BTG Fund Hunting for Real-Estate Bargains as Brazil Market Sinks

  • Vacancy rates at luxury offices in Sao Paulo, Rio at record
  • Tenants are trading up after rents plunged amid recession

Brazil’s largest publicly traded real-estate fund is hunting for bargains in what were once among the priciest markets in the world: top-end office buildings in Sao Paulo and Rio de Janeiro.

Adriano Mantesso, the chief executive officer at FII BTG Pactual Corporate Office Fund, known as BC Fund, wants to buy out rivals after the worst recession in a century sent rents tumbling and vacancies soaring. His focus is on deals in Sao Paulo and Rio de Janeiro, the country’s biggest cities.

"The window for acquisitions is opening right now," Mantesso said.

The two-year economic downturn, brought on by a mix of lower commodity prices and a deep political crisis that kept long-term investments at bay, sent vacancy rates on the nicest office buildings in Sao Paulo and Rio surging to records. Now, with early signs of a rebound in Latin America’s largest economy, trusts holding top-of-the-line buildings are attractive, Mantesso said, especially as tenants in less glamorous offices are trading up, taking advantage of lower rents.

Shares in many of Brazil’s real-estate investment trusts are still trading below the value of the assets they hold in the funds. Vacancy rates for top offices in Sao Paulo and Rio remain above 22 percent, according to real estate consultant Engebanc, from 2.5 percent in 2010. That, combined with a drop in rental prices, has affected the returns of real estate funds and created an investment opportunity, Engebanc’s Chief Executive Officer Marcelo Costa said in an interview in Sao Paulo.

“If you have patience to buy from small shareholders, you will buy an asset at a value that is much lower than the cost to construct a similar building,” Costa said. “It’s a fantastic investment opportunity, but it’s a lot of work.” 

Grupo BTG Pactual, the controller of Mantesso’s fund, sold assets and tapped a credit line from Brazil’s deposit-insurance fund to maintain liquidity after the November arrest of then-Chief Executive Officer Andre Esteves for allegedly interfering with the testimony of a former Petroleo Brasileiro SA executive caught up in a corruption probe. Profit at the investment bank fell 8 percent in the second quarter. Esteves, who has repeatedly denied wrongdoing, was released from jail in December. He returned to the bank in April.

The average office rent asking price in Sao Paulo was 87 reais per square meter ($2.50 per square foot) at the end of the second quarter, down from 90 reais a year ago and from 95 reais a year before that, according to data from Jones Lang LaSalle, a real estate brokerage and research firm. For top notch offices in Sao Paulo’s exclusive Faria Lima area, the prices have fallen to 122 reais per square meter, from 130 reais a year before and 138 reais the year before that.

All the empty offices means construction has plunged, with delivery of new buildings expected to total just 24 percent of that delivered in previous years, according to a report from real estate research firm Cushman & Wakefield. Mantesso says the lack of supply will become acute in about four years, possibly leading to a repeat of the record-low vacancy rates seen in 2010, when rent prices soared to levels in line with the ones charged in top financial centers like New York and London due to the lack of available space.

Sao Paulo ranked 50 in a global list of most expensive office spaces in June, from as high as 8th place in 2012, according to CBRE Group Inc. After posting one of the biggest drops on CBRE’s list of top 50 most expensive markets, Rio is no longer on the rank. The city peaked in 10th place in 2010.

Smaller funds often own just one building and don’t have an active management team that’s recruiting new tenants, meaning they are ripe for takeover that with a little effort could transform the buildings into big money makers, Mantesso said.

Mantesso’s fund has 2.3 billion reais ($692 million) in assets, making it the largest in Brazil. The fund has returned 36 percent this year when including reinvested dividends, above the 26 percent gain for Bovespa Real Estate Investment Fund Index. There are 71 funds that invest in real estate in Brazil and are traded in the BM&FBovespa exchange with 20 billion reais in assets.

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