January 13, 2014
Interviewed by: Privcap
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Shifting Investor Appetite in Brazil

Amaury Junior of Vision Brazil Investments and Jayme Queiroz of Apex-Brasil discuss the challenges facing the country, its managers and investors, and how there’s much more to Brazil than headlines about rising inflation and asset bubbles.

Amaury Junior of Vision Brazil Investments and Jayme Queiroz of Apex-Brasil discuss the challenges facing the country, its managers and investors, and how there’s much more to Brazil than headlines about rising inflation and asset bubbles.

Shifting Investor Appetite in Brazil

With Amaury Junior of Vision Brazil and Jayme Queiroz of Apex Brasil

Zoe Hughes, PrivcapRE:

I am joined today by Amaury Junior, founding partner and CIO of Vision Brazil, and Jayme Queiroz, real-estate investment officer at Apex Brasil. Thank you very much for joining me. Welcome.

Amaury Junior, Vision Brazil:

Thank you.

Jayme Queiroz, Apex Brasil:

Thank you very much.

Hughes: In terms of emerging markets, Latin America has seen considerable cross-border investment over the past five years and Brazil has helped to drive that. Yet, we have seen a considerable slowdown in transactions, particularly during 2013. Should investors be concerned that Brazil’s rapid growth is slowing?

Junior: Looking at the country, you have to see the different regions. Southern regions of Brazil, which have been highly developed, are in a slower pace of development. In contrast, some regions of Brazil are developing at a fast pace. One example is the center-west part of Brazil, where production has been growing at a pace close to 10% per annum. Inconsequently, the GDP of those regions is developing very fast, almost at a China pace.

Hughes: In the macroeconomics of rising inflation, there seems to be concern about rising prices. In particular, we have seen that in Sao Paolo and Rio. What conversations are you having with investors who look at the macroeconomics and ask, “Is Brazil a good place to be putting my money at the moment?”

Queiroz: It is important to emphasize that we are ending the experience of the crisis in the world. The policies applied by the government have been exhausted. It is not that we see all the movements from the credit expansion we have offered to people so they could buy housing.

Also, it is important to note that, when people think about Brazil, they think about Rio and Sao Paolo, but there are many places beyond these. It is not only about the center-west, but about the northeast. People should not be afraid just because things are gaining balance in terms of the politics and policies the government has had to adopt to improve the market and keep growing. Everything will be different by 2014, perhaps by the second semester of the year, and everything will be fine in 2015.

Junior: We came from a consumer-driven growth model and we are heading into an infrastructure-driven model. We are exactly in the midst of that transition between the two different models.

Hughes: What questions are your investors asking as they look to invest in Brazil? Do they have concerns with regard to rising inflation and rising prices? Is Brazil in the midst of a bubble?

Junior: Of course. If the policies for consumer growth were to continue, Brazil would go into a path of a bubble. The government already has a clue via inflation that this is not the right way to go, in the sense that they have to focus more on infrastructure growth. That is where the government is heading. Consequently, one important issue is relevant for Brazil: the legal regulatory framework is relatively stable. That is different from many other emerging markets, where you do not have certainty about the outcome of investments. That provides support for continuing the investment profile, especially for foreign investors.

Hughes: With regard to the regulations, how important is that in terms of getting that cross-border investment into the country?

Queiroz: It is fundamental, because when an investor looks to understand emerging markets, they often try to put everybody in the same boat and say, “It is about an emerging market, it is about risk and everything like this.”

Brazil is different when we talk over this subject. Sometimes they try to compare us with what they see in China and India. It is a completely different scenario that we have to understand.

Hughes: Amaury, how have you seen the investor base change in terms of Vision Brazil? Has it gone from more international to domestic or is international still a key component of your investors?

Junior: Since the beginning of our business, we have opted to focus only on foreign investors. Since 2005, this has been our primary focus. The constituents, the investors have not changed. What has changed is the type of investors. In the early stage, our investors tend to be more short-term oriented in terms of investment tenure. Over time, new investors are focusing more on long tenure—five years and above. That has been more of a shift of the concurrent to the development of the country to a shift toward long-term investments.

Hughes: What do you see in terms of investors coming in, particularly focused on real estate? GIC recently opened an office in Sao Paolo. Do you see long-term investors coming in? Where is their appetite? Is it more in direct investing or still through the funds?

Queiroz: It is more direct investment. In 2008, we were talking about the residential appetite. Now, people are moving toward offices, mixed-use developments. It is a new reality, even for Brazilian companies and developers, because they were not used to some concepts we see in the world now. They are getting this result and investors also are following this tendency, this new trend. Also, trying to understand where the opportunities are in this new market they are experiencing in Brazil. The best opportunities, especially with GIC—they are looking for commercial, shopping centers, retail and buildings. These are really booming in Sao Paolo and Rio de Janeiro. Not only in the cities, but in secondary cities we are seeing this movement. They are moving from the segments they are looking for. It is no longer only residential, but mixed-use.

Hughes: Amaury, looking at how domestic investors target real estate, how are they getting access to the market? Is this providing an opportunity or perhaps even a challenge for you?

Junior: It is a recent development, about five years old. The funds that invest in real-estate receivables are called FII, F-I-I. This has provided segmentation. It allows a consumer to have access to real-estate investments on a diluted basis. Prior to 2008, most real-estate holdings were for relatively wealthy fundraisers. This has made it more popular.

Hughes: That is one concern when investors look to Brazil: where is the exit? How do I sell on this, the assets, and exit this opportunity? Have you seen that develop in Brazil?

Junior: Absolutely, in the case of the first fund we started in the company that now has spun off. Our major access has been through a securitized fund that was distributed locally. This is an expanding segment and that is quite interesting as an exit vehicle, as well.

Hughes: In terms of that exit and getting out of the investments, has that grown considerably over the last few years?

Queiroz: Yes, because one important issue in this matter is that, as Amaury said, five to eight years ago, there were simply no investment funds in Brazil. Now, we were talking for a considerable amount and people are just beginning to understand that this is a possible route for credit and for things to move on as capital.

Concerning exits, the best way to understand, in the real-estate industry, is that you need to do joint ventures with local partners. This is fundamental. Knowing your partner is the main focus. This is how it will work—not just buying a company and selling to the next investor. Do we need a new company to develop that development and get everything sold? Then, move to another partner, not necessarily solely selling the business. This is important to the sustainable Brazilian market, because developers, not exactly in Rio and Sao Paolo, because you have other options to move on about exit options. In other places, this is not true.

The guys from the northeast and the center of the country do not understand how more sophisticated operations from the market will offer good opportunities. They will not have the possibility to launch an IPO or things like this, so it is important to find partners and work with trying to enter. This is the way to go.

Junior: Even from a legal regulatory standpoint, typically, a project in Brazil involves an SP, so it is done almost in a segregated portfolio company. Given that, it makes sense, even when you look at it as an investment. You do not typically invest into the partner, you invest into a segregated portfolio company, so the vehicle was already permissible for JVs.

Hughes: As you look out over the next three to five years, what do you expect in terms of cross-border investments coming into Brazil? Will it increase, considering we have seen a scale-back over the past year? What are your expectations going forward?

Junior: We have been talking a pace of about 60 billion FGI, considering direct investment for Brazil for the past few years. This 2014 outlook will be relatively stable, perhaps downward through that. But, that medium term, this will probably increase because Brazil is going through a more infrastructure-driven phase and this will drive more foreign investments.

Hughes: Jayme, in terms of your expectations, what are you underwriting as you look at the next three to five years?

Queiroz: In 2014, we will see some decrease in the investments. This is not because we are experiencing an over-supply or something. No, it is because the market is in this transaction way and time. Local developers all over the country are preparing for the new wave we will see and experience, and it will come by 2015 and 2016.

Why am I saying this? Because, as Amaury said, as the government is promoting infrastructure, we are seeing a lot of public-oriented investments. But, after this, in these cities where things are being developed, we will see the natural cycle of this industry. It will be all about new neighborhoods, new residential, new retail and shopping centers, active in that expansion and logistics. It is only about the transaction time, so, in 2014, we will see some decrease in the activity. But from 2015 and on, it will increase a lot.

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