Equity International, the global real estate investment company founded by billionaire Sam Zell, sees declining values in Brazilian commercial properties as an opportunity to buy.
A two-year building boom from Sao Paulo to Rio de Janeiro has left a glut of office space that caused rents at some of the most sought-after corporate addresses in Brazil to drop 12.3 percent in the fourth quarter, according to Cushman & Wakefield, the largest closely held commercial real estate firm. Rising interest rates are also pushing property prices lower.
Zell’s Chicago-based Equity International, which he co-founded with Gary Garrabrant in 1999, has invested $2 billion in real estate-related companies around the world, including in Brazil, China and Mexico. Equity’s fifth and largest fund, with $650 million in assets, includes stakes in retail, distribution and corporate companies.
Commercial real estate in Brazil “seems to be becoming more interesting,” said Vijay Jayaraman, senior vice president and investment co-leader at Equity International. “There might be in certain areas an oversupply of product and with interest rates going up there’s re-pricing of some of those assets,” he said in a phone interview from Chicago.
Then, in 2012 the economy stagnated, with growth of 1 percent and only a 2.3 percent increase in 2013. Inflation has been above 6 percent in two of the past three years and foreign investors have retreated.
At the same time, Brazil’s rising interest rates are pressuring rents. After reaching a record low of 7.25, Brazil’s benchmark interest rate has risen to 10.75 percent as the government seeks to damp inflation.
The economy has helped push corporate vacancies up 4.6 percentage points to 17.8 percent in the fourth quarter of last year, according to Cushman. Prices dropped to an average of 108.40 reais ($45.79) per square meter in that time period.
“We’ll still see vacancies increasing this year with the new offices that will be opened,” Miralles said.
Equity International has invested about half of its total assets since the beginning in Brazil, including companies like home builder Gafisa SA (GFSA3) and mall builder BR Malls Participacoes SA, according to Allison Davis, a vice president at Equity International.
The fund’s current Brazilian investments include self-storage company GuardeAqui Armazenagens Self Storage Ltda. and logistics operator AGV Logistica. Equity is precluded by the U.S. Securities and Exchange Commission from divulging its returns, Davis said.
Commercial property owners BR Properties SA (BRPR3) and Cyrela Commercial Properties SA Empreendimentos e Participacoes, or CCP, both based in Sao Paulo, saw office rent revenue drop by about 2 percent in the fourth quarter of 2013, according to regulatory filings.
Vacancies rose from 7.5 percent in the third quarter of 2013 to 12.6 percent in the fourth quarter for CCP. For BR Properties, vacancies fell from 5.3 percent in the third quarter to 4.1 percent in the fourth quarter. An outside spokeswoman declined to comment on behalf of CCP and BR Properties did not return phone call and e-mail requests for comment.
Companies looking for good deals on rent in new buildings are already seizing the opportunity, said Brian Moretti, head of research at TRX, a real estate investment, development and management firm based in Sao Paulo.
“Occupants should take advantage of the lower rents to move to areas that better attend to their needs,” Moretti said in a telephone interview.
Fama Investimentos SA, an investment company with 1.2 billion reais under management, is currently located in the Berrini neighborhood of Sao Paulo, far from banks and other firms who tend to rent in the Faria Lima and Itaim Bibi neighborhoods.
“It was too expensive to move to Itaim,” said Bruno Piacentini, a partner at Fama, in an interview in Sao Paulo. “But now with the rents going down, it might be the right time to make a move.”
Market “dynamics are potentially making conversations more interesting, especially with foreign investors becoming more wary of Brazil, and that leading to less competition,” Equity International’s Jayaraman said.
Not everyone is reducing rents.
One of two towers at the Victor Malzoni building on Faria Lima avenue, which opened in 2012, is still empty after its owners refused to cut the city’s highest rent at 240 reais per square meter, Moretti said. Google Inc. and Bank of China Ltd are among tenants in the building’s other tower, which is in part owned by a private fund run by Banco BTG Pactual SA. The bank declined to comment in an e-mail.
Lower rents at other buildings and a decline in the value of the local currency will attract foreign investors back to Brazil, Moretti said.
“Investor appetites in corporate offices tend to increase as assets get cheaper,” Moretti said.
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