Sao Paulo Makes Short List in Gazit-Globe’s Deal Search

Chaim Katzman, chairman of Israeli shopping-center operator Gazit-Globe Ltd., has been scouring the globe for good real-estate deals for months, from Warsaw to New York.

He says he’s found one in South America’s largest city.

The Tel Aviv-based company is in talks to buy three malls in Sao Paulo and is looking to double the number of shopping centers it owns in Brazil, part of a global strategy to snap up prime commercial property in densely populated cities and sell off suburban assets.

Katzman’s push is winning praise from Bank Leumi Le-Israel and Psagot Investment House, which say it will shore up profits once U.S. interest rates start to rise and curb gains in real-estate prices and rents in one of Gazit-Globe’s biggest markets. The company, which has about 25 percent of its $22 billion of assets in emerging markets, has sold off $2 billion of properties in the past four years to free up funds to invest in urban centers, according to Bank Leumi.

“These are good long-term investments,” Ella Fried, an analyst at Bank Leumi who has a buy rating on Gazit-Globe shares, said in a telephone interview from Tel Aviv yesterday. “Brazil fits exactly the profile they are interested in, in a growing emerging market.”

Gazit-Globe’s U.S.-listed shares have climbed 6.4 percent in the past three months to $13.54 through yesterday, beating a 2.4 percent return on the Bloomberg Israel-US Equity Index. The shares are up 1 percent year-to-date while they’ve gained 1.2 percent in Tel Aviv. The stock rose 2 percent to $13.81 at 9:33 a.m. in New York today.

Brazilian Investments

Gazit-Globe’s Brazilian unit has invested about 330 million reais ($148 million) since 2008 and operates four shopping centers in Brazil, aiming to boost that number to between eight and 10 in the next two to three years. It’s developing a fifth in the Morumbi neighborhood of Sao Paulo, which should open at the end of 2015, according to Mia Stark, Chief Executive Officer of the unit. She declined to comment on the value of the three mall acquisitions in a phone interview yesterday.

The company, which owns about 570 properties in more than 20 countries, plans to have between $1 billion or $2 billion of assets in Brazil within 5 years, Katzman said in a June 27 interview in the company’s Sao Paulo office.

“Brazil is our number one growth market today, no doubt,” he said. “We need to grow our portfolio, and we’d better do it now.”

Slowing Growth

About 7 percent of Gazit-Globe’s net operating income comes from Israel while Brazil accounts for 1 percent. The U.S. and Canada make up 25 percent and 27 percent, respectively, and Europe’s share is 40 percent, according to a company report.

Not everyone sees Sao Paulo as a great investment. Retail sales in Brazil have stagnated as accelerating inflation and higher interest rates erode consumer confidence, while the economy is forecast to grow 1.7 percent this year, the slowest pace since 2009. Presidential elections will be held in October.

“This is a tough year for the retail market in Brazil as a whole, and also for real estate investments, because people are concerned about who the next government will be,” Sergio Manzalli, partner and director at SACS Consult, a shopping mall investment and consulting firm based in Sao Paulo, said in a July 8 telephone interview.

Most mall developers seeking to tap the 40 million people who entered the middle class over the past decade are looking to the north and northeast regions of Brazil, rather than Sao Paulo, he said.

Buy Recommendations

“Real estate to start new business in Sao Paulo is too expensive at this moment, it’s not worth it,” he said. “Competition in such areas is very tough as well.”

Even though Sao Paulo real-estate prices are higher than other parts of Brazil, Gazit-Globe sees it as less risky, said Stark. Brazil is also an easier place to do business than other emerging markets like India or Russia, Katzman said.

Gazit-Globe, founded by Katzman in 1991, is also looking to emerging markets in Eastern Europe to bolster its portfolio.

Four out of five analysts have a buy rating on the shares, which will climb 9.9 percent in the next 12 months to $14.88, according to the average estimate compiled by Bloomberg.

“The world is going toward bigger cities, all the major urban centers will be bigger and richer,” Noam Pincu, an analyst at Psagot Investment House Ltd. who rates Gazit-Globe shares outperform, similar to a buy recommendation, said by phone from Tel Aviv July 8. “Properties there, the good assets there, will always have better value and better demand.”

Before it's here, it's on the Bloomberg Terminal.