Latin Finance - April 2008 - 13

brazilian real estate to drive exponential growth. (See related story, page 14.) level some local executives fear establishes a new higher benchmark for office property in Brazil. One local real estate executive suggests that in order to make a decent return, Hines will have to rent at 110 reais per square meter, much higher than the 95 reais going rate in neighboring buildings. But Hines’ Munro says he’s already agreed to rent several floors at 75 reais per square meter, and expects to make a good profit at that rate. Hines also purchased an adjacent plot of land for expansion and investment will be profitable. “In theory, it’s a core asset because it’s low risk,” he adds. Crowded, Risky Trade Like any other emerging markets boom, the threat of a bust is always lurking at the back of people’s minds, especially given the rocky state of global markets. Most Brazil real estate developers being handed billions of dollars in global savings and endowments have seen more than their share of busts. Project development amid financial crisis, hyperinflation and astronomical interest rates is an entirely different game. But the fear of that happening is fading. “We used to have a big list of risks,” says Citron, “A good part of these risks in Brazil have been reduced or stopped existing at all,” he adds, naming currency fluctuation, inflation and an unfavorable legal environment as the main impediments to long term investing. An appreciating real has proven one of the biggest boons for real estate buyers, says Munro. Many of his assets have appreciated purely by virtue of nationality. “We invested at historically higher exchange rates, so now we’re making money on the FX and the real estate.” But there are still macro risks lurking. A prolonged global Demolishing São Paulo to rebuild: Prosperitas’ Lima slowdown, or an unexpected negative jolt to the Brazilian economy could seriously undermine the development, which may add value to real estate market. And of course the risk of the overall BankBoston building overpaying, or miscalculating the costs of a investment. But one executive who project are still high, especially given the purchased a nearby building says he was number of new entrants. blindsided by a sudden surge in the cost Carlyle’s first deal in Brazil, a $75 of the air rights, which are established million purchase of Scopel, the land bank by the municipal government. He was company, was marred by conflicting shocked to find that following the hike, expectations on returns among the deal’s the expected return on his already co-investors, according to an investor away completed acquisition was significantly from the transaction. The executive adds eroded. He guesses Hines may have had that Scopel could still make for a tidy to pay the same inflated rate for rights buyout for all participants. Carlyle flatly in the plot neighboring the BankBoston denies there were any misunderstandings. building. Hines, a seasoned player, won a hotly “So far, it’s going badly because it’s contested auction for the BankBoston empty,” says Hines’ Munro, referring to building in São Paulo, paying 350 million the BankBoston purchase. But the executive, who has developed millions of reais for the asset, which several months into the acquisition remains unoccupied. At square meters in his 10 years at Hines, says he is absolutely certain the 12,000 reais per square meter, this struck a Jacking up the Price Another closely followed auction in Brazil is for the Naji Nahas plot, a 19,000 square meter stretch of land along the chic Avenida Faria Lima named after its former owner. After aggressive bidding in an auction organized by Citi, an investment fund is rumored to have taken the asset for an unprecedented 500 million reais. That is unanimously considered the highest price per square meter ever paid for land in Brazil. “I wouldn’t say that’s going to establish a new benchmark [for land prices,]” says Citron, suggesting the price was inflated. If he is right, then the buyer rumored to be plotting a high end international hotel on the site, may find itself out of its league with the investment. The rising tide means that São Paulo’s new generation of commercial developers will have to seek out greener pastures, perhaps in other parts of the country, if they can continue to deliver the juicy returns they promise. As extra demand squeezes up prices and compresses profit, prospective investors may also have to descend the quality chain to maintain returns. That is the strategy being employed by BRProperties, a buyer and manager of commercial real estate founded with seed capital from GP Investments. The turnaround shop for real estate assets says it obtains IRR rates of 18% to 25% by buying commercial property at below market value then retrofitting and upgrading. “We seek out the best opportunities, not the highest quality assets,” says Claudio Bruni, CEO, adding he is seeing plenty of the former. For investors focused on real estate, the field is getting increasingly crowded, which is imposing a healthy change on the Brazilian market. That is inevitably pushing investors down the quality chain and out into less developed regions of the country where the supply and demand dynamics are trickier to gauge. “The low hanging fruit is all gone,” says Lima, referring to high end commercial property. “People are going to have to work for their money now.” LF April 2008 LATINFINANCE 13

Latin Finance - April 2008

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