By James Hoeland ’13
South America’s leading economy and one of the most intriguing markets for global real estate investors was the destination for this year’s Columbia Business School Real Estate Association international study trip. From March 16 to 24, twenty-eight students and two faculty members traveled to Brazil, meeting with more than a dozen financial institutions, government organizations, and real estate developers, investors, and service companies in Sao Paulo and Rio de Janeiro to gain a sense of the market landscape and understand how companies are approaching current opportunities.
Following a period of hyperinflation and serious economic tumult during the 1970s and 1980s, newfound political stability starting in the mid-1990s enabled Brazil to foster a much more favorable environment for economic development and investment. The ensuing growth put Brazil on the map as an attractive market for global investment capital, with the country notably being included alongside Russia, India, and China in the so-called BRIC nations. From a real estate perspective, Brazil’s population of nearly 200 million, large demographic bonus, maturing debt markets, high consumer propensity to spend, and relatively limited foreign capital inflows have combined to create a wealth of investment opportunities.
The trip started off in Sao Paulo with an overview of Brazil’s economy and credit markets by Itaú, a leading Brazilian bank. A key point from this meeting that would reemerge repeatedly was that Brazil’s credit markets for real estate are still in the very early stages of development and are only slowly opening. As an illustrative comparison, whereas mortgages amount to 74 percent of GDP in the United States, they total only 6 percent of GDP in Brazil.
This was followed by an in-depth overview of Brazil’s real estate market and landlord-tenant dynamics in the office and retail sectors by Cushman & Wakefield, an international real estate service provider. From there, the group met with international development firm Tishman Speyer, founded by Jerry Speyer ’64, and toured one of the company’s newly completed Class A office towers in Sao Paulo’s central business district.
Also in Sao Paulo, the group met with developers Gafisa, Odebrecht, and GTIS, and had the opportunity to visit one of GTIS’s high-end residential developments as well as a stunning hotel project that had fallen into distress, which GTIS was in the process of acquiring. The wide range of projects and product types being developed by these companies — from GTIS’s luxury housing to Gafisa’s modular affordable housing, and from Odebrecht’s massive speculative office developments to GTIS’s build-to-suit warehouse properties — demonstrated the extreme breadth of opportunities in the Brazil market.
In addition to the development firms, the group met with Sao Paulo-based real estate investors Hemisferio Sul Investimentos, Patria, and Bracor. These firms provided overviews of their investment approaches and examples of recent deals. Each emphasized shopping malls and triple-net-lease credit tenant properties as favored investment strategies in the current market.
Rio de Janeiro
About halfway through the week, the group left Sao Paulo for Rio de Janeiro, with its leisurely, oceanside ambiance. Here too, the group had the chance to meet with a diverse set of companies and government organizations. The first was a two-part meeting with IBM, which introduced its innovative “Intelligent Operations Center for Smarter Cities” system prior to the group traveling to the Operations Center of the City of Rio to see it in action. IBM developed this integrated city-wide monitoring and response network to help cities operate more efficiently. Its features include an executive dashboard allowing government departments such as public safety, transportation, utilities, and emergency management to monitor the city in real time, gather data and citizen feedback, and mobilize response teams when necessary. At the Operations Center, large teams of city workers were monitoring everything from traffic congestion to power supply to an emerging protest forming at a downtown intersection. The level of integration among the different government departments and the resulting volume of data that can be gathered and analyzed through this system represent firsts in the world and could provide a new model for city management.
The group also visited Porto Maravilha, the government organization leading the massive redevelopment of Rio’s old port into a modern commercial center for the city including Class A office, retail, and lifestyle amenities and residential towers. With multi-billion dollar road and tunnel infrastructure projects already under way, Porto Maravilha has begun selling land parcels to private developers. Companies who have acquired development rights in the district include Tishman Speyer, GTIS, and the Trump Organization, providing strong momentum for the development of an international-quality business district in Rio.
In Rio, the group also met with BR Malls, one of Brazil’s most successful shopping mall developers and owners. The talk here helped contextualize the strong demand for retail investment that the group had encountered repeatedly during the trip: Despite the strong consumption culture in Brazil, the amount of built retail area per person is one fiftieth that of in the United States. As a result, there appears to be ample room for shopping mall development, particularly in smaller cities, to fill unmet consumer demand.
The group’s final meeting was with AECOM, the global architecture and engineering service company that is overseeing the design and development of Rio’s Olympic park. The presentation highlighted many of the important considerations surrounding the design of infrastructure and buildings for such a high-profile event, including how the schedule of events impacts the choice of location for specific stadiums and facilities within the overall masterplan. Having done the masterplan for the 2012 London Olympics complex, AECOM is drawing extensively upon its prior experience to ensure a smooth and successful event in Rio.
While the meetings highlighted Brazil’s vast opportunities in the real estate sector, several key challenges that the sector is facing also emerged.
Infrastructure: Transportation infrastructure in particular has not kept pace with Brazil’s rapid economic growth. For cities such as Sao Paulo and Rio de Janeiro to enhance their competitiveness and continue to attract talented workers and investment capital, more efficient transportation systems, including greater access to mass transit and higher-capacity roadways, will be necessary.
Credit Markets: As indicated previously, Brazil’s credit markets are still at the very nascent stages of opening to the real estate sector. Lending to for-lease commercial projects is especially limited, as banks prefer the security of pre-sales offered by residential condo or strata-sale commercial projects. This has severely constrained the development of institutional-quality product.
Institutional Investors: Domestic pension funds and insurance companies have not traditionally invested in Brazilian real estate due to the legacy of high bond yields resulting from rampant inflation. Similarly, foreign institutions have a limited presence in the sector, as they have traditionally been at a disadvantage compared to smaller, local players who know the region and can make decisions very quickly. While institutional capital flows to the real estate sector have been rising, for Brazil to develop a high-caliber, institutional-quality real estate market, local institutions will need increased sophistication in their appetite for real estate investment, and foreign investors and developers will need to continue acclimatizing to the country’s investment environment.
The group gained a tremendous amount of insight into the Brazilian real estate market in just one week. Special thanks to student organizers Carlos Glender ’13, Martin Kielmanowicz ’14, and Andrea Sulyanto ’14 for leading the trip and organizing a great lineup of companies and site visits, and to trip co-sponsors the Jerome A. Chazen Institute of International Business and the Paul Milstein Center for Real Estate. Students were accompanied by Lynne B. Sagalyn, Earle W. Kazis and Benjamin Schore Professor of Real Estate and Director of the Paul Milstein Center for Real Estate, and Leanne Lachman, Executive-in-Residence at the Paul Milstein Center.
Top photo: 2013 REA/Chazen Trip participants visiting Odebrecht’s Parque da Cidade development project (Andrea Sulyanto ’14). Lower photo: View of Sao Paulo’s emerging Morumbi/Berrini business district, with the city’s sprawling skyline in the background (RB Benson ’13).