June 26, 2014
Interviewed by: Zoe Hughes
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Impact Investing in LatAm With IFC

Gabriel Espana explains IFC’s approach to real estate investing in Latin America and how the organization balances impact investing, performance and returns.

Gabriel Espana explains IFC’s approach to real estate investing in Latin America and how the organization balances impact investing, performance and returns.

Impact Investing in LatAm with IFC

With Gabriel Espana of International Finance Corporation

Zoe Hughes, PrivcapRE:

I’m joined here by Gabriel Espana, principal investment officer at IFC. Thank you so much for joining me today.

Gabriel Espana, IFC:

Thank you very much for having me here.

Hughes: My pleasure. International Finance Corporation is a well-known name when it comes to investing in emerging markets and impact investing. Describe the overall IFC portfolio and how real estate fits into that.

Espana: In general, you know IFC very well. We are impact investors. We look for investments in which we can provide and maximize the impact of IFC in terms of role and additionality. We are bringing new services and bringing solutions to lower-income families and helping the emerging middle class.

In real estate, we have a portfolio of close to $1.2 billion, of which 45% is commercial real estate and 55% is affordable housing. You can understand why affordable housing. In general, we are heavily involved in the development stage of the real estate. We have our own green building standards and we help companies to develop the real estate assets needed in line with our practice.

Hughes: Part of that mission is driving sustainable economic growth as well. How does that shape new real estate investments when you’re looking at it? Talk me through the commercial real estate side first. What are you looking for today and what’s attractive in the asset class?

Espana: We tend to invest in real estate that makes sense not only economically, but also in terms of environmental and social aspects of real estate. As you can imagine, construction is heavily dependent on labor. It depends on 200 or 300 different industries, depending on the country, and that’s just the beginning.

Then, it’s how we can improve living conditions for the masses, through the real estate, in the emerging countries where we operate. That’s essentially the philosophy. The approach is commercial. It’s bringing commercial returns and taking commercial risks, but at that same time, doing good while doing well. That’s pretty much the strategy.

Hughes: How do you quantify the impact of your investments?

Espana: We have different indicators, in terms of inclusiveness. Through these investments, how we help people is getting access to water, electricity, and other urban services. This is part of the shared value, the shared prosperity approach we have, and we do this through the different indicators. It’s a quite complex matrix. It’s basically giving access to the people who are lacking access in terms of public services and infrastructure, like water, electricity, and transportation.

The other angle is when we invest in industrial-related real estate such as industrial parks, free-trade zones, and those kinds of projects that also are helping the industrial base of the relevant country to be more efficient, competitive, and attractive for investment. At the same, our principle is that these investments will create new jobs and through this, we’ll help also the development of the local industry.

Hughes: Do you have set guidelines in terms of investing in property types or are you agnostic as to the investments you back?

Espana: Every country has its own strategy. We are active in the emerging world. We cannot pretend to operate in a specific asset class globally when the needs are different in every country. Depending on where the needs are and how we can better provide or support these kinds of investments, that’s essentially the way we allocate projects. We like to be basically opportunistic on a specific real estate project. We like to be programmatic.

Hughes: When you’re looking at emerging markets, when does an emerging market become perhaps more mature or emerged?

Espana: That’s a very good question, because some people think we don’t have a role in countries like Brazil or Mexico. There are certain areas that are not São Paolo, Mexico City, or Monterrey, that are very well developed. In many of those countries, there are frontier regions where there is a clear need for urban infrastructure and real estate. That’s essentially the approach.

In identifying more than countries, regions where the need is there, also we have to recognize that the mega-trend, particularly in Latin America, is one of the regions with the highest urbanization rate. The level of urban poverty is significant. Those people are asking for services that sometimes they don’t have available to them. We have to give solutions to all those people.

Hughes: When we’re looking at the IFC real estate portfolio for Latin America, how much is focused for Brazil or Mexico, versus more frontier markets, such as Colombia, Peru, or Chile?

Espana: Because of the recent history in social housing in Mexico, we are heavily concentrated on Mexican housing. We have also housing in Brazil. The first four markets for IFC in Latin America in real estate are Mexico, Brazil, Peru, and Colombia.

I’m here in New York to attend an event related to private equity fund managers and the investment platform market. Because in certain markets, we cannot approach or reach construction companies or developers directly. That’s our preference. We have been well known as an investor, but we tend to look more in the direct investment market. When the direct investment market is not visible, we try to do it through funds.

Hughes: Do you prefer to go with more direct control over the investments with the operating partners?

Espana: That’s exactly the case. In real estate, we have a very direct and clear agenda on green buildings. We like to have, if not control, but a certain level of influence in the design of the real estate assets that are going to be developed.

For us, real estate is an industry that has an irreversible environmental impact. If we promote real estate, we want to do it properly. In most cases, these real estate assets will remain for more than 50 years, maybe 100, and if we will be promoting these kinds of investments, we want to do it the right way.

Hughes: At IFC, you’re helping spearhead a green initiative for Latin America. Talk to me about the initiative and what your ambitions are over the next few years.

Espana: The initiative is very simple. We have a tool that helps with the design of real estate. It’s not that we are competing against other international certification of green buildings. It’s that we want to compliment and we provide an emerging-market solution considering also the microclimate and environmental conditions of each individual market.

At this time, we have already provided certification in Mexico, Peru, Colombia, and Brazil. The idea is to improve our footprint and to have other developers and investors doing real estate in line with our practice of green building.

Hughes: It certainly seems to be growing in importance among investors. In conversation with other investors, do you find that this is moving up the agenda for them?

Espana: Absolutely. Two months ago, I was in Bogotá attending a similar event. I was surprised when I was approached by fund managers looking for IFC’s funding. I said, “We would be willing to support you, but first, you have to show me you are committed to reach this level of green in your fund.” At the beginning, they were a bit reluctant, but after understanding the benefits of doing something in line with our principles—something that will be good not only for the asset managers who will be managing those assets, but also for the users—we now have interesting pipelines of potential investments in the Andean region that will be in line with our principle.

The good thing is that there is a global trend, as I see it. The people are more concerned about the environmental aspects of their investments; it’s also a catalytic impact. As IFC provides this kind of advisory or technical assistance to do these platforms, other investors are also looking into this with the same level of concern about the environmental implications of their investments.

Hughes: Where is IFC when it comes to real estate in Latin America? Where do you see growth in terms of investments? Where would you like to invest more money?

Espana: Obviously, in frontier regions and frontier countries. As we see a lot of very good opportunities in some of these countries where there is a clear need for real estate assets, we would love to see more. It’s part of our mandate.

As I mentioned, there is a global mega-trend of urbanization. Latin America is not an exception and we the need for these kinds of investments continuing in the largest cities of Latin America.

At the same time, one positive thing is the free-trade agreements they’re having signed in Latin America. That is opening the door for a lot of industrial real estate investments in the pipeline for most of the countries that are heavily involved in free-trade agreements. We see a new wave of industrial real estate and a lot of international real estate investors already taking their positions in those markets in certain countries. That’s going to be the future.

Hughes: When investors look to build either from scratch or from global real estate asset allocations, or look into new countries, one big question is how you balance risk with reward and to make sure that you have risk-adjusted returns for your investments. Being such an emerging market investor, what advice do you have to give to other investors? How do you balance that risk versus the returns, especially in such frontier markets?

Espana: I’m going to mention the example of a project outside of Africa. For a lot of investors in particular in New York, when you talk about investing in Africa, it’s an exotic market that they don’t even consider. We have seen investments in Africa that—when done properly and with a long-term view—are doing fantastic, even better than the best investments in a middle-income country in Latin America. It’s because the guys who were behind those projects were willing to take additional risk, and they are compensated that way.

I’m not going to say that it works for every investor. In real estate, the name of the game is location, location, location. I will say that it’s location, location, location, plus a sponsor—someone with experience, who is able to deliver what is needed. This is a local industry. Real estate is very local, and as investors, we have to find local partners with novice expertise and the skills to deliver what they are promising.

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