NYC players buy up Brazil

Until a few years ago, Brazil was but a Plan B among America’s real estate investors. Now they increasingly view South America’s largest nation as a lucrative, and safe, haven for commercial property investment.

“Brazil is a democracy, Brazil has a free press, Brazil elected a left-wing president back in 2002,” Hines Interests senior vice president Doug Munro told The Real Deal by phone last month from his São Paulo office. “Brazil [now] has control over its inflation concerns of the past. In the 1980s, Brazil was just a basket case in terms of the management of its economy.

“Finally,” he said, “the demographics of Brazil look very similar today to the United States in the 1960s, where [there’s] growth in consumerism [and] increases in salaries — all that was going on and allowed people to build wealth.”

In recent years, Brazil has seen rapid commercial and residential development, driven by low interest rates and the nation’s plan to host the 2014 World Cup and the 2016 Summer Olympics. This steady economic growth, particularly the newfound spending power of its citizens, has attracted more U.S. real estate investors, many of them with strong New York ties.

And while there are always concerns over Brazil’s history of hyperinflation, these investors mention the nation of 195 million residents in the same breath as India or Russia — even China — in terms of potential for returns on investment.

In fact, according to a survey released last month, members of the Association of Foreign Investors in Real Estate voted Brazil the second-best nation for real estate investment — behind only the U.S. Among emerging markets, Brazil was voted No. 1 for the second consecutive year, ahead of China, India and Russia.

Investment by New York–related firms began in the late 1990s, but has increased rapidly in the last few years, partly because the Great Recession wreaked such havoc on the American and European economies.

No more ignoring

As a panelist at a Bloomberg Dealmakers Summit in September, Related Companies president Jeff Blau said the Manhattan-based developer is considering opening an office in Brazil.

“You can’t ignore these markets, given the slowdown in the U.S.,” Blau said. (A Related spokesperson said last month that there was no news regarding a Brazil office.) Even New York City–based residential real estate firm Rapid Realty said it’s considering opening an office in Brazil (see related story on page 30).

Meanwhile, Tishman Speyer, which has long invested in Brazil, is also ramping up its investments. The New York firm owns interests in 17 commercial properties in the country — eight of which are either under construction or recently completed. Tishman’s holdings include the 46,200-square-foot Virtus and the 328,000-square-foot Ventura, both office towers in Rio de Janeiro; the Fascination Penthouses, twin apartment towers in São Paulo; the nearly 23-acre Castelo Branco Office Park in the same city, which is slated to have six office towers and a retail component; and the 279,000-square-foot Green Towers commercial building in Brasília. The firm, through a spokesman, declined to comment.

Tishman is not the only major New York owner invested in Brazil.

Sam Zell’s Equity International has invested in the largest mall owner in Brazil as well as in hotels. The firm is based in Chicago, but is heavily invested in Manhattan.

Meanwhile, the Carlyle Group in 2007 took a major stake in Scopel, a Brazilian developer of low- and middle-income housing, and raised nearly $1 billion for a South American investment fund last year. The private equity giant seems to have pulled away from Brazil for the time being, after being one of the first to become more heavily involved as the recession hit the U.S. and Europe. (Carlyle declined to comment.)

Even the California Public Employees’ Retirement System (CalPERS) has gotten in on the action, investing $95 million in a $100 million Brazilian investment fund with Hines in 2005, reaping a $160 million profit from it when the fund was closed in 2011. A CalPERS spokesman said the system is considering other investments in South America, but declined to discuss specifics.

Although exact figures are not available, Hines, indeed, may be the largest U.S. commercial real estate investor in Brazil.

The Houston-headquartered firm — which has several Manhattan properties, including the condo 40 Mercer, the Lipstick Building at 885 Third Avenue, the planned MoMA tower on West 53rd Street and 56 Leonard Street, where it’s partnering with the Alexico Group — entered the Brazilian market with an initial $500 million investment in 1998. Interest by big manufacturing and service firms (most of Brazil’s new jobs lay in the service industry) spurred Hines’ entry.

“Hines decided to follow those companies, and try and build real estate for them — office, logistics and, in some cases, expatriate housing, that kind of thing,” Munro said.

At least that was the initial reason. Now Hines invests because of the promise of Brazil’s economic growth. The firm not only launched the fund with CalPERS, but also owns or manages 22 properties, mostly in São Paulo and Rio de Janeiro, and mostly office buildings, including the 90,000-square-foot Coca-Cola headquarters in Rio de Janeiro; and the massive (relatively speaking for Brazil) 481,804-square-foot Panamerica Park, an office hub for São Paulo’s tech industry.

Equity International, by contrast, has always invested in companies, rather than in assets. Equity’s biggest Brazil investment so far was a stake in the country’s (and Latin America’s) largest mall operator, BR Malls. It sold 18.2 million shares of it in 2010, pocketing $245 million while retaining a small stake.

Last year, the company invested in GuardeAqui, a private self-storage company. Other companies Equity International has invested in recently include AGV Logística, a private logistics company; Brazilian Finance & Real Estate, a private specialty finance company, including real estate finance; and Bracor, a private assets-outsourcing firm.

“What we see in Brazil right now is a lot of the things that we like about the countries in which we invest in,” said Brian Finerty, a senior vice president of investments at Equity International. “We always go back to these key criteria for a country, which are: emerging middle-class, growing consumerism, large housing deficits, large population sizes … [and] some semblance of a financing market.”

A free-spending class

The macroeconomic news from Brazil is seemingly good. In 2010, the country’s gross domestic product grew by its highest rate ever — 7.5 percent. And while it slowed in 2011, it still grew by around 3 percent. Meanwhile, the unemployment rate, now at about 6 percent, is lower than the current rate in the U.S. Finally, the projected inflation rate has slid steadily since late last year to around 5 percent, while home prices have risen year-over-year since before the Great Recession.

Not surprisingly, given these favorable economic indicators, Brazil’s commercial hubs boast vacancy rates that would make Manhattan landlords envious.

In São Paulo, Brazil’s business capital and largest city, the vacancy rate for high-end office space was 7.4 percent by the end of the third quarter of 2011, according to Jones Lang LaSalle’s most recent figures, slightly lower than the quarter before. In Rio de Janeiro, the second-largest city, the real vacancy rate, taking into account signed contracts for leases, was a paltry 4.4 percent by the third quarter’s end.

The average asking rent for both cities’ top space was around $70 to $80 a square meter per month, Jones Lang LaSalle said.

How long can such growth continue? It might depend on Brazil’s emerging-market competitor and top trading partner: China.

“If China has a slowdown, Brazil could be impacted,” Munro said. “Will it go on forever? No, but it appears to have at least 10 years of moderate-to-good growth ahead.”