Dec. 27 (Bloomberg) -- Argentine buyout fund Pegasus Capital and Merrill Lynch & Co., the biggest U.S. brokerage firm, are setting up a $200 million fund to invest in real estate as the economy expands, Pegasus managing partner Mario Quintana said.

The fund, called Pegasus Real Estate Fund I, will invest in commercial and residential properties as well as tourism projects, Quintana said. It already has residential investments in the Buenos Aires neighborhood of Caballito and an office building in the city's financial district.

``Demand for property will increase as salaries are rising, thanks to the recovery,'' said Quintana. ``The perception of risk in this country has dropped, making it much more attractive for investment.''

Residential property prices in Argentina have gained an average of 60 percent since 2002, lifted by fourth straight years of economic growth of more than 8.5 percent, said Armando Pepe, founder of the country's Real Estate Chamber. The central bank predicts growth next year of 7.5 percent.

Argentina's economy shrunk by 11 percent in 2002, its worst recession ever, after the country defaulted on $95 billion of bonds in late 2001.

Pegasus's biggest assets in Argentina include music chain Musimundo SA, ice cream chain Freddo SA and coffee stores Aroma SA.

To contact the reporters on this story: Eliana Raszewski in Buenos Aires eraszewski@bloomberg.net; Daniel Helft in Buenos Aires at dhelft@bloomberg.net.

Last Updated: December 27, 2006 15:57 EST