul Investimentos, being one of the first to invest in a real estate sector in Brazil pays dividends down the road.
“We try to be where no one else is,” said Lima. “The theory is that, if we get to these unexplored markets and start making money, it draws attention to them and then everybody else comes.”
Lima has proven this theory before, most notably with the firm’s early entrance into Brazil’s industrial market. After developing the largest logistics portfolio in the country between 2008 and 2011, the fund manager sold all of those assets – encompassing some 22 million square feet of space – to Global Logistic Properties in 2012, the largest-ever real estate exit in the Latin American nation. 
The massive trade marked the Singapore-based logistics provider’s entry into Brazilian industrial real estate, as well as HSI’s exit from the sector. “If you’re an early mover and you create a certain size within a key market, you’ll be taken out,” said Lima. 
Now, HSI is once again getting ahead of the pack. Starting in 2011, Lima anticipated both a slowdown in the Brazilian economy as well as a significant amount of real estate supply coming to market – the combination of which would lead to prices and leasing rates dropping dramatically. “We started looking outside the box,” Lima said. “We started asking ourselves, ‘What can we do that is different from what everyone else is doing and that essentially can deal with this slower economic cycle while still making money?’”
The answer was hospitality and self-storage assets, two property sectors where few other private equity real estate firms in Brazil have ventured. Indeed, roughly half of the $650 million in HSI’s latest real estate fund, Hémisferio Sul Investimentos Fund IV, is being deployed in these new strategies, although they were not part of the vehicle’s original investment thesis, which had targeted retail, residential and office real estate.
Last March, HSI launched a new hotel platform, Zii, to cater to domestic business travelers in the secondary and tertiary cities in northern and northeastern Brazil. Many of these cities are benefiting from commodity or infrastructure booms but still lack quality hotel properties. The platform’s first hotel, for example, is being built in the town of Parauapebas, which is located close to the world’s largest iron ore mine. 
Hospitality in Brazil also lacks standardization, where hotel properties, even among larger, more established brands, can vary widely in quality, explained Lima. “What we’re proposing is a cookie-cutter solution,” he said. “My customer is going to know exactly what he’s going to get, no matter what city he enters. That’s one of the things that we’re betting on for creating customer loyalty.”
HSI has faced some initial challenges with Zii, particularly the dissolution of its short-lived joint venture partnership with WTorre in November. The firm, however, bought out WTorre’s interest in the platform and currently has five hotels under construction, with two scheduled to open this year. Plans call for investing about $125 million of equity to build up to 20 hotels, each with 100 to 120 rooms, over the next three years.
Meanwhile, HSI also is expanding into the self-storage market, with plans to invest more than $100 million to build 20 properties in the city of São Paulo. In December, the firm closed on a joint venture with M3 Capital Partners, which owns interests in several self-storage properties. The new platform, Goodstorage, currently has three facilities under construction.
While some of the demand for self-storage space is coming from the growing middle class in Brazil, about 70 percent of users in São Paulo are small business owners, according to Lima. “Because of the way the city is set up, you can’t bring large trucks in,” he explained. “You’re better off storing your stuff inside the city, and the only place you can do that is in self-storage units.”
Even in Brazil’s largest city, self-storage still is a relatively untapped market, with few organized players. “It’s a fairly open playing field,” Lima said. However, “you need to set up everything from scratch.”
HSI also will be investing up to 20 percent of Fund IV in real estate debt, where the firm will act as a lender to distressed Brazilian developers on the asset level. After taking on too much corporate debt during the real estate boom of the mid-2000s, many such companies now are unable to repay or refinance and consequently are coming up short on cash for their projects. As a lender, HSI expects to generate returns through the repayment of loans with interest – or to take over the project if the borrower defaults, Lima noted.
Eventually, HSI plans to exit its hotel investments through a property or portfolio sale to a hotel REIT or owner-operator in Brazil, or an individual sale of each hotel room to retail investors. As for self-storage, Lima doesn’t anticipate that the market will remain an open playing field for long. “The key is to be able to get some scale in a major market like São Paulo,” he said. “The global players already have started to look.”