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FOR THE WORLDS PRIVATE REAL ESTATE MARKETS

Sponsors:
Equity International
LaSalle Investment Management
Supporter:
UBS Global Real Estate

THE 2014 GUIDE TO PRIVATE REAL

ESTATE INVESTING IN LATIN AMERICA
A special supplement to PERE magazine

NEWS ANALYSIS

Hines readies new

Mexican investments

Most read on

PERENews.com [Latin America]

in 2014

As it prepares to re-invest in Mexico, the

Houston-based real estate investment
firm faces headwinds in both raising and
deploying capital south of the border
Following the $122.18 million sale of a 1.3 million-squarefoot industrial and retail portfolio to Mexican-based REIT
Fibra Uno in February, Hines is gearing up to invest in
Mexico again, with plans to deploy some $250 million in
the country over the next five years.
In an interview with PERE, Palmer Letzerich, senior
managing director and director general for Mexico and
Central America at Hines, noted that the firm had just a
mix of land and retail properties remaining in its Mexican
property portfolio. However, we have the deepest pipeline
weve had in the last five years right now, he added.
Indeed, Hines currently is evaluating some $500 million of investment opportunities in Mexico, ranging from
single-building, build-to-suit office projects and industrial
park developments to off-market office and industrial
acquisitions. In contrast to previous years, the firm plans to
focus solely on the office and industrial sectors, allocating
approximately half of its investment capital to each.
In support of this, Hines, which
has been investing in the country
since the 1970s, is preparing to
launch its largest Mexico-focused
fund yet. It is seeking to raise
approximately $250 million from
Mexican pension plans through
a publicly-listed private equity
Letzerich: gearing up real estate fund, known locally as
a CKD, according to a filing with
the Mexican National Banking and Securities Commission.
The firm made the initial filing in July 2012, but the offering
had yet to go public as of press time. The firm also may raise
additional capital from non-Mexican investors through
joint ventures or co-investment arrangements.
With its current go-around in Mexico, Hines also is shifting away from a purely opportunistic approach. Targeted
net returns are in the 15 percent to 20 percent range, compared with 20 percent-plus prior to the financial crisis.
Hines bid to ramp up its investments in Mexico, however, may be beset with challenges. Raising capital through
CKDs, for one, has become less of a sure bet. Meanwhile,
rising investment volumes in Mexico, fueled largely by the
Fibras, have driven up pricing and consequently lowered
potential returns. This has made it more challenging to
attract capital from US investors, which have noted that
the same mid-teens returns being touted for Mexico can
be achieved on domestic deals without the political and
currency risks.

GTIS EYES THIRD BRAZILIAN FUND

GTIS Partners, the New York-based real estate investment firm,
is preparing its next fund for Brazil. The vehicle likely will be
similar or larger in size than its predecessor fund, which raised
$810.2 million in equity and $93 million in co-investment capital
in 2012.
MORGAN STANLEY AIP FORMS JOINT VENTURE
Morgan Stanley Alternative Investment Partners (MS AIP)
created a joint venture with GuardeAqui to invest R$800 million
($330 million) to R$1 billion in Brazilian self-storage properties
through 2018. The partnership represents MS AIPs first
investment in the emerging property sector in Brazil.
GARRABRANTS NEW FIRM TARGETS FIRST FUND
New York-based Jaguar Growth Partners, led by former
Equity International executives Gary Garrabrant and Thomas
McDonald, plans to launch its first institutional fund within
the year. That fund is understood to be targeting $750 million
in equity.
LASALLE PULLS MEXICAN FUNDRAISE
LaSalle Investment Management decided to end its efforts to raise
$300 million in capital from Mexicos pension plans through
its first listed private equity real estate fund in Mexico, known
locally as a CKD, after originally filing in November 2012.
EI MAKES SECOND COLOMBIAN INVESTMENT
Chicago-based Equity International partnered with Bogotabased Terranum Hotels to buy Decameron, a Colombian allinclusive hotel and resort company. EI struck its first deal in
Colombia in 2011, investing $75 million in Terranum Corporate
Properties, a related entity of Terranum Hotels.
GLPS BRAZIL PLATFORM GROWS TO $1.1BN
Global Logistic Properties has raised an additional R$538 million
($230 million) for its Brazil-focused development joint venture.
The Canada Pension Plan Investment Board and GIC Private
Limited made the follow-on commitments, bringing the total
investment capacity of the platform to $1.1 billion.
CANADIAN PENSION FORMS JV WITH DEVELOPER
An undisclosed Canadian pension plan has committed $250 million to Advance Real Estate, a Mexican industrial real estate
developer, through an asset-level joint venture that would support
development in central Mexico over the next four years.
PROLOGIS EXITS PRIVATE MEXICAN INVESTMENTS
Prologis exited the bulk of its Mexican private portfolio, including
all of its remaining private equity real estate investments in the
country, into Fibra Prologis, a new Mexican real estate investment
trust that completed its initial public offering in June.

THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN LATIN AMERICA | PERE

SPONSOR INTERVIEW | EQUITY INTERNATIONAL

Front and center

Global investment firm Equity International has made Latin America its main focus
once again

quity International (EI) may be one of the best-known

private equity real estate firms in Latin America and
is considered a pioneer in the region, having invested
there since 1999. Fifteen years ago, the Sam Zell-led firm saw
opportunity in Mexico and Brazil as key macroeconomic and
demographic trends converged. Indeed, stabilizing economies with positive government support, together with young,
growing populations and burgeoning middle classes, fueled
demand across numerous real estate sectors.
In the early 2000s, EI amassed a portfolio in Mexico
targeting homebuilding, industrial, retail property and specialty finance with companies such as Homex, Corporate
Properties of the Americas, Mexico Retail Properties and
Credito Inmobiliario. The firm then moved into Brazil in the
mid- to late 2000s, replicating its strategy with Gafisa, Bracor,
BR Malls and Brazilian Finance & Real Estate. As funds
matured and EI exited these companies, the firm expanded
its geographic reach into Asia and Europe, although it always
maintained a presence in Latin America.

A sizable pipeline

Lately, Latin America has become front and center again for
EI. The firms current portfolio includes new investments in
Mexico, Brazil and Colombia, with an eye to extending across
the Andean region, according to Brian Finerty, senior vice
president and co-lead of investments. While it also continues to look at emerging markets in Asia and Eastern Europe,
Latin America accounts for the bulk of its investment activity.
For example, EIs five portfolio companies in Brazil, Mexico
and Colombia currently represent approximately 70 percent
of the firms assets under management, while its two other
companies in Asia make up the remainder.
Now, we see a different story playing out in Latin America,
Finerty says. In the past, the entire region felt like one big
growth engine. Today, each country in Latin America has
more disparate economic prospects. The various countries
within the region are striving to stay competitive globally and
maintain growth projections in different ways, such as signing new free trade agreements and implementing labor and
economic reforms.
The changing economic landscape in Latin America, in
turn, is spurring new opportunities. With respect to our
pipeline, we feel good where its at, says Finerty. Actually, its
probably bigger than it has been in years.
Finerty, who joined EI in 2009, said the firm currently is
evaluating an investment pipeline of more than $1 billion in
the region. The opportunities span Colombia, Mexico, Peru
and Brazil and across property types, including industrial
and retail real estate.

PERU

One of EIs major objectives in Latin America is to expand

6

into Peru, a country that is at an inflection point in its

real estate market in terms of transforming from a forsale market to a for-rent market, according to Finerty.
The firm has identified one local real estate developer
that it considers to be well-positioned to capitalize on
that shift, as well as the lack of affordable housing in the
Peruvian residential market, which historically has targeted the middle- to high-income classes.
There has been very little lower- to middle-income
product, and we think there is a significant opportunity
in that segment, says Finerty. He notes that the Peruvian
government has become much more supportive of policies for low- to middle-income housing, while banks also
have created mortgage programs for this emerging segment of the residential market.

MEXICO

Meanwhile, EI also has re-entered Mexico over the past

year, making an investment last fall in Advance Real
Estate, an industrial developer in the central region of
the country. Within Mexico, one particular area of focus
has been the residential market, where the top three public homebuilders have now either filed for bankruptcy or
are headed toward bankruptcy.
It is the one public area where we continue to see the
most distress, says Finerty. Weve spent and continue
to spend considerable time trying to find the right way
to invest in that. Potential investment strategies would
include restructuring a Mexican homebuilding platform
or acquiring an interest in such a business.

BRAZIL

EI currently is less focused on the Brazilian residential

market, where it already is invested in the homebuilder
Grupo Th. We already have exposure to residential, so
were not as active and looking for additional homebuilders there, says Finerty. Whereas we dont have exposure
in Mexico and I think that the setup is one where our
equity capital is much more valuable.
That said, EI sees investment opportunities in Brazil
as a result of tighter credit markets in the country. The
capital competition is not as severe as it used to be, says
Finerty. And that makes our capital more valuable in
Brazil. I think we can find more interesting entry points
in Brazil now than we have been able to in the recent past.
Despite the countrys economic slowdown, EI still
considers the underlying real estate fundamentals in
Brazil to be strong. For example, it considers the lack of
institutional-quality industrial facilities in the country
to be a potential future play.
EI also has been evaluating opportunities in real
estate finance, where the firm previously had exposure

PERE | THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN LATIN AMERICA

EXPERT COMMENTARY | LASALLE

The best real estate bets in Mexico

In the next few years, investors should take advantage of Mexicos export sector growth
by overweighting industrial and office investments relative to retail and residential.
By Manuel Zapata

ince 2010, Mexicos two main drivers of growth the

export sector and consumption have followed different paths. Manufacturing exports have outpaced private
consumption by more than three times, with an average
growth rate of 13.5 percent versus 4.3 percent, respectively,
from 2009 to 2013. Although the different growth rates are
expected to eventually converge, the strong momentum in
the export and corporate sectors has translated into attractive
investment opportunities in industrial and office real estate.
Mexico has comparative advantages that continue to attract
foreign direct investments. Leading corporations in advanced
manufacturing industries, such as automotive, aerospace and
information technology, are establishing and growing operations in the country, increasing demand for both industrial
and office space. Multi-year investments in these industries
are currently underway, which will help to fuel continued
export growth.
By contrast, retail sales and consumer confidence in
Mexico are lagging but improving at a slow rate. Same-store
sales declined in real terms by 3.7 percent in 2013 and 4.4
percent in the first quarter of this year. Meanwhile, consumer
confidence is 18 percent below pre-global financial crisis levels. In fact, low consumption growth is partly responsible for
driving gross domestic product growth down to its current
low levels of 1.1 percent in 2013 and 1.8 percent in the first
quarter of this year.

Space demand drivers by sector

structural growth rate to at least 4 percent to 5 percent per

annum, according to The Economist.

Real estate capital activity

Over the last three years, domestic real estate capital markets
have deepened considerably. It was just three years ago that
the first Mexican REIT or Fibra for its acronym in Spanish
was formed. Since then, the local REIT market has increased
its market capitalization by more than $6 billion per year.
Today, there are eight Fibras plus two developer operators on
the Mexican Stock Exchange.

Market cap of the Fibras

Source: Bloomberg

In addition, while traditional private financing has been

available since 1994, the public debt market now has become a
reality as well. Fibra Uno, for example, has begun to place debt
in the public market, while other Fibras also are likely to use
that market in the future.
These developments have improved transparency and
liquidity, and that trend will continue as the number of real
estate players in Mexico increases and data series lengthen.
Over time, these developments will translate into lower
property premiums for real estate in Mexico, relative to the
historical average.

The attractiveness of industrial, office

Source: INEGI

These different macroeconomic trends have contributed

to the greater attractiveness of the industrial and office sectors relative to retail and residential. The structural reforms
undertaken by Mexico in 2013, including those in energy,
financial services, telecommunications and labor, are
rivaled only by the implementation of the North American
Free Trade Agreement 20 years ago and will push Mexicos
10

The industrial sectors primary drivers are the advanced

manufacturing industries, which have grown between 7
percent and 7.6 percent per annum over the last five years.
That growth can be attributed to comparative advantages that
those industries have developed in specific markets, as well as
national internal consumption, which has grown in line with
retail sales. Since the mid-1990s, manufacturing exports have
increased 7.6 times, from $41 billion in 1993 to $314 billion
in 2013. As a result, several new industrial markets quickly
developed, in addition to already existing markets such as

PERE | THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN LATIN AMERICA

Monterrey and Mexico City.

Industrial is the deepest real estate sector in Mexico, thanks
in part to corporations forming advanced manufacturing
clusters, like technology in Guadalajara and aerospace in
Quertaro, over the last few years. These companies, moreover,
have developed space needs beyond logistics and manufacturing, calling for office space for their operations as well. This
combination of space needs creates repositioning and development opportunities.
The other beneficiary of corporate sector growth is the office
sector in Mexico City. Mexicos capital is the center of most
high value services in the country. Close to 70 percent of the
500 largest corporations in the country, regardless of their
place of origin and sector, are located there, as are all governmental entities and regulators.
Additionally, there is pent-up demand for higher-quality
office product. As of the second quarter of 2014, the total inventory of Class A space in Mexico City was 45 million square feet.
That supply is relatively small, given the size of Mexico Citys
economy and the office demand that it generates. Net demand
and supply of Class A office space in Mexico City have grown
at an average annual rate of 9 percent and 9.1 percent, respectively, since 2010. During that time, the Class A vacancy rate
has fluctuated between 11 percent and 12.5 percent.
Adding to the appeal of industrial and office is that lease contracts, financing and pricing all are denominated in US dollars.
As a result, investors can benefit from financing terms similar
to those obtained in the US.
Finally, the recently passed structural reforms will drive
investments in energy, telecommunications and several
industrial sectors. As companies expand and new headquarter locations are established, Mexico Citys office market will
benefit from this additional demand for space.

Early in the residential, retail cycle

Mexicos retail and residential real estate sectors, meanwhile,

are less robust than industrial and office. Overall retail
demand, as measured by durable goods sales, has just reached
pre-crisis levels, although the sales of some high-ticket items,
such as automobiles, still have yet to reach pre-crisis levels.
However, several markets have grown considerably faster than
the national average, providing niche investment opportunities such as infill retail centers in primary cities.
In 2014, consumers are facing higher income taxes as a result
of the recently approved fiscal reform, particularly for highincome households that account for more than 40 percent of
the countrys total disposable income. Higher income taxes
affect purchasing power, which in turn reduces the rate of
growth, or new store openings, by retailers.
In the Mexican residential market, which is primarily forsale housing, the amount of money that can be invested in
projects is relatively small. This is because the proceeds from
sales in the first phase typically finance the second phase, and
so on. In addition, lower purchasing power and consumer
confidence have affected the rate of sales, and that affects rates
of return.

The attractiveness of retail and residential sector will improve

significantly once GDP grows above 3.5 percent. At that rate,
the economy generates around 800,000 formal jobs per annum
and wages increase in real terms. In addition, Mexico labor
force growth will outpace population growth, with rates reaching 1.6 percent and 1.1 percent per annum, respectively, over
the next five years.

Choosing investment styles

Given the increasing demand for space in several markets, as

well as improving liquidity, transparency and capital markets
depth in Mexico, LaSalle recommends that investors pursue
value-added and opportunistic property deals in the country. These types of transactions allow investors to achieve a
very attractive yield through repositioning, expansion and
development, while achieving additional capital market gains
through rent growth.
Strong demand for real estate, together with low or moderate vacancy rates, will allow landlords to lease space and
secure growing cash flows. Investors can pursue these strategies with two alternative goals: building to core, which implies
a long hold period; or development and redevelopment to sell
into the deeper capital markets.
With either strategy, investors seeking to commit capital to
Mexico should focus on the US dollar-denominated sectors of
office and industrial real estate at the present time. This will
allow them to capitalize on both the current export growth
trend in Mexico, as well as the countrys structural reforms,
while also offering protection from potential currency risk. In
terms of the real estate opportunity set in Mexico, it may be the
smartest choice that an investor can make right now.
ABOUT THE AUTHOR
Manuel Zapata is head of research at LaSalle
Investment Management in Mexico. He
joined the firm in April 2007 and is responsible for macroeconomic insight, sector
analysis, property market forecasting and
micro-market underwriting for specific assets
in Mexico. He can be reached via email at
Manuel.Zapata@lasalle.com.
ABOUT THE FIRM
LaSalle Investment Management has been investing in Mexico
since 2004 and currently manages more than $1 billion of investments in the country. A real estate investment manager with
more than 30 years of experience and some $40 billion in AUM
globally, LaSalle specializes in providing management services
to a broad range of public and private investors, including pension plans, foundations and endowments, sovereign wealth
funds, corporations, insurance companies and individuals from
across the globe. The firm invests exclusively in real estate and
operates across all major property types and real estate markets
within Europe, the Americas and the Asia-Pacific region. It is a
wholly owned but operationally independent subsidiary of real
estate service provider Jones Lang LaSalle.

THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN LATIN AMERICA | PERE

11

PARTNER FOCUS

Diamonds in the rough

Finding a local partner in Latin America is a lengthy and intensive process,
but taking the time to find the right group can pay off in the form of long-term
relationships. By Katherine Bucaccio

hen investing in Latin America, one of the most

difficult tasks for managers is finding the right
local partner. While a good partner can result in
a longstanding relationship, a bad one can affect the performance of entire funds.
Although it might run counter to the fast investment pace
of the private equity real estate industry, some of the most
active property investors in Latin America advise that the
partnership process in the region is best taken slowly. The
path to building the right relationship requires thorough
due diligence and an in-depth evaluation of compatibility in
order to establish a sense of trust with a partner.
Our view is that a bad local partner can ruin a good piece
of real estate, says Fred Gortner, chief operating officer of
Paladin Realty Partners. Theres no substitute for thorough
partner screening, oversight and controls. And if youre
executing an investment strategy through joint ventures, the
quality of local partners is paramount.
This is especially important in the case of newcomers to the
market, many of whom may cut corners and fall short when
it comes to due diligence and relationship building. There
can be a tendency for first-time funds and newer funds to
just put the money out, and that can really lead to problems
if you havent been actively investing in these markets for an
extended period of time. I would urge patience and being
deliberate in how you go about originating and underwriting
new relationships, Gortner advises.
Getting referrals from other managers, spending time
understanding the local players and market activity and
ironing out any possible conflicts of interest will lead to the
highest possibility for success, Gortner says. Indeed, it is not
uncommon for Paladin to spend more than a year on the process, he notes.
12

Dealing in the dark

The ambiguities and variances in the regions institutional

investment processes make insight from a local partner essential to a newcomer. Francisco Andragnes, head of real estate at
Compass Group, notes that a good partner can help newcomers
get accustomed to the way that a Latin American market like
Mexico functions and the fact that financial instruments and
information on rent growth and projections cannot be obtained
as easily as they can in the US.
Thats the biggest difference between the US and Latin
America. You feel youre operating much more in the dark,
Andragnes says. In that sense, somebody who has been in the
market over time is able to develop better access to information
and has their own proprietary sources. Having them as a partner can help you navigate a market with less light.
While its common to view a potential partner in terms of
the assistance it can provide, the reverse is also important. For
example, in the 17 years that Black Creek Group has worked in
Mexico, principal Jim Mulvihill has seen some success partnering with Mexican landowners because of the benefits that Black
Creek can offer in return.
In Mexico, land is highly sought after and mostly controlled
by wealthy families, Mulvihill explains. Unlocking that value
for them by being a good partner and bringing institutionalgrade real estate development to them is very valuable. Its not
just a sale of the land but a sale in the participation of the upside
of the property.

Pan-regional challenge

While Mulvihill and Andragnes currently focus on Mexico,

firms like Paladin are running pan-regional funds. A broader
focus, however, has the potential to make the joint venture
process more challenging, notes Matt Posthuma, a corporate

PERE | THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN LATIN AMERICA

partner at law firm Mayer Brown.

People say real estate is very local, and thats certainly true
for Latin America, says Posthuma. Every country is different
in terms of its legal and tax regimes and with respect to operating partners. The manager itself, as a first step, really needs to
have people on the ground.
Although there are similarities between Brazil, Mexico and
the Andean region in regards to underlying macro fundamentals and demand drivers, Gortner notes that the financing
schemes for real estate development can vary widely from
country to country. Operating partners rarely work in multiple regions, and there are nuances in the way joint ventures
are structured in each country and the way control provisions
are enforced. Understanding these differences takes time, and
the real key to executing a pan-regional strategy is experience,
he stresses.
Separately, Posthuma notes that its helpful to find local
partners that have worked with international investors and that
have staff who have been educated or worked in the US and who
speak English well. A partner with such a profile will be likely
to better understand and help execute a general partners goals.

timely and intelligent manner to any questions and decisions

that might arise within the joint ventures. In addition, you can
remove the partner and take over the development operations,
if needed.

The good and the bad

Paladin looks for four things in a joint venture partner: integrity and good character; competency in a particular strategy;
the ability to have skin in the game, or a meaningful coinvestment; and an attractive pipeline of prospective projects. A
long-established presence in the market also is critical.
Wed much rather partner with a local development firm
thats been active in a particular market or country for a decade
or more than compete directly with them, Gortner says.
Paladin has been forming joint ventures in seven countries in
the region for more than 15 years. The firm has teamed up with
more than two dozen local operating partners over that period
of time, most of which are still on the roster for current joint
ventures. Ricardo Raoul, a former local operating partner, even
joined the firm last year as its Brazil country head.
Gortner expects that 75 percent to 80 percent of Paladins
fourth fund, Paladin Realty Latin America Investors IV, will be
comprised of new joint ventures with longstandVertical integration
ing local operating partners. The more you repeat
Finding good partners in Latin America can be so
successful local partner relationships like that, the
difficult that some long-established players have
more substantially you reduce the partner risk and
since shifted to vertically integrated platforms.
you enhance the execution of a joint venture busiFor example, Compass for-rent housing platform
ness plan, he says.
does all development and management in-house,
While well-established players are desirable, they
and the firm has its own sources of information,
also are harder to come by. Andragnes notes that
technology and procedures rather than relying on
every market has a handful of well-known players,
third-party systems.
but other potential partners are more difficult for
Meanwhile, Black Creek initially conducted joint
US investors to access and often operate with difventures for its Mexican industrial platform when
it first entered the country more than 15 years ago,
Mulvihill: utilizing his ferent performance standards.
firms own local team
Even some of the largest Fibras in Mexico do
but it has seen greater success in using its own local
not have institutional property management systeams and operating systems rather than allocating
the capital. I hear people insinuate that, without a local partner tems, notes Mulvihill. When evaluating potential partners,
in Mexico, youre not going to be able to get things done because you really have to look at the inherent systems that the company
the corruption is so prevalent, comments Mulvihill. I couldnt has developed and how robust those systems really are.
disagree more.
While investors in Black Creek and Compass investments Avoiding bad experiences
have voiced a preference for this vertical integration, Posthuma The most serious consequences of not conducting thorough
has seen the fees associated with integrated platforms present due diligence is poor investment performance, or the total disissues for investors in the past. He notes that some LPs prefer to integration of the partnership itself. Ive had situations where
keep service providers at an arms length.
clients have gotten involved with people who were really disRightly or wrongly, theres definitely a suspicion on the part honest. They were defrauded by their local partner in situations
of a lot of investors that somehow vertically integrated platforms where they didnt do good due diligence and maybe took the
are charging more fees than they would have with a third-party word of someone a bit too seriously when they shouldnt have,
developer or property manager, he says.
comments Posthuma. From a documentation perspective,
Meanwhile, Paladin approaches the situation from both when youre negotiating your development agreement or JV,
angles. The firm primarily uses joint venture partners, but it also you need to have something that adequately protects you.
has in-house development expertise to do select direct deals.
Adds Mulvihill: Whats unfortunate is that many large instiHaving direct development capability in-house is important tutions have had bad experiences as a result of people allocating
for a couple of reasons: it improves your underwriting and the capital to the wrong partners. Still, that doesnt mean that the
ability to manage and adds immeasurable value to a joint ven- opportunities arent there. In fact, the opportunities are better
ture investment, says Gortner. Youre much more responsive now than ever.
if youve actually been a developer, understand the questions
A good partner takes time to find and cultivate. Once found,
and issues facing a real estate project and can react in a more however, such diamonds in the rough are worth the wait.
THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN LATIN AMERICA | PERE

13

Chuck Bedsole, managing director of the global practice in

the hospitality and leisure group at professional services firm
Alvarez & Marsal, muses that, for all its size and despite all
the euphoria of the World Cup and the Olympics, Brazil is
facing a very tough time from a macroeconomic perspective.
Maybe it is not such a bad thing that they are capital starved
at the moment, at least until they get things settled.
Part of the problem is that it is very difficult to both establish a company in Brazil and subsequently get the money
repatriated, Bedsole says. The currency also is very expensive,
with the Brazilian real overvalued. The return on investment is just not worth it for one deal, he adds.
Currently, the country has a lot of real estate supply in
office, retail and residential, according to Bedsole. The country needs to work through that supply for a long
time before there will be cause for optimism,
he says.

The fourth option is debt. Although Mexican banks currently are very risk averse in terms of residential lending,
mezzanine or debt financing measures can plug that financing gap, Munk says.

Limited to homebuilders

It is important to note, however, that distress in Mexico has

primarily been limited to a few big residential builders. In
Mexico, the industrial, office and retail sectors are not in any
distress, says Munk. Industrial, in particular, is the engine
of the Mexican economy.
Mexico is very vibrant across all asset classes, agrees
Bedsole. In my 25 years, there is more capital there than
ever, both equity and debt. There is private equity, family
office money, investment from offshore and incountry capital.
Some of the countrys large public homebuilders, however, strayed from their core
business and expanded in other markets in
Opportunity set in Mexico
Latin America and other segments such as
Meanwhile, in Mexico, Munk is adamant that
resorts, says Bedsole. Still, the market is sound
the countrys real estate market cannot properly
long term. He notes that investment opportube called distressed in the traditional sense.
nities may come from asset sales from the larger
Distress, after all, refers to situations where valbuilders, as well as investments in smaller develues are lower than debt levels, which does not
opers. Investors also can get involved in debt
apply to most of Latin America. However, from
restructuring.
the perspective of investment opportunities,
Wainer: institutional private
However, Gregorio Schneider, managing
they certainly could be treated like distressed
equity is the only capital
looking to invest now partner and chief investment officer for New
investments, he says. There is a lack of capital
York-based Terranum Capital, asserts: In
among some of the larger homebuilders. That is
Mexico, we do not have distressed projects. We
certainly a distress factor.
have distressed developers because they had
In Mexico, the problem has been a change
a problem with their business model or in its
in the government housing policy, which traexecution. Banks are not lending, so there is a
ditionally had supported low-income housing
lack of liquidity, and developers do not have the
development in suburban or rural areas of
capital to complete their projects. If they can be
Mexico. More recently, however, the rules of
completed, people want to buy.
the mortgage subsidy program were changed to
Consequently, funds like Terranum now have
focus on city or urban projects. This left some of
opportunities to lend to projects to get them
the larger homebuilders out in the cold because
completed. The big public developers have run
they had over-extended themselves on speculative developments far from urban centers.
Schneider: dont write off big into trouble, but the private developers have
developers just yet kept growing, says Schneider, whose firm has
Consequently, many developers have reorgan$236 million in assets under management and
ized, and even homebuilders that remain solvent
are struggling, according to Munk. There are opportunities offices in Mexico City, Bogot and Lima. The private firms,
moreover, have been grabbing market share from the big
to fill the void, he says.
One potential opportunity is direct investments in the builders, which had accounted for 25 percent of the market
struggling homebuilders, which have stocks that may be hard at their peak but now need to sell assets to cover their debts,
to value but are still operating businesses. A second option is he notes.
Still, Schneider is not willing to write off the big develdirect investment in projects. Even if the banks are not lending to the homebuilders or to residential developments, there opers just yet. They are retooling and restructuring. One
or another will disappear, and one or another will survive.
still are good projects that are in need of capital.
A third potential opportunity is for private equity to back The overall economy in Mexico is strong. This creates great
the smaller players and the new ventures that have sprung opportunities now and over the longer term. This is not a secup to fill the gap left by the big developers pulling back. The tor in crisis.
For all the upheaval, however, investors see the ratchet movdevelopers that are not healthy are some of the big publiclytraded ones, says Munk. But there are plenty of smaller ing in a positive direction. The troubles affecting Brazilian
and Mexican developers are not here to stay.
emerging players that remained healthier.
THE 2014 GUIDE TO PRIVATE REAL ESTATE INVESTING IN LATIN AMERICA | PERE

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