PRINT THIS STORY:

CHANGE TEXT SIZE:

GIANT ATTRACTION

Brazil’s underdeveloped retail real estate sector lures foreign investors

By María Bird Picó

Brazil has attracted a lot of attention from foreign retail real estate investors lately. And you don’t need to look far to see why. The country has the world’s 10th-largest economy, accounting for half of South America’s gross domestic product, and its population of 188 million is projected to reach 260 million by 2050. The country is highly urbanized, with some 80 percent of the population residing in a major city.

Housing construction is booming, in turn boosting demand for new retail space. Last year about 135,000 new homes were built, twice the number built the year before, according to Prudential Real Estate Investors Latin America.

Even the high crime rate benefits the retail industry, because it makes Brazil’s famously secure malls an attractive destination for leisure, business and shopping. The clincher for developers is that, so far, the number of malls in Brazil is small in view of the country’s size. With the 11 that were under construction at the end of last year, Brazil’s total is 315 malls.

Abrasce, Brazil’s mall trade group, tallies the gross leasable area of its malls at 8,637,092 square meters (93 million square feet). That comes to about .05 square meters per capita of GLA. Brazilian malls sold some $21 billion worth of merchandise last year, accounting for just 18 percent of overall retail sales, according to Abrasce. “We are still a society with not much access to shopping centers,” said Marcos Carvalho, president of Rio de Janeiro-based Ancar Empreendimentos. “We have mainly regional and power centers, and few neighborhood centers.”

One reason for the shortage is a lack of capital, and this vacuum has helped spark the recent string of joint ventures between North American and Brazilian retail real estate companies. Following the partnership of Rio de Janeiro-based Nacional Iguatemi and Chicago-based General Growth Properties three years ago, three other North American retail real estate names invested in Brazil last year: Developers Diversified Realty Corp., Cadillac Fairview and Ivanhoe Cambridge. Moreover, Canada’s Brookfield Asset Management, with assets in Brazil’s real estate, financial services and energy industries, last year created a $700 million-plus specialty real estate fund focused on the acquisition of shopping centers in Brazil.

“These [foreign] investments are going to be very good for our industry, because most companies could not grow as fast as the retail market for lack of long-term financing,” said Paulo Malzoni Filho, president of Abrasce. “It is very hard to grow at a fast rate when you have to finance your own projects. Investing in Brazil is a good opportunity because of higher returns. We also have a mature and high-quality mall industry that stands out from that of other emerging countries.”

The deals are equally good for foreign developers that find growth opportunities in their home markets increasingly scarce. Cap rates for Brazilian retail real estate average between 11 and 12 percent, higher than the 6 to 7 percent for similar-size properties in North America, according to some executives. “Companies are looking for higher yield opportunities, and foreign markets are providing them,” said Richard Brown, executive vice president of Ohio-based Developers Diversified Realty, which now owns 46.5 percent of Sonae Sierra Brazil, a major mall developer and operator. “With the emergence of the economies of India, China, Brazil and the former Soviet Union, the world is changing. Real estate, which used to be a domestic business, is now becoming an international business for all of us.”

Other companies expanding internationally are expected to arrive in Brazil as the country approaches investment-grade status — a green-light credit rating that will attract more foreign investment. In South America only Chile currently enjoys such a designation. “The economics make sense,” said Paul Weeks, who oversees capital markets for Cushman & Wakefield in São Paulo. “The country is still stable and is getting closer to investment grade.” Inflation has been under control for several years, interest rates are going down, and the inflation index (a key indicator that is used to readjust real estate rents) is at 1.5 percent, the lowest in 14 years, says Weeks. “We have been in Brazil for over 100 years and believe the shopping center sector is well positioned to benefit from the country’s positive economic and demographic trends,” said George Myhal, Brookfield’s managing partner for Brazil investments, a roster that includes three shopping centers.

Iguatemi Empresa de Shopping Centers shares that belief and announced plans in September to go public. If regulators sign off, Iguatemi will be the first Brazilian mall operator to trade publicly. The company’s seven-mall portfolio includes Iguatemi São Paulo, one of Latin America’s ritziest malls.

At least 14 malls are breaking ground this year. And ALSHOP, Brazil’s shopping center tenants association, estimates that some $2.5 billion will be invested over the next three years in mall expansions and construction.

With Brazil, timing played a major role. Not being as hot as other markets two years ago, the opportunities there were higher, says Andrea Stephen, executive vice president of investments at Toronto-based Cadillac Fairview, a wholly owned subsidiary of the Ontario Teachers’ Pension Plan.“The more we learned about Brazil, the more we liked it,” said Stephen. “From a retail perspective, there is currently an emerging middle class and a government that has been very focused on the growth of the economy.”

Cadillac Fairview owns 46 percent of Rio de Janeiro-based Multiplan Empreendimentos Imobiliários, Brazil’s largest mall-owner firm by GLA. “Multiplan is a first-class company, and that’s clearly what attracted us to that company in particular,” Stephen said. “Its malls are well run, well tenanted and well led.”

The partnership with Cadillac will no doubt help Multiplan grow faster, but there were other considerations, says Beatriz Lobato, Multiplan’s CFO. “Equity is always welcome, but we also were very interested in the know-how exchange and the prospect of new tenants,” said Lobato.

The joint venture has been busy with two new mall developments, in Porto Alegre and São Paulo, and with the expansion of Park Shopping, in Brasilia; BH Shopping, in Belo Horizonte; and Shopping Anália Franco, in São Paulo.

To be sure, Brazil has been on the international radar for quite some time as a member of the so-called BRIC — a term coined by a Goldman Sachs economist in 2003 to refer to a select group of emerging markets: Brazil, Russia, India and China. If these countries continue as they have been, they are set to become the dominant economies in the world by 2050, says Goldman Sachs.

But in Latin America Mexico has been capturing the attention of North American investors until now. Companies investing in Brazil say they are also eyeing Mexico, but the right opportunity has not come up yet.

The track record and professionalism of the Brazilian mall developers that have so far entered into joint ventures eased the decision, executives point out. “We are in an emerging market that has over 275 shopping centers — not the case everywhere,’’ said Claude Sirois, vice president of acquisitions at Canada-based Ivanhoe Cambridge, which formed a venture with Brazil’s Ancar Empreendimentos. “Brazil’s shopping center industry shows more sophistication, is better organized and has more in-depth expertise. We are very pleased to see what they have been able to build over the years, despite their ups and downs, and how they have been able to grow a very interesting and strong retail industry. There are stores we would love to have in our malls in Canada.”

Brazil also presents opportunities on several fronts and not just in new developments, executives point out. Lack of long-term financing forced mall developers to sign up several investors to build one mall, a practice that has resulted in small mall portfolios and highly fragmented ownership. Multiplan, for instance, has only nine shopping centers. Sonae Sierra Brazil’s stakes in its nine-mall portfolio run from 9.3 percent in the Shopping Metropole center to 96.5 percent in Parque Dom Pedro, South America’s biggest mall.

Consolidation is expected in the coming years as joint ventures buy out smaller partners and small mall operators. Rio de Janeiro-based Aliansce Shopping Centers, for instance, formed after General Growth’s investment in Nacional Iguatemi, has completed 12 transactions over the past two years; these have included new malls and the buyouts of partners in other malls, such as Iguatemi Bahia and Shopping Taboão.

“The question that remains is whether there will be enough opportunities in such a competitive environment,” said Renato Rique, president of Aliansce.

Some Brazilian mall owners are reportedly holding off to fetch higher prices as competition intensifies.

“The challenge now is finding the projects, not the money,” said Carvalho. “The market is changing very fast, and there is an accommodation process taking place now. There is no habit of selling and buying shopping centers. But we are ready for an aggressive expansion.”

If Brazilians’ income continues to grow, opportunities abound, particularly for companies that tap the relatively virgin mall market for the lower-income classes. Brazil has one of the widest gaps between high- and low-income earners, with the wealthiest 20 percent of households accounting for 62.1 percent of total consumption. But Brazil’s huge and growing middle class is actively purchasing goods, though some believe the potential is higher.

“We can easily double the number of malls, but only if consumption increases,” said João Pessoa Jorge, CEO of Sonae Sierra Brazil. “Macroeconomic statistics are very good, but a basic requirement in our industry is for people to have money in their pockets so tenants can sell and people can buy.”

Consumers have more access to credit these days. Brazil had 73 million credit cards during the first half of last year, up 20 percent from the year-ago first half, according to ABECS, Brazil’s credit card trade group. This figure is projected to exceed 80 million this year.

“We are looking at the same crystal ball,” said Ivanhoe’s Sirois, “and we all see a bright future.”