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Why CPPIB, Tishman Speyer are ready to bet on Brazil again

Foreign firms well versed in Brazil's real estate market are starting to deploy capital again, but others continue to remain skeptical of the country's volatile economy

Falling interest rates and sweeping economic reforms have boosted confidence in Brazil’s real estate market, leading to fresh capital commitments from longtime investors.

Last week, the Canada Pension Plan Investment Board partnered with Brazil-based developer Cyrela Commercial Properties to purchase a São Paulo office complex from Brookfield Asset Management for $250 million. Earlier in the month the Toronto-based institution, which has an office in São Paulo, also formed a 1 billion reais ($238 million; €214 million) joint venture with Cyrela to invest in apartments in the country’s most populous city.

Rodolfo Spielman, CPPIB’s head of Latin America, said the pension has committed to rental housing – an atypical strategy for a market with a home ownership rate of over 70 percent – because it “expects the multifamily sector to particularly benefit from an improvement in São Paulo’s local business activity and consumer confidence levels.”

Meanwhile, New York-based manager and developer Tishman Speyer, another long-running Brazil investor with an office in the country, broke ground on a high-end residential development in October and has pre-sold 45 percent of the homes. This comes after it bought a São Paulo office building for $22 million in early 2018 only to sell it for $36.8 million in July after leasing it up.

It is not just US firms that are re-engaging with Brazil. The biggest deal in the past 24 months was part of GLP’s $12 billion take-private transaction in January 2018, in which it transferred ownership of its $1 billion Brazil portfolio to a consortium of five Chinese firms, namely Hillhouse Capital, Hopu Investments, SMG Eastern, China Vanke and the Bank of China.

Overall, cross-border investment has tepid in the country, which has been rocked by political scandals and recession during the past five years. So far, foreign investors have invested $12.1 million in the country this year, down from $19.7 million in 2018. But structurally lower interest rates is gradually prompting an increase in investment by firms with a presence in the country. Brazil’s benchmark rate, which peaked above 14 percent in mid-2016 when the country was roiled by economic recession and widespread political graft, has been whittled down to 5 percent and the central bank is expected to drop it another 50 basis points this month. GDP also is expected to increase 0.8 percent year over year, according to Morgan Stanley research, which would make 2019 the third straight year of economic expansion for Brazil after back-to-back contractions in 2015 and 2016.

Investors and analysts also have confidence in a new conservative government in the country led by President Jair Bolsonaro, who was elected last October. The administration has succeeded in passing a sweeping pension reform, which is expected to save the country 865 billion reais, according to Bank of America-Merrill Lynch. The state is expected to liquidate more than 3,700 real estate assets valued at $8.6 billion in the coming four years, according to a report from New York-based manager GTIS Partners. There are also plans for the government to privatize roughly $1 trillion of non-real estate assets, including Petrobras, the publicly owned utility company at the heart of a massive money laundering scandal involving dozens of government officials. A new tax structure is also in the works, which market experts say is crucial to making the business environment more palatable.

“The market sees the reforms that are already in place changing the confidence of investors,” Daniel Cherman, Tishman Speyer’s Brazil country head, told PERE. “Looking forward, we will continue see those reforms happening and the indicators are positive, so we are starting a new cycle after a long down cycle and we are going to see increased GDP growth and a more sustainable environment with lower interest rates going forward.”

Among the top global private equity managers, Brookfield has been the most active buyer in the Brazilian market during the past five years, with more than $2 billion of acquisitions, according to research provider Real Capital Analytics. However, the firm also ended up pulling back from the market in 2016 and 2017 when the country was dealing with the impeachment of President Dilma Rousseff and its aftermath. The Toronto-based manager closed just one deal during that stretch. In 2018 it acquired a portfolio of industrial assets alongside Digital Realty, a California-based REIT, but only began buying new office properties this March.

Aside from these numbered few, most foreign investors have shied away from Brazil during the past few tumultuous years.

Paladin Realty Partners, a California-based manager that specializes in Latin American investments, has historically leaned heavily on Brazil, allocating roughly 60 percent across its five real estate funds to that market, Ricardo Raoul, the firm’s Brazil country head, told PERE. However, it has not raised blind-pool capital since early 2017. Though it has ramped up activity in Brazil through club deals, Raoul said many institutional investors are not yet sold on the country’s turnaround. “It’s better today than it was a year ago but it’s not strong enough to raise a pan-regional fund like we like to,” he said. “Investors are in a wait-and-see mode, they want to see how reforms play out.”

Cross-border investment in the country peaked at $23 billion in 2015, the same year domestic activity bottomed out at $5.5 billion. Since then, the two groups have taken divergent paths, with local investors gradually ramping up investment as foreigners pulled back.