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FOREIGN TIES

North American investors team with Latin American developers

BY MARÍA BIRD PICÓ

Magaly Capurro is not surprised General Growth Properties has entered Latin America through joint ventures with local partners in Brazil and Costa Rica. She is only surprised that it has taken this long for a major U.S. name to get involved in the region.

After all, she says, in Peru, where Capurro manages the Lima-based Plaza San Miguel, a 646,000-square-foot mall, there is a huge demand for retail. Plaza San Miguel is one of 13 shopping centers in this country of 27.5 million people.

“One only needs to take a look at our few malls, which are always packed and do well,” she said. “The problem has been one of perception, not of lack of market.”

Retailers from neighboring countries, particularly from Chile, have been quietly entering the market in recent years, she says.

Indeed, the shopping center industry is thriving throughout Latin America, luring foreign investors with potentially high returns in relatively underdeveloped local markets. Domestic developers in partnership with those investors stand to gain access to capital, expertise and new tenants.

It is against this backdrop that General Growth formed a venture in Peru with Grupo Sambil, a Venezuela-based property owner and construction company and Costa Rican investor Genesis Fund to build Sambil Costa Rica, a proposed 500,000-square-foot regional mall on the western side of San José, Costa Rica.

In Brazil, General Growth shelled out $32 million in August in a 50-50 partnership with Rio de Janeiro-based Nacional Iguatemí Group, in whose property management business it has a controlling stake. Nacional Iguatemí owns nine properties in Brazil, totaling 3.2 million square feet. It also has a partial interest in two shopping centers: Shopping Iguatemí Salvador, in Salvador, Bahia, and Taboao da Serra, in São Paulo.

The venture has wasted no time. In December it acquired a 50 percent stake in Leblon Shopping, a 247,500-square-foot mall in one of Rio de Janeiro’s most affluent neighborhoods.

Such ventures are an encouraging sign, sources say.

“It is a positive move for our industry,” said Pedro Velíz, director of the real estate division at Marbensa, which owns four Guatemalan shopping centers, including Guatemala City-based Gran Centro Los Prôceres.

Like other executives, Velíz says his firm would be open to talking with foreigners interested in the market. “Competition gets keener, and the products improve.”

The regional economy grew 5.5 percent last year, which has pushed up retail sales and kicked off the construction of new shopping centers and the expansion of existing ones.

The factors behind this growth are high demand for the region’s raw materials, particularly from China, and favorable international interest rates. The Institute of International Finance estimates that the inflow of private capital to Latin America totaled $43 billion last year, more than double the $19 billion in 2002. Also helping is the fact that almost all Latin American countries have devalued and floated their currencies. Regional governments are also targeting inflation and debt.

This auspicious scenario is luring foreign investors looking beyond their mature markets back home. In Mexico, for instance, U.S. shopping center giant Kimco Realty Corp. and Sam Zell’s Equity International Properties are investing in malls and shopping centers.

To be sure, the Latin America incursion of Chicago-based General Growth, one of the two largest owners of retail space in the United States, is occurring at a more cautious pace than the aggressive foray into Europe by The Mills Corp. and Simon Property Group. But the mere fact that General Growth chose a market perceived as risky is significant. Paul Weeks, a director at the São Paulo-based office of Cushman & Wakefield Healey & Baker, says he sees such investment as a logical step.

“People look at these Latin American countries and see risk,” said Weeks. “But once you decide to invest in a country like Brazil, for instance, there are lots of opportunities. The population of São Paulo and its GDP alone are bigger than Argentina’s. We are a stepping-stone in the region.”

This was not lost on Sonae Imobiliária, the Portuguese mall builder, which formed a partnership with Brazilian development firm Enplanta in 1999 and now co-owns seven centers in Brazil. Sonae Imobiliária’s portfolio includes Latin America’s biggest shopping and leisure center, the three-year-old Parque Don Pedro, which boasts 1.2 million square feet of retail space.

Hey, look closer
A bounty of opportunities is available elsewhere in the region if foreigners will only look beyond the red-inked headlines, says Jorge Botero, a project manager and investor in three shopping centers in Calí, Colombia.

“From afar, a country’s problems look more serious than when you are there,” said Botero. “At our end, Washington, D.C., has the same perception problem.”

Following a serious recession, Colombia gave birth last year to about 30 new shopping centers, and there are others on the way, though none so far involve foreign partners. Calí, for instance, has four currently under construction.

General Growth, for one, has looked beyond the newspaper headlines — and likes what it sees.

“Latin America in general has a reputation as volatile, but you really have to look at different regions to make a judgment call,” said Alex Berman, senior vice president of General Growth Properties Ventures, the firm’s foreign development arm. “Brazil, for instance, is one of the best-performing countries in the world right now.”

Other international markets outside Latin America might be more stable politically and economically, but their mature economies also offer less potential development. “We chose Brazil and Costa Rica because we look for good opportunities in what we think are good-opportunity countries that are on the rise,” Berman said. “We can also market our skills with the right partners. It was natural we got together.”

Cap rates in Latin America are in the double digits, providing a better return than many U.S. shopping centers. The fact that no single developer dominates in most of these markets means opportunity for consolidation. And the market penetration of shopping centers is still low. Brazil has one of the more developed mall industries in the region, but shopping centers still account for only about 18 percent of total retail sales. The reason, in Brazil and across the region, is that existing centers are concentrated in the main cities, leaving plenty of development potential as regional economies prosper.

The access to capital afforded by major foreign partners is important, given the limited availability of funding in Brazil, Colombia, Costa Rica and Guatemala, to name a few. Brazil has stemmed the capital flow further by restricting the use of government-run pension funds. Those construction loans that are available are short-term and carry a double-digit interest rate that make them unattractive, if not unbearable, says Weeks.

Space for cash
To finance projects, many Latin American developers are forced to sell a portion of retail space to tenants, says Carlos Phillips, general manager of Paseo de las Flores, a new mall in Heredia, Costa Rica. In Costa Rica, for instance, developers generally cannot get construction loans that extend beyond three years, and those come with rates between 12 and 14 percent, which accounts for why Paseo de las Flores had sold 40 percent of its retail space by the time it opened in November.

“Ideally, we would love to retain all the retail space,” said Botero. “But condominium ownership is one of the few ways we can still develop these projects in cash-strapped countries like Colombia.”

Another alternative is to charge tenants “key money” over and above rent and common-area maintenance charges for the right to occupy a site, a practice that is widespread in Latin America and in less-developed European markets.

But financing is not the only reason to hook up with an overseas partner. A foreigner such as General Growth can also bring access to new international franchises and tenants, sources say.

“It’s not the same if I ask a retailer like J.C. Penney to open a store in Costa Rica than if GGP invites them down,” said Phillips. “Obviously, a retailer would have more confidence going in with a well-known and established company.”

Peru, for instance, still has only a handful of U.S. retailers, including Payless ShoeSjource and Tommy Hilfiger. In Colombia, the boom in shopping centers has created a so-far unrequited need for new retailers to diversify the tenant mix and stand out from the pack.

“We are all looking to improve our tenant mixes without, of course, affecting our local tenants,” said Roberto Puga, manager of the Guayaquil, Ecuador-based Mall del Sol, which has 430,500 square feet of retail space.

Then there is the managing and technological experience offered by such firms as General Growth, which has some 153 million square feet of retail space under management.

“We are making a company that will have better opportunities and will, in the end, last longer,” said Renato Rique, president of Nacional Iguatemí. “We have always been a very active company, but with GGP we will be more aggressive. There will be more juice going on.”

Some developers, of course, are gaining access to such foreign expertise without signing on with full-fledged partners. They do this by contracting with prominent firms such as RTKL Associates, a Dallas-based design firm, says Javier Gasteazoro, a director of Grupo Roble, an El Salvador shopping center development firm with some 5.5 million square feet of retail in Central America. RTKL has designed some of the expansions and renovations of its flagship MetroCentro retail center in San Salvador.

Grupo Roble owns the Multiplaza Escazú, just down the road from General Growth’s proposed center in Costa Rica.

It has not all been smooth sailing in Costa Rica for General Growth. The venture there is still on, executives say, but Sambil Costa Rica is on hold. General Growth has committed $70 million for a one-third interest in the project, but the partners are studying the market further in light of the competition from three new malls, the firm says.

On paper Costa Rica is the ideal market. Long touted as one of the most stable Latin American countries, foreign investment in general (not just in the retail sector) has been rampant during the past two decades. The $9,100 per capita annual income of its nearly 4 million residents is high by Latin American standards — the fourth-largest after Puerto Rico, Argentina and Chile.

But the greater metropolitan area, comprising Alajuela, Cartago, Heredia and San José, is teeming with shopping centers — there are now 15. Between Christmas 2003 and Christmas 2004 alone, roughly 904,000 square feet were added to the market in the San José-Heredia area through three new projects: Multiplaza Este, Paseo de las Flores and Terra Mall.

Grupo Sambil and General Growth officials stop short of calling San José a saturated market, though. (Executives at Genesis Fund declined to be interviewed.)

“We have no doubt there is a market for the type of mall we are proposing,” said Alfredo Cohen, vice president of Grupo Sambil. “But we must further study the market and assess what consumers are looking for.”

Ain’t scared
General Growth’s Berman says the firm was aware of the impending deluge of retail space in the market when it joined the venture last August. “Certainly, the country has more products than a year or two ago,” he said. “We are now trying to get the best product for the marketplace and move forward.”

Grupo Roble’s Gasteazoro is skeptical. “Costa Rica’s economy is stagnant, and the amount of retail space in San José has exceeded demand.”

But if so, that is an exception to the rule in Latin America, and foreign investors show no signs of letting themselves be scared off. Not only is General Growth open to doing business across the region, published reports say U.S. rival Simon Property Group is looking to do the same.

“It’s all opportunity-driven,” said Berman. “There is no country in Latin America that we consider completely off the radar.”