quinta-feira, 12 de maio de 2011

Brazil’s “Quiet” Real Estate Boom (Forbes Blog)

Spend an hour talking with Alpine Woods Capital fund manager, Joel Wells, and he’ll turn you into a true believer. There’s the obvious story everyone following Brazilian real estate has been hearing since 2005 — housing prices are rising, interest rates are at historic lows, the middle class is the majority of the population for the first time ever and they have money to burn.

There’s more to Brazil’s real estate narrative than government low-income housing programs like My Home, My Life driving much of the market interest in names like Gafisa (GFA) and Cyrela Realty (CYRE3).  Major private equity firms are investing in hospitality companies rumored to have brand namers like Warren Buffet chasing them down for a possible stake. Shopping mall operators like BR Malls (BRML3) are raising capital in secondary offerings, and investors are oversubscribing to new issues.

Quiet? Yes, because many of these companies are thinly traded on the BM&F Bovespa exchange in São Paulo. And their growth prospects on the commercial side are largely being managed by discreet private equity guys, operating out of the limelight.

BHG Brasil Hospitality Group (BHGR3) is one of those guys. It started out as a company called Invest Tur, buying up a lot of property along the shore of Brazil’s northeastern tourist states. They also ran a resort-type hotel called Txai, which they had hoped would become a five-star luxury brand in Bahia, Brazil’s beach resort state. “The problem is, these guys had the land, and the ideas, but no infrastructure, no roads. How were you going to get to these places? Their luck changed when they met private equity firm GP Investments. In Brazil, this is a huge name,” he says. “GP injects the company with its small Golden Tulip hotel brand, which it rented from Starwood (HOT). They changed the name of the company to LA Hotels. LA being Latin America. But then they realized that it would be wiser just to focus on Brazil, and it become BHG. They’re buying and building mid-sized hotels in underserved cities and will raise capital in either September or October in order to develop that pipeline of properties. Right now, BHG is not very liquid, but later this year we are going to see a major liquidity event for this company.”

BHG is growing fast. On March 22 it completed its acquisition of Brascan Imobiliaria Hotelaria e Turismo and is now the proud owner of the InterContinental hotel in Rio de Janeiro, home to the 2016 Summer Olympic Games. It’s made BHG the third largest name in hotel development in Brazil.
Brazil’s hotel industry is fragmented. Of the roughly 7,000 hotels and inns spread out across the country, 60% are family owned, according to a study from the Brazilian offices of global real estate consulting firm Jones Lang LaSalle. That leaves a lot of room for consolidation, says Wells.

BHG plans on building and buying hotels in second and third tier cities like Manaus in Amazonas state, a city of over 1 million in the heart of the rainforest. Other underserved markets include big agribusiness states like Goias and Minas Gerais, or wherever the FIFA World Cup will be heading in 2014 when it plays at arenas spread out around Brazil in lesser known cities like Natal in Rio Grande do Norte to Curitiba in Parana in the deep south.

“The question is whether or not GP can manage this and I think they can,” says Wells. The other side of the story is that everyone is catching on to the growth story in Brazilian hospitality development. “Everyone knows there’s a space deficit. You’ve got Hilton looking. And there’s a space of about four to five years to get it done right, build your brand, monetize it in a fund structure or something like that and then when the time is right…walk away.”

The emerging market real estate world is not a new one for Wells, nor Alpine. The $549 million Alpine International Real Estate fund (EGLRX) has been around since 1983 and entered the emerging markets in 1988. Today, that fund is around 45% weighted to emerging market properties from Russia to China. Wells managed that fund with Samuel Lieber. It’s up 88% over the last 10 years and 1.88% year-to-date ending March 11.

“We thought we should have a pure play emerging market real estate fund, too,” Wells says. Alpine launched its Emerging Markets Real Estate Fund (AEMEX) on Nov. 3, 2008 with its own capital. All told, Alpine has around $2 billion in real estate holdings spread out across 30 nations.

For Wells, emerging market real estate will benefit from burgeoning consumer demand and ever more sophisticated capital markets in a part of the world whose share of global GDP will overtake that of the US and Europe within a decade, according to the World Bank.

Within the universe of emerging market real estate, Brazil is a shining star. “I like to look at management of these companies and a lot of my particular favorites come from the private equity world,” Wells says. He likes to follow the tracks of GP Investments, which also owns part of shopping mall developers BR Malls. US real estate magnate Sam Zell also owns a stake. BR Malls has grown through greenfield development and acquisitions and “if you look at the six big mall developers right now, they are very capable. BR has enormous liquidity. I know their CEO Carlos Medeiros very well and, once again, he is someone who comes to this from private equity.”

That’s what makes the real estate boom in Brazil so ”quiet”. Venture capital and private equity firms are some of the main participants building this market out, and private equity tends to be a tight knit club of investors-in-the-know. Wells wants to position Alpine in that crowd, rather than just stock pick property developers based on forward multiples and price to book ratios.

“Quiet” is the inside track, or as inside as one can legally get.

It’s not that Brazil’s super mall companies are secretive. They’re not. They’re are liquid. In big states like São Paulo, they are indeed household names like Iguatemi (IGTA3). It’s an upscale and huge mall built on the side of a very busy avenue in the Itaim neighborhood of ”Sampa”, what the locals call São Paulo.  Iguatemi is another buy and hold for Wells. It accounts for around 2% of the emerging markets real estate portfolio. It’s listed under Novo Mercado rules on the Bovespa exchange, which require a 25% payout in dividends to shareholders.

“With Iguatemi you are getting growth today, then you’ll get income in the future and maybe a take out,” Wells says about a possible acquisition of the company by a multinational at some point in the future.

“We are positioned up and down the pay scale for shopping mall developers, from Multiplan (MULT3) to General Shopping (GSHP3), but it has become clear to investors here in the US that BR Malls is the horse to ride in this derby,” says Wells.

Real estate prices in Brazil aren’t cheap.  Residential properties in São Paulo can go for double that of similar sized residential properties in Miami or Las Vegas. The residential boom is mostly being fed by a government program to provide below market rate loans to developers building properties that can sell for under R$140,000, or $86,956. Home buyers in turn can get below market rate loans from government banks like

Caixa Economica Federal. For many, the program has made housing affordable in a country growing richer by the year.  Since it launched in 2007, it’s been the strongest fundamental behind a number of home builders.  In the commercial and retail space, companies like BR Malls and BHG, stand to benefit from the changing realities in Brazil.  Those changes include a relatively stable to stronger currency, historic low unemployment, 4% low-end GDP growth estimates for 2011, rising to 5% in 2012, and increasing salaries.  If Wells is right, his investors might just benefit as Brazil builds to suit its lifestyle. That might mean that sooner than later Brazil’s real estate investment trade might actually get noisey.


Kenneth Rapoza

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