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DEVELOPERS EYE LATIN AMERICA'S PENSION FUNDS

By María Bird Picó

Foreigners investing in Latin American retail real estate are frequently backed by the equity of international pension funds hungry for higher returns in emerging markets. Meanwhile, the region's own pension funds are often denied access to those same opportunities.

Just ask Peruvian mall developer Roberto Persivale. Peru's pension funds hold a monstrous $25 billion, but REITs have seen little of it. Peruvian law tosses REITs and publicly traded stocks into the same investment category. Given the restrictions on the amounts the funds can allocate to any one category, REITs have lost out to the booming stock market. The mall industry, meanwhile, keeps lobbying to have real estate investment placed in its own category.

“Peru still has a long way to go,” said Persivale, a partner in Lima, Peru–based Asesorandes, a mall development firm that spent a year trying to set up a Peruvian REIT, without success. “It is a shame that there are so many brakes that block investments of this capital in our industry. There is no reason why, with a strong local pension system, our industry has to solely rely on foreign investment.”

Latin America's relatively young pension funds are growing at a fast clip, but few are major players in retail real estate, except in a handful of countries. More than half of the region's pension fund assets are invested in public debt. Little wonder that developers are salivating. Fourteen Latin American countries held $471 billion in pension fund assets between them as of June, according to the Santiago, Chile–based International Federation of Pension Funds Administrators. Brazil alone had $203.1 billion, followed by Chile, with $100.6 billion and Mexico, with $81.9 billion.

These assets, which grew 44 percent from June 2006 to June 2007, are set to expand further as more countries create private retirement savings vehicles and pass laws making such savings compulsory.

Many countries allow pension funds to invest in real estate, but most lack some of the mechanisms to make REITs attractive to them, according to Paulo Gomes, vice president in charge of Latin American research and underwriting at Prudential Real Estate Investment.

“Pension funds are ideal for our mall industry because they are not anxious investors and look to invest for the long term,” said Marcelo Zuliani, retail director at the Buenos Aires, Argentina, office of Colliers International. Argentinean real estate developers are lobbying for legislation that will allow pension funds to diversify their investments, now allocated mostly into fixed-income securities. Argentina's pension funds have grown apace since the economic crisis early this decade and the subsequent currency devaluation that prompted many Argentineans to set up retirement accounts overseas, says Zuliani.

In Venezuela, meanwhile, the government runs the pension system, so any prospect of tapping this source for development is a long way off, says Venezuelan mall developer Mario Castro. The picture is brighter in Brazil, Chile and Costa Rica, which boast mature, well-structured pension systems with access to retail real estate. The same is true of Colombia, where pension funds have enthusiastically invested in real estate since the creation of that country's first REIT last February.

REITs have propelled rapid development in Costa Rica over the past three years, says José Chavarría, president of Costa Rica–based Mega Development, which owns three malls, including the Heredia-based Paseo de Las Flores, in which one Costa Rican pension fund holds a 10 percent stake. Pension funds are an attractive alternative capital source to banks, says Chavarría. “We are conservative developers and prefer to sell a portion to a pension fund administrator than expose our company to a large debt.”

Chile was the first Latin American country to launch pension reform, back in 1981, moving to a privately managed, fully funded system of individual accounts for beneficiaries. It has become a model for the region. Subsequently, Chile's pension funds have become active mall investors. The AFP Provida pension fund, for instance, has a 6 percent stake in Parque Arauco, a Santiago-based mall developer and administrator. The fund has also invested in bonds issued by Parque Arauco and by Cencosud, another Chilean mall developer that used the proceeds to build Alto Las Condes, a Santiago mall.

Generally, Latin American pension funds are free to invest in all economic sectors, but shopping center investment must be done through a trust. This type of structure is complicated, says Joaquín Cortez, Chile-based director of investments of Spanish bank BBVA's Latin America pensions and insurance unit. Thus, BBVA has no retail real estate investments in the pension funds it administers across the region.

In Brazil pension funds were a major source of financing for retail real estate during the 1980s. But that role was minimized starting in the early '90s, when the government reduced the percentage of assets that pensions can allocate to malls. “The government wanted the funds to finance more of the public debt,” said Paulo Stewart, president of São Paulo–based mall developer Saphyr. “In 1995 pension funds could invest up to 15 percent of assets in malls, but the percentage was gradually reduced until reaching today's 7 percent. The government wants to further reduce that percentage because of the booming stock market.”

Stewart estimates that Brazilian pension funds own about a quarter of that country's shopping centers. “Because of restrictions in capital access, we were forced to build one shopping center at a time even when we knew there were good markets for more.”

REITs have not taken off at all in Mexico. In 2003 the government created FIBRA, a type of REIT structure that was supposed to be modeled after the U.S. REIT, though with fewer tax benefits. The trust structure was flawed, and even though the government amended the law in 2005, the country has yet to see a single trust set up.

“There are fiscal implications and other issues that do not make it the best exit strategy for a real estate portfolio,” said Roberto Charvel, director and portfolio manager at the Mexico City office of Prudential Real Estate Investment. “Also, the reality is that there are not enough good and large real estate portfolios. The first Mexican REITs will probably be industrial, since this was the first market for institutional investments, and these portfolios are now larger. But retail portfolios are catching up very fast.”

Jorge Girault, CEO of Mexico City–based G. Acción, a real estate development firm that owns six shopping centers, say it is marvelous that foreign investors are pumping money into Mexico's mall industry through companies like his. What a shame, he says, that they cannot be invested more efficiently through local REITs. “If the assets and capital are already in Mexico,” he argues, “why not provide the incentives to allow local developers the use of attractive and cheap capital to invest in an efficient manner in Mexico? If Mexico creates the necessary tools for this type of investment, our country's competitiveness will increase, and the effects will be felt directly in our people's pocketbooks. Unlike the stock market, retail real estate yields are stable, and you are investing in land and bricks that are not only insured but appreciate in value over time. Retail real estate is an excellent risk-free investment.”