February 10, 2014
Interviewed by: Privcap
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Brazil’s New Movement: The Focus On Secondary Markets

Sao Paulo and Rio de Janeiro are income plays for investors targeting Brazil. For more value-added and opportunistic plays, investors need to turn their attention to the country’s secondary markets. 

Sao Paulo and Rio de Janeiro are income plays for investors targeting Brazil. For more value-added and opportunistic plays, investors need to turn their attention to the country’s secondary markets. 

Brazil’s New Movement: The Focus On Secondary Markets

With Amaury Junior of Vision Brazil Investments and Jayme Queiroz of ApexBrasil

Zoe Hughes, Privcap:

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

Amaury Junior, Vision Brazil Investments:

Thank you.

Jayme Queiroz, ApexBrasil:

Thank you.

Hughes: As investors look at the real-estate opportunity and the opportunity set in Brazil, there are many different opportunities compared to just a few years ago. The economy has definitely matured, as has the real-estate opportunity set. Amaury, where are you seeing your appetite, both for real assets and real estate?

Junior: We invest in alternative segments—they are obviously real-asset segments—in particular, we have invested a lot in real estate as a standard asset, but also invested into the agricultural ownership of farms. As a consequence, we are involved in projects related to rural-to-urban conversion, which tends to be related to a master plan of urbanization of like rural areas. This is very attractive, especially in the center-west part of Brazil and the northeast part, where you have accelerated development of cities that were underdeveloped in the past. Now they are receiving a lot of influx, especially on the logistics side.

Hughes: With regard to the master-plan communities you are investing in, these are large-scale developments. What is it about residential? Is it logistics? What exactly are you planning?

Junior: Typically, when we look into a project like that—for instance, one we are looking at now—it is a combination of our expertise of four groups. Two of the groups are to have the expertise in agricultural development, in a purchase of land. The other two groups have an expertise in urbanization. So, it has to be a joint venture such that the project can be successful. And it is in combination with a plan that is well thought-out, that involves not only the aspects related to urban development, but also developments related to agricultural, because these are interface cities.

Hughes: It seems to be the ultimate in mixed use.

Junior: Absolutely.

Hughes: Jayme, is that something you are seeing, especially on the real-estate side, perhaps the merging of the traditional food groups and the mixed use coming through in Brazil real-estate opportunities?

Junior: Yes. When you talked about mixed-use developments, they are so rich a scenario that you can include into this part. Concerning these food groups and industry in Brazil now, we are facing an experience there is more of a way to develop industry sectors and neighborhoods. We have two classic examples of this: one in Barreiras, the city of commissary. It is very close to Salvador, though I am not sure the distance. Also, the next point people are exploring is Goiânia, which is in Pernambuco. It is all about the automotive industries moving to those places, close to the ports being developed in those two states. Because of these companies moving there, we are seeing a lot of local developers doing partnerships and joint ventures, so they are promoting these master-plan communities. Once we are talking about that, it is hard, because each of them has its own spirit. Why am I saying this? Some of them are including welfare structures, like schools and hospitals. Some are just looking to provide housing for the people who are to work, and to improve conditions in retail, like shopping centers and things. It is important to understand and emphasize in this new movement that the capital cities of Brazil—especially the top ten when it comes to macro-economic activity and representative—do not have more space to develop. Or the licensing process: it is hard to get and to understand for new entry players. Because of this, we are seeing people trying to reach out new markets and understand what the opportunities would be in these secondary cities that are close to the main cities.

Hughes: Obviously, the interplay, in terms of the agricultural investments you are seeing, also plays into real estate.

Junior: Yes. It is the tip of the iceberg. Because when we see the logistic development happening—for example, the Port of Santos in the state of San Paolo is a main port of Brazil. The big problem in Port Santos is that we have lines of trucks to load that take five days to reach the port. Why is that? Because one of the main producing states in Brazil, Mato Grosso, doubled the production of corn this year. They went through 20 million tons, which is allowing Brazil to be one of the largest exports of corn in the world. But the problem is that there is no storage in the state of Mato Grosso to hold all that corn, so the corn is stored in trucks. As a consequence, several things are coming out. For instance, in Mato Grosso, the amount of logistic storage needed is triple what is currently installed. So, we need to install 20 million tons of logistics in the state just to supply the current demand for production, which tends to increase at a pace of 5% to 10% per annum. So, a catch-up game is percolating, especially to these developing cities in the countryside of Brazil.

Hughes: We are obviously seeing a lot of appetite in terms of logistics and industrial. Are you seeing that appetite go to other areas of Brazil, particularly in terms of the logistics?

Queiroz: Yes, for sure. Especially related to the retail market, we are seeing that the model you used to apply here in the U.S. is coming to Brazil now. What do I mean? It is just because the market is now understanding that, in order to better supply the full country with its logistics and infrastructure challenge, they need to develop small-type distribution centers, supply centers. We are seeing many of these new developments in the state of San Paolo, Minas, Rio de Janeiro. Some are also taking place in Mato Grosso and Goiás, because the industry is understanding that they can no longer have their products only in one state to reach all the other 26. They are pulverizing this in small structures, and we are seeing a lot of people developing and funds being raised to support these kinds of developments.

Junior: In addition, there is also a clear change into export routes of Brazil. The clear routes in the past have been southern routes, related to the state of San Paolo and some southern states of Brazil. There is a big push now to the northern routes, like the Port of Itaqui in the state of Maranhão, the Suape in the state of Pernambuco. There are also ports in the interior Amazon, such as Santarem. The driver in there is coming out for a content development of new roads, new railways and new ports. And, effectively, the logistic cost will drop. Logistic costs in Brazil are very high—this will lead to a boom, which percolates into the real-estate markets. So, things are running in tandem in here.

Hughes: Obviously, when investors look at Brazil, they will automatically think Sao Paolo and Rio, and obviously will be concerned in terms of the pricing we are seeing in those markets. Rio is probably the third most expensive office market in the world. How do you address investor’s concerns about those two markets, and how do you get them to look outside the two main cities in Brazil?

Junior: There are different issues to be tackled here. Rio and Sao Paolo are already rich markets, with expensive real-estate properties. Even when you go outside the periphery of Sao Paolo and of Rio, there are interesting opportunities. You have to look more broadly even when you look at those dates, but, parallel to that, many midsize to small size cities in Brazil are booming. They are developing and growing very fast. For instance, I travel a lot in the countryside. There are cities with 300,000 people that do not even have a sewage infrastructure that needs to be developed. This is exactly where the opportunity lies. Because this is where you will get a high interest, of both investors and people relocating for real-estate projects. In many cases, when developers launch a project those cities, they sell the whole project in one day. It is already pre-sold because of the demand that is repressed demand in there that they are fine with the lack of availabilities there.

Queiroz: But the best recommendation for investors is that if they are looking for Sao Paolo and Rio, they should focus into income and not necessarily direct investments. If you are looking to do new joint ventures or to develop new developments and projects, your opportunities open more. Also, it is about the industry you are focusing in. Because if you were looking for residential, there are key aspects you should look for that are different from looking for hospitality and new hotels. It is very important to understand this—the market is not the same for different industries inside the real estate.

Hughes: Amaury, how do you get investors comfortable with the risks involved? Because, particularly in regard to the master plan, this is a huge development. There are obviously inherent risks. How did the investors become comfortable and how do you underwrite those risks?

Junior: For instance, the first thing is allocating your own capital to do the development, so it is like having the same stakes the investors have. Typically, the most difficult part is the conversion process, which involves a lot of risks, but also the projects are already with the approvals, etc. That is when it’s very attractive for investors to invest, and when you need the bulk of the money for development.

Hughes: Jayme, in terms of the potential risks, how do investors get more comfortable with inherent risks they are seeing in the market in Brazil? What kind of advice are you offering investors looking to—

Queiroz: The first thing is to know your partners, as we have been saying here. They have to have some traditional in this market. They have to understand the particularities of it. If you were trying to reach out the market, do not try to do a partnership with the guy from Sao Paolo. I often see investors trying to do this kind of strategy. So, we will like to go to the northeast and to the north region of Brazil. But, as I do not know a player from that place, I will go with my partners that I know from San Paolo and Rio. We have seen that the guys from San Paolo and here, they often cannot understand how the market particularities have happened in this other state. Please find a local partner—this is the first recommendation. Second, in Brazil there are many offices and companies and enterprises that are not used to doing market research in order to attest that the numbers of supply and demand are effective, and the stocks are selling—all this information. So, it would be good to search for partners that are used to this to hire market studies and to prove these numbers. It is important because we are seeing over-supply movements in some markets. We are seeing slowing down in the sales; it is important to understand the numbers and how they are performing.

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