As domestic property investment managers raise their game, Stephanie Schwartz-Driver asks if there is room for international players
Although Brazil is the largest and most crowded of the Latin American markets, it remains challenging for foreign fund managers to get a toehold. And as domestic fund managers grow their presence, can outsiders maintain their position?
The year 2012 proved to be a very successful fundraising year for Latin America in general – according to figures from Preqin, eight funds closed with a combined $3.4bn (€2.5bn), up from the $3bn raised by nine funds in 2011.
Funds dedicated to Brazil have traditionally accounted for the lion’s share of funds raised: of the 10 largest Latin American closed-end private real estate funds that closed from 2008 to mid-year 2013, eight were focused on Brazil. And the trend is still in play.
Of the 10 largest Latin American funds currently in market, seven are devoted to Brazil and one other includes Brazil in its country mix; the Brazil-focused funds account for 66% of capital targeted. However, interest in other countries is growing; five of the funds in market are targeting Colombia, although they are only targeting a fundraise of $600m, well below the fund target for the Brazil funds.
The largest private equity real estate fund in Brazil is the GTIS Brazil Real Estate Fund II, an $810m vehicle run by GTIS Partners. The size of the fund is indicative of the state of the market, according to William Cisneros, senior managing director of GTIS Partners. “It is a huge market, but it is not such a big fund. There is not a lot of private equity real estate capital in Brazil.”
This has kept the level of competition in scale, Cisneros notes. “There is no doubt that a situation as compelling as Brazil’s attracts new players, but it has been a tough nut to crack for many people,” he says. “It is challenging for the big players particularly. We do a lot of detailed work without putting that much capital into play.”
GTIS is in the process of investing BREF II, with around 50% of the capital deployed already. The fund is invested in residential, office, industrial and in hospitality; the firm is not meaningfully engaged in retail.
GLP Brazil Income Partners I, the fourth-largest private real estate fund invested in Brazil, takes a much more niche approach focusing on the logistics market. The fund was established in November 2012 specifically to acquire five development projects. It was formed simultaneously with the acquisition of the platform, which consists of stabilised assets that are fully built facilities with strong projected cash flow.
Global Logistic Properties (GLP) owns 41% of the fund, with the Canada Pension Plan Investment Board holding just under 40%, and the Government Investment Corporation of Singapore owning 19%.
GLP is the largest logistics provider in China and Japan, and Brazil is a logical market to expand into, according to Jeff Schwartz, co-founder and chairman of the executive committee of GLP. In part, he says, this is because there is already a significant Japanese and Chinese presence in the country. “Chinese investors see it as a basket of resources, and it has always been a place where Japanese people have felt comfortable. In fact, the largest Japanese population outside Japan is in Sao Paulo.”
This is not to underestimate the attractiveness of Brazil’s strong long-term fundamentals and its tremendous natural resources, especially energy, as well as population dynamics that favour continuing economic growth – all this is combined with an under-served logistics market. GLP sees the Brazilian business as “accretive and complementary”, says Schwartz. “It is more the fact that we thought Brazil presented a good opportunity than saying that we wanted to be outside of Asia.”
Right now, both GTIS and GLP are benefiting from economic turbulence in Brazil that has depressed land prices; economic growth was down to 1.5% in the last quarter, an admitted improvement against GDP growth in 2012 of only 0.9%, according to the Instituto Brasileiro de Geografia e Estatistica. “Price is down on land acquisitions,” says Schwartz, “and there is less competition because the market has slowed a little.” GLP is looking at some opportunities in development and land acquisition, focusing on Sao Paulo and Rio de Janeiro, although the firm is present in 22 cities through the platform it acquired.
Cisneros sees its biggest competitors as the public home builders in Brazil, and GTIS is benefiting from the fact that its stocks are very compressed at the moment. This mean that there is less competition to buy land in residential areas.
“We recently bought a huge piece of land in Sao Paulo but it is a non-starter for public home builders to do that now,” Cisneros says. But, he acknowledges that “this is not true of where the home builders were two years ago. And two years from now, they will be more excited to start new projects.”
GTIS’s ability to be counter-cyclical is one of the firm’s strengths, says Cisneros. “We can deliver high IRR and high multiples without taking a lot of risk. It is a different incentive structure than growth-based private companies. We can be opportunistic when it is tough for them.”
An economic slowdown, along with some currency volatility and government instability, has also limited investor appetite. “We do not see a massive inflow of capital today. It is more rational,” says Schwartz.
Cisneros agrees: “There is a lot more noise than action from investors,” he says. “A lot are looking, and a lot tried and have not done anything.”
At the same time as investors are looking beyond Brazil, competition is heating up for fund managers, as local firms make headway. “The development of a private real estate fund industry in Latin America is reflected by the growing importance of managers headquartered in the region,” according to a Preqin report, which found that Latin America-headquartered fund managers accounted for 52% of the capital raised by Latin America-focused funds in 2011-12.
In addition, 57% of the capital being raised is for Latin America-headquartered funds. This is in contrast to previous years: from 2005 to 2010, Latin America-headquartered managers accounted for only a quarter of funds raised.
One way that foreign fund managers succeed is by having a strong local base in the country. GTIS has a homegrown team, led by Joao Teixeira, a Brazilian real estate developer. Teixeira developed five of the top 10 office buildings in Brazil.
“Our development expertise, combined with investment expertise, gives us an edge,” says Cisneros, adding that many private equity managers in Brazil tend to come from the financial sector rather than real estate.
GLP similarly sees itself as a domestic business, despite its foreign ownership. “Everybody at senior level is Brazilian,” says Schwartz. “The only advantage we have is that we focus on one thing and we do it well.”