Wednesday, June 16, 2010

Colombia is Heating Up: A Real Estate Hot Spot

 Colombia is Heating Up: A Real Estate Hot Spot 

For over twenty years increasing numbers of investors from outside the region have been looking for opportunities in Latin American real estate markets, but only the convergence of various positive factors in the last few years look to have firmly established this exciting and bountiful investment sector.

Underserved real estate markets with large populations and an increasingly wealthy middle class have been the carrots that have attracted the attention of many a real estate investor to Latin America. However, interest often remained just that as investors and developers were discouraged by volatile inflation, precarious economies and indebted governments. Tedious bureaucracy, regulatory barriers, corruption and the lack of reliable local partners were further reasons to enter the market at your own peril.

Whilst obstacles still remain, the property investment scenario in Latin America has changed dramatically during the last few years. The boom in commodity prices have given a huge boost to many of the regions economies. Brazil and Peru have joined Chile and Mexico in gaining investment-grade credit ratings. Improved credit policies have fuelled consumer spending and the purchase of homes, which in turn has seen a rise in demand for retail, manufacturing and industrial space. The major office markets of the region Sao Paulo, Buenos Aires and Mexico City lack class A space so consequently have very high occupancies and consistent rent growth from increasing demand.

Though predicting the future has become increasingly difficult in the current worldwide economic environment, it is generally considered that Latin America will weather the crisis better than some other regions. Through experience many Latin American nations have learnt how to handle downturns in their economies much better. Some governments have built up currency reserves during the commodity boom years to help tide them over as international trade slows down and the regions economies are much less dependent upon credit than most countries around the world.

After consulting leading players in regional real estate sector Alternative Latin Investor found a general consensus that Brazil, Chile and Panama are best placed to face the worldwide crisis. These countries have historically been strong in attracting inward investment and now have internal demands that can provide life to their respective real estate sectors. Mexico has a developing middle class that is creating demand in many sectors not least in real estate, but their economy is closely linked to their larger neighbour and likely to suffer more than other countries further south. Peru and Colombia have both been attracting an increasing international interest and we will look more closely at Colombia later in this article.

Uruguay and Argentina are expected to feel the effects of the downturn more than the earlier mentioned countries. Argentina has been fairly successful at attracting foreign investment, but it suffers from a lack of confidence in the current administration. Uruguay has been attracting some interest in recent years through agricultural and tourism real estate investors, though the country is often affected by the economic climate in neighbouring Argentina.

Venezuela, Ecuador and Bolivia are the least attractive Latin American countries for real estate investors at present. Historically these countries have not attracted significant foreign real estate capital and there are concerns about political instability especially in Bolivia. Venezuela is suffering a drop in revenue as the price of oil remains low, though the previous boom has left its legacy in the form of inflation above 20%.

Nathan Weber, managing principal at Latin America Realty Partners  has been involved in Latin American real estate for over five years and thinks the sector is showing very good conditions for the present and future “What I have seen in the five years I have been in the business is that there have been a significant amount of funds with dedicated capital to invest in commercial real estate in Latin America. I would say there are a lot of very intelligent people in this asset class in this geographic region for a couple of reasons: - one, you have great demographics in almost every country except say Venezuela and Bolivia. For the last seven years we have seen standards of living rise and newly formed middle classes. Middle classes drive an economy and subsequently drives real estate development.”  And Webber says that the sector looks set to grow well into the future “I think its really attractive too because there is something like a 20 million unit shortfall of housing for domestic markets throughout Latin America, so residential communities targeting the middle class is something that is very attractive. Even in the current economic climate people need a place to live.... so that has been underserved and we see a lot of investment going into that asset class right now.”  During an exclusive interview with Alternative Latin Investor, Nathan Webber told us that in his experience the market draws from investors mainly located outside the region “sixty to ninety percent of investors in commercial real estate in Latin America were foreigners, the majority of that coming from the US, Canada and some European and middle Eastern money. That money was deployed primarily through private equity funds and through traditional investment banking firms.”

Whilst its generally agreed that the Latin American region is better placed than most regions to face the economic downturn Nathan Webber says that the Real Estate sector has been affected “I look at our markets now and its really hard to do a deal whatever your doing. My four main markets are Colombia, Brazil (Brazil being by far the largest) and Mexico and we do some work in the US. What we have seen in our market is that many of the traditional players and investors have withdrawn completely or retrenched and are not investing and trying to figure out a strategy. Who is investing right now are private equity funds that have dedicated capital to invest in Latin America. In terms of what those funds are seeking, you are looking at close end funds 5-7 years, capitalized. The average size is US$200 million all the way up to over a billion dollars. Those type of investors, 5-7 closed funds are seeking, after internal tax, rates of return of about 25%.” However whilst conditions may be tough for deal making at present, Webber told Alternative Latin Investor that Colombia should be top of the radar for those entering the market “I think Colombia is a hot spot right now, they have a large undersupply of commercial real estate, their security situation has vastly improved. It’s a great regulatory business framework... very similar to the US as far as actual legal code.”

Colombia's central bank chief Jose Dario Uribe said the country's economy may expand 1 percent next year in the "worst case scenario" due to turmoil resulting from the worst credit crisis in 80 years. Growth may decelerate to 1 percent to 4 percent depending on how the global slowdown affects consumer confidence, capital flows and exports to the U.S., Venezuela and Ecuador, Uribe said at the bank's quarterly presentation in Bogotá. The economy may slow to 3.5 percent in 2008 from 8 percent last year. "We can't say exactly what will happen," said Uribe, adding that inflation will ease in an "important way" in 2009. “Adding monetary policy has helped Colombia face the shocks we’re seeing from the global crisis.”  The central bank Chief says the banks’ next decision would be to cut interest rates, without giving a time frame.

Surging consumer demand in Colombia since President Álvaro Uribe took office in 2002, pledging to make the nation safe from drug-funded violence, helped drive the US$172 billion economy last year to its fastest expansion in decades. According to the World Bank, Colombia was ranked second only to Chile as a place to do business in Latin America. At the end of 2008, the investment rate was 26.5% of GDP. The Banco de la Republica (Colombian central bank) say that foreign direct investment grew 26% when compared to the same period in 2007, going from US$ 6,772.5 million to US$ 8,537 million. Oil and mining industry investment grew by 30% from US$ 4,520.4 million to US$ 5,884.2 million. Whereas investment in other areas increased by 18% going from US$ 2252.1 million in 2007 to US$2652.8 million in 2008. The number of tourists that visited Colombia has doubled since 2002, from 661 thousand travelers to 1.4 million in 2008. Between 2007 and 2008 the number of tourists grew by nearly 10%, fives times more than the overall world growth of 2%.

Amaury de Parcevaux is First vice-President and Marketing Director of Falcon Real Estate Investment Company, which was founded in 1991 by former Chase Manhattan Bank real estate experts Howard Hallengren and Jack Miller. Falcon has a focus on non- US investors, those being institutional, private banks, family offices, hedge funds and wealthy individuals domiciled outside the US. Amaury says that Falcon have structured an umbrella fund based in Luxembourg that offers investors different options in Latin America “our fund gives people the choice of either investing in Argentina, Colombia, Brazil or the US in commercial real estate or an Agri fund, which will invest in Uruguay, Argentina and Brazil.”  The investor base for the fund is heavily focused on European countries such as Germany, France, Spain and the UK, with over 80% institutional fund participation. However, whilst Europe has dominance in the fund at present, Amaury would like to widen its client base “We are also trying to target Colombian pension funds in Bogotá and also the Chilean family offices and venture funds. We also have a fairly large marketing effort in the Middle East were we have been since 1991. We have some very large clients there who have historically invested in the US with us and since we started working on those Latin American markets they have expressed an interest to go there as well.”  While Amaury is looking to expand the geographical spread of his clients he feels that the umbrella structure of the Falcon Latin America fund is proving to be a good selling tool. “Every investor can access one of the five sub funds for $250,000 dollars and up, so there is clearly an interest from the flexibility of this choice. A lot of those commercial funds, especially the ones investing in Mexico and Brazil are usually targeting institutional investors and have minimums anywhere from US$5 to US$20 million. So when you tell people, look, you have a shot at a diversified fund in one of those Latin American countries from US$250 thousand there is definitely an interest. Of course between an interest and a firm commitment there is a bit of a delay sometimes given the environment today. It’s not entirely easy to raise money, but we’re hopeful we will be able to launch at least a couple of those sub funds within the next 3 to 4 months.”

When asked by Alternative Latin Investor to elect a “hot spot” in Latin American real estate Amaury finds the opportunities offered by Colombia difficult to ignore, but explained that it can be difficult to alter the perceptions clients have of the historically troubled South American country “I think its very interesting to see the Europeans… lets say the French who have a very negative image of Colombia, and when you mention launching a fund in Colombia they look at you thinking…. you must be mad!…there is no way we are going to be investing in Colombia. With Betancourt already having been abducted you want us to go there”. However, whilst some may need convincing that Colombia has changed drastically Amaury de Parcevaux does not “when you talk to people who really understand Latin America they really usually favour Colombia because its one notch below investment grade. It has had a fabulous comeback with the security today and also in terms of economic growth, they have not had negative growth for something like 15 years except for 1999, so it’s a really well managed country.”

(ArticlesBase SC #1598828)

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