Sam Zell sees great opportunities in Latin America
The region has some of the best investment opportunities for the next decade, says the mega-investor.
May 15, 2018Real Estate
Sam Zell was one of the pioneers among international investors to invest capital in real estate in Latin America. Since the founding of Equity International, in the late 1990s, he has invested more than $2 billion in companies in 15 countries, much of which in the real estate market in emerging economies, including the region’s.
He reads at least four newspapers every day, travels constantly, and makes a point of keeping himself well informed in search of a basis for assertive decisions. Therefore, it is with subject knowledge that he says that some of the best investment opportunities for at last the next ten years are concentrated in Latin America.
Shortly before participating as the keynote speaker of Latin America GRI 2018, he granted the following interview to GRI Magazine:
Which places in the world attract you more today when it comes to real estate investments? From where should the biggest returns come from?
Of all the corners of the world, I believe Latin America has some of the best investment opportunities for the next decade at least. Competitive labor costs and currency depreciation in recent years have helped position the region well. Further, the economic factors that are likely to drive growth are more diversified today. Specifically, we spend a lot of time in Mexico, Brazil, Colombia, Argentina and Japan. We tend to focus on countries where capital is scarcer and therefore highly valued. We are always very focused on whether we’re getting paid for the risk.
How do you see Latin America today – particularly in a year of elections in several countries and possible political-economic changes?
Given the number of elections and other political changes throughout Latin America, there will likely be enhanced short-term volatility. But we believe this dynamic often results in opportunity, particularly in Latin America, where recent reforms are expected to put many of the countries on more solid footings for the long term.
Three years ago, at a GRI Club meeting in São Paulo, you said that you still saw Brazil as a country with a great future, but that there were serious problems of governance. You also said that Mexico and Colombia had become very attractive. Has this analysis remained the same or somehow changed since then? Why?
As I mentioned these are among our target markets. Given the pain that Brazil’s real estate market has endured during the worst recession in the country’s history, as well as general oversupply in many sectors, we would have expected to see more attractive investment opportunities over the last few years. But given the banking system’s general lack of desire to take back assets or be overly punitive with its borrowers, many groups that should be seeking equity capital have decided to just hold on for as long as possible in the hope that a market recovery may bail them out. In Colombia, as we have learned and in many ways benefited from, the real estate market is small compared to Brazil and Mexico. When capital starts to flow in a small market, real estate re-prices very quickly. While we are still believers in the long-term fundamentals of Colombia, competition for assets and tenants has created a competitive market, and as a result, more moderate returns. Our view on Mexico remains largely unchanged. There is a lot of noise around NAFTA negotiations and elections, and that has impacted others investors’ view on the country, but we believe this is a short-term issue. Ultimately we think Mexico’s strong fundamentals, including a low-cost labor force and growing middle class, will drive demand for real estate.
Should Latin America receive more investments from Equity International in the near future? In new assets or in those in which the company is already invested?
We hope so. It all depends on the opportunity. We are equally focused on new investment opportunities and on growing the platforms of our existing investments. The latter has been the majority of our investment activity in recent years, but that could always change.
Is it possible to point out the more attractive real estate segments in the region currently or do you still prefer to look at the opportunities one by one?
In many cases, we have found that pricing has been more attractive outside of the major real estate asset sectors. We see potential in expanding the definition of traditional real estate into areas like infrastructure, self-storage and telecoms, and we have been active in those areas. But we will always still look at traditional real estate asset classes as well.
Should Guarde Aqui, now linked to Kipit by the joint venture with Patria Investments, move towards an IPO? Is self-storage a sector that tends to gain even more breadth in Brazil and Latin America with the expansion of e-commerce and the development of compact residentials?
It’s still early for self-storage. I think that sector has just gotten started, and that we’ll see continued growth from e-commerce and logistics-driven operators. We are also seeing demand from local entrepreneurs who are looking for space to store their products in central locations close to customers. After the merger with Kipit, Guarde Aqui now has 22 stores, which makes it the largest self-storage platform in Latin America. We are still actively deploying capital and have an aggressive expansion plan for the company over the next few years. While we’re not pursuing an IPO right now, it is an option in the future.
What are the plans for Estapar? Does the parking market remain attractive, even in the face of trends like self-driving cars?
Estapar is very focused on investment, institutionalization, and innovation. The company has deployed more than half of our 2016 investment into attractive investments at high-traffic-generating assets like airports, hospitals, and malls. Estapar has a strong pipeline and we expect to deploy the remainder of investment capital this year to take advantage of the current market dislocation. As Estapar continues to achieve scale, we want to position it as the dominant, best managed and most institutional parking platform in Latin America. So, we are highly focused on governance. Estapar is also spending a lot of time and resources in ensuring that the company stays ahead of new trends in technology. Their new app creates a captive customer base by finding the nearest garage, pre-booking their spot, and paying for parking through mobile devices.
In Mexico, Acosta Verde recently received Equity International follow-on investments. Is the mall market in the country and in Latin America still an opportunity, while we see malls closing doors in the United States?
As a starting point, the US is highly over-retailed and has much higher e-commerce penetration than Mexico. Further, AV’s product and target market are segmented to better withstand the impact of online shopping. The company’s malls are anchored with things like medical facilities that make going to them a necessity, and their target customers tend to shop online less. To date, we’ve seen foot traffic increasing and attractive year-over-year NOI growth.
What can you tell about your recent investments in Argentina?
We’ve been looking closely at Argentina for over five years, and just recently made an investment, partnering with Goldman Sachs Merchant Banking Division and other institutional investors, as well as with Grupo Pegasus’s real estate team to incorporate and capitalize ARG Realty. The partnership invested over US$300 million, which was the largest real estate investment in Argentina in over a decade. Initially, ARG will focus on the office and retail sectors in Buenos Aires, and over time the company will look to expand into other income-producing real estate sectors in the country. Limited investment in real estate over the last 15 years has generated a significant undersupply of institutional quality product, primarily in the office, retail, and industrial sectors. So, we think there is an attractive opportunity to scale the platform through strategic acquisitions and developments.
By Giovanna Carnio, editor-in-chief
He reads at least four newspapers every day, travels constantly, and makes a point of keeping himself well informed in search of a basis for assertive decisions. Therefore, it is with subject knowledge that he says that some of the best investment opportunities for at last the next ten years are concentrated in Latin America.
Shortly before participating as the keynote speaker of Latin America GRI 2018, he granted the following interview to GRI Magazine:
Which places in the world attract you more today when it comes to real estate investments? From where should the biggest returns come from?
Of all the corners of the world, I believe Latin America has some of the best investment opportunities for the next decade at least. Competitive labor costs and currency depreciation in recent years have helped position the region well. Further, the economic factors that are likely to drive growth are more diversified today. Specifically, we spend a lot of time in Mexico, Brazil, Colombia, Argentina and Japan. We tend to focus on countries where capital is scarcer and therefore highly valued. We are always very focused on whether we’re getting paid for the risk.
How do you see Latin America today – particularly in a year of elections in several countries and possible political-economic changes?
Given the number of elections and other political changes throughout Latin America, there will likely be enhanced short-term volatility. But we believe this dynamic often results in opportunity, particularly in Latin America, where recent reforms are expected to put many of the countries on more solid footings for the long term.
Three years ago, at a GRI Club meeting in São Paulo, you said that you still saw Brazil as a country with a great future, but that there were serious problems of governance. You also said that Mexico and Colombia had become very attractive. Has this analysis remained the same or somehow changed since then? Why?
As I mentioned these are among our target markets. Given the pain that Brazil’s real estate market has endured during the worst recession in the country’s history, as well as general oversupply in many sectors, we would have expected to see more attractive investment opportunities over the last few years. But given the banking system’s general lack of desire to take back assets or be overly punitive with its borrowers, many groups that should be seeking equity capital have decided to just hold on for as long as possible in the hope that a market recovery may bail them out. In Colombia, as we have learned and in many ways benefited from, the real estate market is small compared to Brazil and Mexico. When capital starts to flow in a small market, real estate re-prices very quickly. While we are still believers in the long-term fundamentals of Colombia, competition for assets and tenants has created a competitive market, and as a result, more moderate returns. Our view on Mexico remains largely unchanged. There is a lot of noise around NAFTA negotiations and elections, and that has impacted others investors’ view on the country, but we believe this is a short-term issue. Ultimately we think Mexico’s strong fundamentals, including a low-cost labor force and growing middle class, will drive demand for real estate.
Should Latin America receive more investments from Equity International in the near future? In new assets or in those in which the company is already invested?
We hope so. It all depends on the opportunity. We are equally focused on new investment opportunities and on growing the platforms of our existing investments. The latter has been the majority of our investment activity in recent years, but that could always change.
Is it possible to point out the more attractive real estate segments in the region currently or do you still prefer to look at the opportunities one by one?
In many cases, we have found that pricing has been more attractive outside of the major real estate asset sectors. We see potential in expanding the definition of traditional real estate into areas like infrastructure, self-storage and telecoms, and we have been active in those areas. But we will always still look at traditional real estate asset classes as well.
Should Guarde Aqui, now linked to Kipit by the joint venture with Patria Investments, move towards an IPO? Is self-storage a sector that tends to gain even more breadth in Brazil and Latin America with the expansion of e-commerce and the development of compact residentials?
It’s still early for self-storage. I think that sector has just gotten started, and that we’ll see continued growth from e-commerce and logistics-driven operators. We are also seeing demand from local entrepreneurs who are looking for space to store their products in central locations close to customers. After the merger with Kipit, Guarde Aqui now has 22 stores, which makes it the largest self-storage platform in Latin America. We are still actively deploying capital and have an aggressive expansion plan for the company over the next few years. While we’re not pursuing an IPO right now, it is an option in the future.
What are the plans for Estapar? Does the parking market remain attractive, even in the face of trends like self-driving cars?
Estapar is very focused on investment, institutionalization, and innovation. The company has deployed more than half of our 2016 investment into attractive investments at high-traffic-generating assets like airports, hospitals, and malls. Estapar has a strong pipeline and we expect to deploy the remainder of investment capital this year to take advantage of the current market dislocation. As Estapar continues to achieve scale, we want to position it as the dominant, best managed and most institutional parking platform in Latin America. So, we are highly focused on governance. Estapar is also spending a lot of time and resources in ensuring that the company stays ahead of new trends in technology. Their new app creates a captive customer base by finding the nearest garage, pre-booking their spot, and paying for parking through mobile devices.
In Mexico, Acosta Verde recently received Equity International follow-on investments. Is the mall market in the country and in Latin America still an opportunity, while we see malls closing doors in the United States?
As a starting point, the US is highly over-retailed and has much higher e-commerce penetration than Mexico. Further, AV’s product and target market are segmented to better withstand the impact of online shopping. The company’s malls are anchored with things like medical facilities that make going to them a necessity, and their target customers tend to shop online less. To date, we’ve seen foot traffic increasing and attractive year-over-year NOI growth.
What can you tell about your recent investments in Argentina?
We’ve been looking closely at Argentina for over five years, and just recently made an investment, partnering with Goldman Sachs Merchant Banking Division and other institutional investors, as well as with Grupo Pegasus’s real estate team to incorporate and capitalize ARG Realty. The partnership invested over US$300 million, which was the largest real estate investment in Argentina in over a decade. Initially, ARG will focus on the office and retail sectors in Buenos Aires, and over time the company will look to expand into other income-producing real estate sectors in the country. Limited investment in real estate over the last 15 years has generated a significant undersupply of institutional quality product, primarily in the office, retail, and industrial sectors. So, we think there is an attractive opportunity to scale the platform through strategic acquisitions and developments.
By Giovanna Carnio, editor-in-chief
