WEB FEATURE: Global Market Report – South America
In the third and final piece of MHN's global market report, a look at South America shows that potential for large-scale apartment communities exists in the region's big cities.
This is the third of three installations on MHN’s global market report. Part one focused on Asia, and part two focused on Europe.
South America
As capital flies around looking for the best place to land, the big cities in South America show definite promise. Chairman of Equity Group Investments Sam Zell recently said in an interview on CNBC, “In a few weeks you’ll be hearing that the stock exchanges of Colombia, Peru and Chile are merging, making it the second-biggest stock exchange in Latin America behind Brazil, but larger than Mexico’s. This newly merged market will become a major funnel of capital into these markets after this event.”
In comparison to the other BRIC countries, Phillips says he sees the growth in Brazil as “a more modest pace of modernization but still pretty profound.” The country has “a relatively transparent market, an approach to development that is pretty similar to what we do here. It’s a market that could emerge as a potential investment vehicle for American companies.”
Quarterly cap rates by region. Americas in blue; Europe, the Middle East and Africa in green; and Asia Pacific in orange. (Source: Real Capital Analytics)
Bob Wislow, chairman and CEO of U.S. Equities Realty, agrees that there are markets to be tapped in South America, highlighted by the major cities in Brazil; Santiago, Chile; Bogota, Colombia; Lima, Peru; and definitely Buenos Aires, Argentina. “There’s no doubt that the multifamily market in Argentina has been a very hot market,” Wislow says. “The quality of the buildings has soared dramatically.”
Although the markets in Argentina and Chile have concentrated on condominium projects, there are developers “who are doing lofty kinds of contemporary buildings for successful young professionals to rent and doing extremely well in the market because there just isn’t much competition or much available in terms of those kinds of nice spaces,” Wislow tells MHN. “The market is expensive in Argentina, a little less expensive in Chile. There are certainly international prices on the high-end condo buildings.”
Argentina has a totally different way of financing condominium projects. Historically, developers have pre-sold their buildings before starting development, where the buyers put down half up front, then pay a monthly amount during construction so that the units are paid off by the project’s completion. But that end product of the high-rises, Wislow says, is generally very sophisticated. “You walk into one of those units and you think you’re in a very high-end unit anywhere in the United States—great amenities, great pools, workout rooms, club floors, very nice apartments, nice kitchens. You’d be very impressed, especially in Buenos Aires and in an area called Puerto Madero, which has a lot of foreign investors in it.”
Big picture
When people talk about the BRIC construct, lumping those four countries together as the hot spots for growth, it’s a useful concept, but only to a certain extent. As Phillips says, “They all do fit within a general category of fast-growing, rapidly developing, rapidly urbanizing countries, and so it’s useful in those ways, but Brazil and Russia couldn’t be much more different, or India and Russia for that matter.” But however wildly divergent these countries are, a few maxims can be applied across the board.
In general, when it comes to an international rental market, there’s simply not a defined product. “Most of the housing is held by people who own a couple more units than they live in themselves,” Harrelson says. “The renters-by-choice aren’t engaged the same way that they are in this country, where mobility and efficiency and access to a fairly robust group of amenities are popular. Other countries just haven’t developed that same level of awareness or acceptance of rental property.”
And even as young people become more attracted to that lifestyle, other pieces have to fall in place. Harrelson points to the absence of any government-supported debt piece in other countries. “If you think about the role of Fannie and Freddie in the U.S., and HUD, it’s been to provide affordable debt to residential, for-rent products.” Investment doesn’t have the same appeal when you’re zero-leveraged.
Some think this may be starting to change. “We’re starting to see glimmers,” Pentland Lally says. “The New South Wales government [in Australia] is talking about developing and investing in rental housing. I believe some markets are starting to see a need for affordable workforce housing, or affordable housing in general. So they’re starting to take note and allow this type of development to start.”
Since Pinnacle has gotten its feet wet in foreign territory, Harrelson’s phone has been ringing. “As we’ve declared our intentions, I’ve received calls from anywhere from Bangladesh to Australia, from people who believe they too are under-served and that there’s an opportunity.” These calls come from both developers and governmental agencies who see the potential. In Sydney, for example, Harrelson says, “The supply-demand would blow you away in terms of the year-over-year rent increases and lack of availability for rental products.”
Harrelson is confident that the row of hurdles in this process of international expansion leads to a worthwhile finish line. “The fact that the world is getting smaller is a good thing,” he says. “I think that, notwithstanding the challenges of our own economy and so forth, there’s an opportunity to enthusiastically go outside our borders. You certainly need to be aware of the risks, [and] prepared for the setbacks; but my belief is that the rewards will be there.”
