CalPERS claims still to be "excited" by Brazil after selling its joint-venture property fund for $160m. But at least one economist is warning of an asset bubble.

The announcement last week that CalPERS and sustainability specialist developer Hines had cashed up $160m (€111m) from the sale of their multi-asset, multi-city Brazilian real estate fund doesn't mark a vote of no-confidence in the BRIC market du jour. Far from it.

Joseph Dear, chief investment officer of the $238bn pension scheme, said in a statement that, having generated a 60% internal rate of return on its $95m investment, he was still "excited" by opportunities in the Brazilian real estate market. He pointed to the scheme's strategy to invest 15% of its allocated capital to growth property markets, including Brazil.

Even so, it was a nifty bit of timing - especially if you believe, like economist Samy Dana of the Getulio Vargas Foundation, a think tank, that Brazilian real estate is already bubbly. The argument is that Brazil's consumer credit ratio, currently at 47% of GDP, has contributed to bubbles elsewhere in the economy, including real estate. "All crises in the world were preceded by a credit boom," says Dana.

Asked when he expects property to generate an asset bubble, he says: "It's already happening. Real estate prices have increased in a disproportionate way compared with Brazilian economic growth. With high interest rates in Brazil, you can see from rent value over real estate value that prices are overestimated."

A loss of value on the asset isn't the only risk investors would face if the bubble burst, he points out. "What starts out as a good investment can become something not so interesting," he says. "If there is a devaluation of the real [currency], investors will lose out when they return capital to its country of origin." 

At least on its currency, Brazil has been relatively cautious. Early last year, there was significant speculation that it would make progress toward currency convertibility, until the government in October ruled it out in order to prevent volatility caused by so-called 'hot money' rallying.

(Vitoria Saddi, a partner at São Paulo-based SM Managed Futures, points out that "a currency is the mirror image of the country - and there's a lot to be done in Brazil both in politics and economics. If you travel anywhere with the real and try to exchange it, good luck.")

Still, not everyone is as pessimistic about the Brazilian market. Rudyard Ekindi, head of investment research at NEST, recently visited São Paulo to hold discussions with a view to scouting investments for the scheme's imminent portfolio formation.

Although it's still at the theoretical stage, he points out that the pension scheme will reach a significant scale and have to consider a wide range of asset classes for the purposes of risk management. "That means we have to look at emerging markets, and Brazil is a good place to start," he says.

At a recent Brazil investment summit in São Paulo, Ekindi identified transparency as one of the major issues for pension funds investing in emerging markets. This week, he confirmed his impression of Brazil as a transparent market that is both keen to attract international investors and sufficiently transparent to do so.

"It's an advanced, developed country in terms of its infrastructure, regulation and government," he says. "From our initial discussions, it could potentially meet the requirements we have for investment."

Yet he also points to significant peculiarities of the Brazilian market, notably the disproportionate (though he didn't use that word) size of its hedge fund industry and the fact that much of the market is privately owned. Several operas of large banks, for example, are held either privately or by families - "a very different situation from the one you would find in Europe".
"There are governance implications, and it would require the investor to do due diligence, though the regulatory environment gives us confidence," he adds.

Not only CalPERS but other US investors, when they've invested in Brazil, have done so via joint ventures, such as the recent one between Starwood Capital and MRV Engenhana e Participacoes to invest in industrial.

So would NEST favour either a joint venture or investment via a fund set up in Europe or the US? "Look, I love to make things simple," Ekindi says. "I don't want complications. I'm not going to eliminate any scenario in principle, but the principle has to be simple. If there's an infrastructure project of any scale in Brazil, I want to know about it from the Brazilians."

He adds: "If a fund manager in the US can demonstrate they have the introductions and can add value, why not? But I don't want a US manager who doesn't know any more than a UK fund manager."