Arab Investors Join Latin America's Real Estate FiestaPublished August 10, 2010 in Arabic Knowledge@Wharton
Guatemala City isn't a popular choice among international property investors scouting for locations to build a signature office tower. For all its attributes -- a booming population, proximity to the United States and pro-business laws -- the largest city in Central America is known more for crime and corruption than real estate opportunities. Yet, in its busy commercial area, construction has begun on a downsized replica of one of the Middle East's most iconic modern structures, Dubai's sail-shaped Burj Al Arab Hotel. The 16-story office building won't match the luxury of the Arabian Gulf's only seven-star hotel. But in an urban center dominated by aging, monolithic office buildings and hotels, the tower is sure to bring some style to Guatemala City's skyline.
"We've had a lot of high-profile, expensive investments in the city in the last few years, but nothing like this," says Juan Gonzalez, a Guatemalan businessman. "This is going to change the make-up of the city. This building will be an icon."
That might be true. But the most impressive aspect about the building is not its architecture; it is the fact that it is even being built that astonishes locals. During the recent global economic downturn, construction projects were cancelled across the world. The United Arab Emirates (UAE) was particularly hard hit, leaving more than US$360 million of construction projects either on hold or cancelled. Guatemala City's Dubai Center is not suffering the same troubles as its namesake, despite the fact that the building's investors are all Arab. From an idea that took hold during a visit by a delegation of Arab executives to Guatemala City five years ago, an investment group from the UAE, Inversiones Sazitasa, is bankrolling the project with an initial investment of US$20 million.
And Guatemala City isn't the only Latin American country enjoying the attention of Arab real estate investors. For example, Colombia's beautiful but underdeveloped Caribbean coast is the site of the latest effort by Royal Group, a UAE-based conglomerate of 60 companies headed by Sheikh Tahnoon bin Zayed Al Nahyan, son of former UAE President, Sheikh Zayed bin Sultan Al Nahyan. Royal Group's expansion in Colombia began in 2009 with the development of Vision Cedar Bogotá, a five-star, 200-room hotel, two bars and a restaurant in the country's capital. The project is due to be completed next year.
For many Arab businesses, these undertakings mark a major departure from previous investment strategies. "If you go back to 2005, Gulf investors would have laughed if you suggested Latin America," says Daniel Melhem, president of the Gulf Latin America Leaders Council (GLLC), an economic development advisory organization, and a principal of Argentina-based real estate firm Knightsbridge Partners. "It wasn't on the map for them. They were making plenty of money in the United States." That's changed today. "Fast forward to 2010, you have daily flights [to Latin America] from the Middle East, and regular visits by heads of state," he adds. "In the next 18 months, we're going to see a number of significant deals here."
Brazil a Prime Target
Spurring Arab investor interest is Brazil, the emerging-market darling that's Latin America's largest economy. While other countries continue to fret about the slow speed of their recoveries, Brazil's central bank announced in June that it expects the country's economy to grow 7.3% this year, the biggest economic expansion in 24 years. Much of that growth will be export-driven, with both old and new trading partners. The Arab Brazilian Chamber of Commerce predicts trade between Brazil and the Middle East will reach roughly US$6.6 billion in 2010, a year-on-year increase of 33%.
Brazil's economic progress is no aberration, asserts Fernando V. Ferreira, a Wharton real estate professor. "From the 1980s to the mid 1990s, we saw a climate of high unemployment and runaway inflation," with the latter reaching triple and quadruple digits, notes Ferreira, a native Brazilian. "But during the financial crisis, interest rates had to come down. Government rates came down, household rates came down and that was a real help for the country's growth because that gave many people access to credit for the first time." According to Ferreira, growth has provided many Brazilians with new job opportunities. "Unemployment went from 13% to 8% [in 2009] and is around 7.5% today. That's what's driving the interest in real estate."
Brazil's growth is hard for Arab real estate investors to ignore, states Angela Martins, international director of Banco ABC Brasil, which is controlled by the Arab Banking Corporation. "During the [financial] crisis, Arab investment was affected, so we did not see many [property] deals being concluded," she says. That dry spell should end "now that Brazil is booming, and the Gulf Cooperation Council is emerging from the Dubai turmoil."
A sign of the changing times is the US$100 million purchase in April by Elysian International, a UAE-based property developer, of a sprawling development in Rio de Janeiro, which includes villas, apartments and a five-star hotel. "We have been keeping our eye on Brazil as an emerging market for some years now," Masood Naseeb, Elysian's founder and CEO, said in a press statement. Citing Brazil's robust economy, growing per capita wealth, and popularity as a tourist destination -- especially since winning the bid to host the 2014 World Cup and the 2016 Olympic Games -- Naseeb added that he expected "a 1,000% to 7,000% appreciation of land [prices] in the region, particularly in the coastal areas."
In the latest "Emerging Trends in Real Estate" report from consultants PricewaterhouseCoopers (PwC) and nonprofit Urban Land Institute (ULI), a chapter on Latin America highlights several reasons why the entire spectrum of real estate in Brazil is attractive. First, according to the research, the country needs eight million new housing units to meet pent-up demand. Meanwhile, there are only 400 shopping centers for a country with a population of nearly 200 million, and warehouse space is "limited and obsolete." As for the office segment, neither of Brazil's two biggest cities -- Rio and São Paulo -- has a strong supply of very high-end office space, according to the report, and like Mexico City and Buenos Aires, existing space in both cities have high occupancies and strong rent growth.
Other experts agree that it is indeed the office markets in Rio and São Paolo that real estate experts are watching most closely. "Office markets in Brazil have taken the lead [in the region's real estate attractiveness], as they translate the most compelling secular economic growth story in the region into strong office demand and corresponding increases in rental rates," stated a report assessing the first quarter of 2010 from real estate services company Jones Lang LaSalle (JLL).
According to the latest semi-annual global office rents survey published in May by CB Richard Ellis (CBRE), another real estate services firm, São Paolo is now the tenth most expensive office market, with an occupancy cost of US$100.00 per square foot per annum (compared with the top-ranking market -- London's West End -- at $182.94 per square foot per annum). "This is [due to] a combination of the appreciation of the Brazilian Real against the U.S. dollar over the past year, the scarcity of new office product and the strength of the local office market," CBRE analysts noted. "Latin America is holding up better than the rest of the world, and is the only region posting positive gains [in occupancy costs], with an average 3.4% increase." Of the 15 markets in the region, only three declined, and the largest increases were in Rio (17.7%) and São Paulo (15.9%).
"There are companies looking to invest heavily in real estate, while also setting up [their own] offices in São Paolo and Rio de Janeiro," states Melhem of the GLLC. There are already a variety of multinationals with locations in the cites, including U.S. computer chipmaker Intel, German carmaker Volkswagen, Indian IT firm Wipro and U.S. hotelier Marriott International. Another will be joining them, thanks to the July agreement between Kuwait and Brazil to establish a joint investment company, likely to be based in São Paolo's financial hub.
Deepening Economic Ties
A steady stream of trade and commerce delegations from the Middle East have also been visiting the rest of Latin America. Kuwait's Prime Minister Sheikh Nasser Al-Mohammad Al-Ahmad Al-Sabah made the most recent official trip in July. The tour, which included stops in Brazil, Chile, Cuba, Uruguay, Mexico and Argentina, aimed to strengthen relations and promote foreign investment in Kuwait, the government said in a statement. Al-Sabah's visit came on the heels of a historic stop by Syria's President, Bashar al-Assad, in June. Assad's tour included the first-ever visit by a Syrian president to Argentina, where he spoke of deepening economic ties. Trade between Syria and the region amounted to US$380 million last year.
But Middle Eastern investors haven't turned their backs on Europe and the U.S., the two regions traditionally favored most by Arab property investments. The Qatar Investment Authority recently bought a number of London landmarks, including a large portion of Canary Wharf, luxury retailer Harrods and the Savoy Hotel.
Yet enthusiasm for those markets is waning. Amid the recent financial woes befalling U.S. and European real estate, some Arab investors have suffered embarrassing losses. That includes Dubai's Istithmar World's foreclosure sale of the W New York Union Square hotel for US$2 million, which the firm had bought for US$282 million in 2006.
Experts also say that the global investment environment is working increasingly in Latin America's favor. For example, the capitalization rate (a percentage relating the value of an income-producing property to its future income) on an office building in the U.S. was around 10% on average in 2001, but has since fallen to less than 5% in many markets, according to The Wall Street Journal. Meanwhile, investors are seeing 9% cap rates in Brazil and Colombia, and 13% in Argentina, Melhem says.
But as experts in the PwC/ULI report note, international real estate investors have been wooed by Latin America before, sometimes much to their frustration. "Investors' and developers' tentative initiatives [in the region] typically foundered in confronting a potpourri of daunting challenges," they wrote. Corruption, a lack of transparency, regulatory issues and the lack of reliable local partners are among the challenges the researchers cited. Another report in 2009 by the United Nations' Economic Commission for Latin America and the Caribbean, said the region suffers from high energy costs, sometimes volatile exchange rates and, perhaps more importantly, security issues. The United Nations Development Programme, for example, named Central America the most murderous region in the world. This "can add to the uncertainty faced by ... real estate activities," the UN report stated.
The International Monetary Fund has said that the region's reliance on sales of commodities and other export products -- the very thing that has helped drive growth for many Latin American countries -- makes them vulnerable. When prices and demand for exports soften during global downturns, so do demand for office space and other real estate. The IMF, however, said demand for those products, particularly commodities, is strong in the short term. In July, Nicolas Eyzaguirre, head of the IMF Western Hemisphere Department, said the Latin American economy could grow by as much as 5% this year. But he warned that the growth is not without risk of "overheating."
As the economic recovery takes hold and some of those concerns wane across Latin America, perhaps the biggest worry for foreign investors is now geopolitical. The region has long been beset by political instability and civil strife. More recently, there have been an emergence of leftist presidents -- most notably Venezuelan President Hugo Chávez -- whose nationalizing policies have had divisive reverberations across the region. "On one side, you have the countries aligned with the U.S. and Europe, countries like Mexico, Peru, Colombia and Chile," GLLC's Melhem says, adding, "But on the other side, you have Cuba, Paraguay, to some extent Argentina, and ... Venezuela. Brazil doesn't align with anyone. So there are two different spheres of influence. Is it a worry? Of course." But like just about all the other obstacles investors in the region have faced over the years, "it doesn't mean that it can't be overcome."