US investment firms are setting their sights on the Brazilian real estate market, lured by economic fundamentals.

SAO PAULO — From the middle-class residential market to the A-class office space segment, the real estate sector is going through a period of intense business activity that has not been seen for a long time. The lasting decline in domestic interest rates coupled with low inflation and high liquidity in the international capital markets have led investors to take a closer look at the giant Latin American market.

Those who had injected a large amount of cash in Mexico in the beginning of the decade are now keen on seeing Brazil as their next big move.

“It’s really like a tsunami coming,” says Paul Weeks, head of capital markets at Cushman & Wakefield in São Paulo. “For years and years, we have been waiting for foreign investors. In the past six months, they have been coming like in a tidal wave. There is so much money coming in this country.”

SAM ZELL BUYS

Take Sam Zell. The U.S. billionaire has recently gone on the shopping spree after selling Equity International at home. In a few bold moves, he has already won back its initial bid, such as in the transaction with Gafisa, a high-profile building company in São Paulo. Only months after he bought a 32 percent stake for $55 million, he reduced it to 27.7 percent and got his money back. He then acquired a 14 percent stake in Ecisa, the owner of seven shopping malls in the country, which he later increased to 55 percent in partnership with GP Investimentos, a local private equity fund. Last June, he launched his most ambitious move with Bracor, a joint venture with a local investor, Carlos Betancourt. Bracor initially planned to invest $200 million in industrial and commercial buildings, but it already intends to spend another $120 million within two years.

Investors who have had a taste of the Latin American potential in Mexico are now increasingly turning their attention to Brazil, as the economic fundamentals look sound enough.

”Sam Zell is a bit like Bill Gates,” Week says. “When he goes into the market, people usually follow him like sheep.”Credit Suisse, Lehman Brothers, Bear Sterns, Merrill Lynch are all ready to step in, he says.

MORGAN STANLEY FUND

And Morgan Stanley Real Estate has just launched a $200 million fund focusing mainly on the residential segment. Foreign investors were also responsible for 75 percent of the funds that were raised as part of last year’s eight IPOs in the sector, including Gafisa, GP Investimentos, and São Carlos Empreendimentos e Participações.

Significantly, GP announced the launch of a new company, BR Properties, on January 2nd, in partnership with Banco Safra and foreign investors (Lehman Brothers Real Estate Partners, Sandell Asset Management, Tudor Group, Talisman Fund and The Peter Malkin Family and Belfer Management). The company, which is to focus on commercial office space, has an initial capital of $25 million that is due to be increased to $100 million at an unspecified date.

Meanwhile, São Carlos has already been responsible for one of the largest transactions in the commercial market. The company, which was launched by Jorge Paulo Lemann, Carlos Alberto Sicupira and Marcel Telles – the owners of the popular retailer Lojas Americanas – acquired almost half of the Eldorado Business Tower, a 32-story state-of-the-art building being built in São Paulo.

Foreign investors will increasingly seek to control entire buildings, according to market analysts. With a 14 percent vacancy rate in São Paulo, the main office market in the country has now recovered from the crisis of the past five years (in 2005, the vacancy rate hit 20 percent) and is now ready for take-off. Prices of A-class office space are still only at the level they were in 2000, but they should keep on increasing as the vacancy rate is expected to fall again this year.

Source: Latin Business Chronicle

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