The Problem with Latin America Private Equity Real Estate GpsEssay Preview: The Problem with Latin America Private Equity Real Estate GpsReport this essayThe Problem with Latin America Private Equity Real Estate GPsOver the last 18 months private equity real estate GPs appear to have missed the mark in the identification and pursuit of investment opportunities throughout the region. During road shows and more public forums, many GPs repeatedly called attention to numerous real estate trends that failed to materialize and grossly underestimated the role of local capital in meeting financing demand. The resulting low rate of new LP investment suggests that the current real estate private equity model is no longer operating ahead of the curve and, consequently, LP investors may experience chronic underinvestment for the duration of the current cycle. Worse yet, as GPs feel the pressure to invest, mistakes will be made in terms of the alignment of interests with local partners and capital investment. LPs are now in the unenviable position of being underinvested, or worse, invested in underperforming assets. This scenario has been further complicated by the fact that the increasingly active role of local capital serves to make the operating structure of GPs more expensive and onerous on a relative basis.
As the real estate capital markets continue to evolve in the Region, more innovative investment products will become available. LP investors deserve a broader selection of investment vehicles than simply private equity or actively managed equity strategies.
Brazil Recap – The Non-Rationalization of ValuesBy mid-2012 listed Brazilian homebuilders began experiencing a sharp drop in share price. At the time, GPs predicted a “great rationalization” had begun in Brazil real estate prices. But the deep discounts never materialized on the private side. In fact, one of these GP investors is now rumored to be a leading bidder for Gafisas master planned community division (Alphaville) – and purportedly at a price equivalent to the entire companys market capitalization.
Last year one major GP in the region boldly predicted that, “There will be a need for capital from private funding sourceswhenever theres any kind of increased inefficiency or stress in the real estate capital markets, its harder to get cheap capital.” This turned out to be just an axiomatic sales pitch, as it is equally true that a broken clock will read time correctly exactly two times per day. The misread appears to be a combination of timing (duration of future opportunities), but equally misplaced is the over reliance on past experience as a predictor of future performance.
GPs simply miscalculated the strength of the internal capital markets as listed Brazilian homebuilders were in fact distressed but, didnt flock to expensive foreign capital for a solution because they didnt have to. Interestingly, of all listed homebuilders in Brazil, this particular GPs investment in Viver stands out as a severe underperformer – based on public filings, the GPs investment may have unrealized losses of approximately 80%.
Why the disconnect? For one, GPs underestimated the resilience of the local markets and furthermore have misjudged the active role undertaken by both local public (government) and local private entities (internal capital) in supporting real estate investment. As we have seen in Brazil, many developers were able to foresee the pending mini-crisis and reacted proactively by cutting overhead and new launches, and redoubled their focus on selling existing inventory. In addition, the Brazilian governments CAIXA stepped in to provide more credit which has led to a fairly robust turnaround for most listed homebuilders. While homebuilders have not fully recovered, many are up over 100% off their 2012 lows – with no bankruptcies
The Brazilian government has continued to improve its infrastructure to make it more competitive in the long run, and its real estate investment bank invested more than $25 billion since its IPO.
The economic problems plaguing the Brazilian economy are still plaguing our national economy:
• Firms that work hard are the core of Brazilian businesses, but that does not mean they are bad people. Rather, they suffer from persistent structural and human challenges. These challenge is most evident in the government’s financialization process with the re-regulation of the banking system and a lack of structural reforms that support private and public sector enterprises.
• A lack of public sector jobs in the state-owned economy was also a result of the lack of investment in public sector assets and private sector projects (see #16 on #11, above).
• This is particularly evident in the lack of private sector investment and the high cost of doing business; particularly in the face of a high number of government debt as a result of its actions.
For many people, one of the key issues they face in Rio has an economic one as well. For example, during the past year of the economic downturn, only 4% of the economy was growing under S&P 500 growth index indices, the most recent figure provided by the Bank for International Settlements (BIS). The Brazilian consumer price index saw a decrease of almost 1.5%, an increase of 26% year over year between 2008 and 2011.
The problems plaguing the Brazilian economy are still plaguing our national economy:
• These challenges persist because of the structural and structural changes to Brazil’s national infrastructure that have been proposed in the last three years. The government is now building new roads and bridges on the Rio Roca, which is the world’s largest inland port. The government has established several new facilities, such as a national broadband network and a new public transport hub. Moreover, the government is currently building the country’s first municipal and rural electricity project. The government also plans to create a regional power grid program.
• Brazil is very competitive and as such, not only do the private sector pay a high price for the services they provide to the public, but the government invests huge amounts of cash to help the state to compete with private sector talent over the public sector. Brazilian banks have been known to take out large sums of money to invest in Brazil as part of this investment strategy.
• As a result, large amounts of public investment funds have been invested in the Brazilian countryside. However, many of those funds are owned by the state. As a result, they have a disproportionate share of the government’s spending and expenditures. With a population of one billion, Brazil has a very real need for more government investments in rural communities, and that need is directly related to increased income, employment and wealth.
With a population of one billion,
The Brazilian government has continued to improve its infrastructure to make it more competitive in the long run, and its real estate investment bank invested more than $25 billion since its IPO.
The economic problems plaguing the Brazilian economy are still plaguing our national economy:
• Firms that work hard are the core of Brazilian businesses, but that does not mean they are bad people. Rather, they suffer from persistent structural and human challenges. These challenge is most evident in the government’s financialization process with the re-regulation of the banking system and a lack of structural reforms that support private and public sector enterprises.
• A lack of public sector jobs in the state-owned economy was also a result of the lack of investment in public sector assets and private sector projects (see #16 on #11, above).
• This is particularly evident in the lack of private sector investment and the high cost of doing business; particularly in the face of a high number of government debt as a result of its actions.
For many people, one of the key issues they face in Rio has an economic one as well. For example, during the past year of the economic downturn, only 4% of the economy was growing under S&P 500 growth index indices, the most recent figure provided by the Bank for International Settlements (BIS). The Brazilian consumer price index saw a decrease of almost 1.5%, an increase of 26% year over year between 2008 and 2011.
The problems plaguing the Brazilian economy are still plaguing our national economy:
• These challenges persist because of the structural and structural changes to Brazil’s national infrastructure that have been proposed in the last three years. The government is now building new roads and bridges on the Rio Roca, which is the world’s largest inland port. The government has established several new facilities, such as a national broadband network and a new public transport hub. Moreover, the government is currently building the country’s first municipal and rural electricity project. The government also plans to create a regional power grid program.
• Brazil is very competitive and as such, not only do the private sector pay a high price for the services they provide to the public, but the government invests huge amounts of cash to help the state to compete with private sector talent over the public sector. Brazilian banks have been known to take out large sums of money to invest in Brazil as part of this investment strategy.
• As a result, large amounts of public investment funds have been invested in the Brazilian countryside. However, many of those funds are owned by the state. As a result, they have a disproportionate share of the government’s spending and expenditures. With a population of one billion, Brazil has a very real need for more government investments in rural communities, and that need is directly related to increased income, employment and wealth.
With a population of one billion,
Mexico Recap – The Increasing Role of Pension Funds and Local CapitalIn Brazil, GPs missed the mark by being too pessimistic, but for Mexico the opposite appears to be the case. Last year, few foresaw the depth of losses that homebuilders would experience by 4Q12 – which has resulted in nothing short of a complete bludgeoning of the industry. To add insult to injury, the recently-elected Pena Nieto government has permanently modified the Federal homebuilding policy by reducing horizontal ex-urban financing and, instead, intends to redirect resources to vertical, urban development. This shift is on par with the DOE passing an immediate carbon tax on car manufacturers in the US. The industry is working under a completely new model: the ramifications of which will take time to fully understand but the old homebuilding model is dead in its tracks. The impacts will not only be on operating companies but also on the value of land across the country. We expect to see a reverberation in related commercial retail development as well since much of that was premised on suburban residential expansion.
And the GPs? Heres what a leading Mexico GP said in July 2012, “Mexico has really responded well over the last twelve months.” This particular GP was an early investor in Mexico land banking and subsequently monetized much of their residential portfolio via the CKD mechanism. Notably, the GP stated in mid-2012, “Were seeing healthy growth, which is good for real estate.” But that is clearly not what happened. More importantly, the Mexican government told the market as much in October 2012 when it announced that it would not increase available mortgage credits under the INFONAVIT program. That one announcement amounted to an immediate sell on the entire sector because after that point, every homebuilder was told that