Reflections on Brazil’s Real Estate Market

After one week, two cities, fifteen meetings, four site visits, and an ungodly number of caipirinhas, I think our REA/Chazen group has gotten a basic handle on the Brazil real estate market.  From what we’ve seen, it is clear that Brazil continues to develop on the back of a large and young population, a strong consumer culture, and the opening of credit markets.  Yet, the country’s built environment will need to catch up quickly in order to support the next phase of Brazil’s growth and economic development.  In the two cities we visited, Sao Paulo and Rio de Janeiro, the existing infrastructure, commercial buildings, hotels, etc were clearly being taxed by the growing demands placed on them.  As this process of infrastructure and real estate upgrade takes place, there appear to be significant opportunities for both local and international investors alike.

Brazil’s real estate market is still very much dominated by local developers and investors, although sources of capital for institutional quality real estate are still scarce.  Established sources of real estate capital in other countries, such as pension funds and insurance companies, have not traditionally invested in real estate in Brazil due to the legacy of high bond yields resulting from rampant inflation.  Now, although some of these institutions are moving into real estate investment, the learning curve is extremely steep, with many of these institutions unaccustomed to the private equity promote structures and limited control rights employed by the fund GPs.

By the same token, there has only been limited investment in the Brazil real estate market by international institutions (save for Sam Zell and Equity International, who own or formerly owned significant stakes in several of the most successful Brazilian real estate companies).   A few major developers and investors, such as Tishman Speyer, Hines, and GTIS, have penetrated the market.  However, large international institutions have traditionally been at a disadvantage compared to smaller, local players who know the region and can make decisions very quickly.

This dynamic would appear to be changing quickly, though.  First off, the allure of strong returns in the Brazilian market – several of the companies we talked to spoke of achieving mid-20s IRRs with minimal leverage – and the growing acceptance of Brazil as a destination for institutional real estate investment should attract foreign capital in significant quantities in the coming years, especially given the low yields in the US and other developed markets.  Secondly, as the local institutions become more sophisticated in their investment strategies, an enormous source of capital for real estate investment will be released.  The continuing development and opening of Brazil’s real estate credit markets will further support the flow of funding to the industry.

Against this backdrop, which of the two cities we visited offers a better investment environment?  I’m glad you asked.  Sao Paulo is clearly the more established business and commercial center of the two cities.  There are several brand new Class A office towers under construction and at the moment office rents are at the same level as those of Midtown Manhattan.  However, the city is a sprawling metropolis and has very few barriers to entry.  The city’s core commercial center seems to shift every few years as new, higher quality offices are built.  The constantly shifting spatial dynamics result in little long term certainty regarding the investment value of a building.  Furthermore, the onslaught of new office supply may be cause for concern if tenant demand cannot keep pace.

Rio, by comparison, has served as more of a leisure destination in recent history.  However, overcrowding in Sao Paulo and the infrastructure investments for the upcoming World Cup and Olympics have been attracting increased commercial demand.  As it stands, there is very limited Class A office property in Rio, and top offices also command prices on par with Midtown given the shortage of supply.  The city is undertaking a redevelopment of an old port, Porto Maravilha, that will provide a sizeable amount of modern commercial development.  The natural constraints on the city imposed by its geography reduce the likelihood of unconstrained development, and the presence of an attractive commercial district following the port redevelopment could provide a big boost to Rio as a real estate investment destination.

                Thanks for tuning in to the blog.  Hope it has been interesting, informative, insightful and even more.  I’ll leave you with a few pictures from our trip.

James Hoeland ’13

The group meeting with Tishman SpeyerPhoto by Andrea Sulyanto
The group meeting with Tishman Speyer
Photo by Andrea Sulyanto
The group on the roof of a newly completed building by Tishman SpeyerPhoto by Andrea Sulyanto
Group shot on the roof of a newly completed building by Tishman Speyer
Photo by Andrea Sulyanto
The building we affectionately called
The building we affectionately called “The Watermelon”
Photo by Gary Hack
Group shot at an abandoned hotel projectPhoto by Andrea Sulyanto
Group shot at an abandoned hotel project
Photo by Andrea Sulyanto
The obligatory Christ the Redeemer shotPhoto by Andrea Sulyanto
The obligatory Christ the Redeemer shot
Photo by Andrea Sulyanto
Group shot on Sugarloaf MountainPhoto by Andrea Sulyanto
Group shot on Sugarloaf Mountain
Photo by Andrea Sulyanto

Miracle on the Han River – Post-Korea thoughts

Walking around Seoul in 2013, it is hard to believe that in just 1953, South Korea’s per capita GDP was on par with that of Indonesia and Egypt, when today it is closer to that of Portugal.  Korea’s economic growth, referred to as “the Miracle on the Han River,” has been an export-driven process, which has transformed the economy from nearly zero to a trillion dollars.  Korea’s economic success has brought with it: technological innovation, advancement in education, modernization, and incredible improvements in standards of living.

Credit: Wikipedia
Credit: Wikipedia

We had the opportunity to meet with some of the leading companies in the global marketplace such as Samsung, Hyundai Motors, Hyundai Heavy Industries, Lotte Group, SM Entertainment, and CJ Foods – it is impossible not to be impressed by South Korea, which is compounded in the context of just how much the country has developed in the past 60 years.

Hyundai Motors showroom
Hyundai Motors showroom
Visiting the Samsung D'light showroom
Visiting the Samsung D’light showroom
Testing out the virtual technology at Samsung
Testing out the virtual technology at Samsung

For many of us, this was the first of untold future Korean business interactions.  From working at Korea’s multinational conglomerates (Samsung hires many CBS graduates) to investing in Korea to partnering with CBS classmates who call Korea home, my prediction is that  “The Miracle on the Han River” will have significant global business implications for many of us going forward.

Tofu BBQ
Tofu BBQ (Photo credit: Kelly Fallon)

Graciously, a few classmates and fellow travelers have shared some highlights in their own words:

Jjimjilbang (Korean bathhouse) in Busan

“After a long day at Hyundai, we had the opportunity to finally relax at a luxurious  Korean spa. The jjimjilbang (as bathhouses are called in Korea)  is an essential part of Korean daily life. I was shocked by how many people were at the spa at 11pm on a Wednesday. After changing into out spa uniforms, the group enjoyed using the eighteen different saunas and numerous hot and cold springs. My favorite was the led sauna which had pulsating neon lights and sounds. This might not sound like a relaxing atmosphere but it certainly was.”

– Daniella Gold Zimmerman, CBS ‘14

CBS students in one of the many saunas
CBS students in one of the many saunas (Photo credit: JoonHong Kim)
Korean bathhouse
Korean bathhouse (Photo credit: Joon Hong Kim)

K Pop at SM Entertainment

“During our visit to SM Entertainment, we heard from [one of the business executives] about the business side of the K-pop phenomenon – as he told us, it’s much more than Gangnam Style. We learned about the process of recruiting and training artists, and about the different audiences each group targets. It was a fascinating look into a cultural movement many of us knew little about before our trip, and I think most of us came away with an increased appreciation for K-pop, and more than a few catchy tunes stuck in our heads.”

–    Alix Cody, CBS ‘13

Enjoying K Pop &  Karaoke in Seoul
Enjoying K Pop & Karaoke in Seoul


Key takeaways from David (Zhibo) Liu

  • “Family business succession is always a tough issue: Hyundai, founded by Mr. Chung Ju Yung, was ever the largest conglomerate in South Korea, but was split into a few groups due to the “War of the Prince”. Though Hyundai Motors and Hyundai Heavy Industries are still one of the largest players in their respective business worldwide, it still implies that the succession of family business is really a tough job
  • $80K wage for the line workers at Hyundai Motors – the highest payment among automakers worldwide: such high compensation level is even rare in the US, where the auto workers can normally earn $40-60K per year. High labor cost is not a bad thing because it also guarantees high quality
  • Again, low labor cost of competitors is not necessarily a competitive advantage, a viewpoint double confirmed by Hyundai Heavy Industries (HHI): when asked about the competition from Chinese shipbuilders, who have lower labor cost, the representative from HHI believed that low labor cost can only lead to low end products, though they also know that the competitors may catch up some day. Therefore, what they need to do include (1) try to prolong the catch-up period (at least 5 years based on today’s situation) (2) improve mid and high end products and strengthen the customer relationship (3) further diversify the business portfolio
  • The persistent focus on R&D makes Samsung exceptional: there’re now 60,000+ staff in R&D, over 25% of total staff in Samsung Group, and the R&D expense is 5.5-6.0% of total sales; both figures are quite high, contributes to its $188 Bn sales in 2012, and form a solid foundation to achieve its target of $400 Bn in sales in 2020″

– David (Zhibo) Liu, CBS ‘14

Catching up with Dean Hubbard in Seoul
Catching up with Dean Hubbard in Seoul

Personal Reflections on visiting the DMZ/JSA (Demilitarized Zone & Joint Security Area)

– Yael Silverstein

Bridge of No Return, DMZ
Bridge of No Return, DMZ
Looking onto the North Korea side of the Line of Demarcation, Joint Security Area
Looking onto the North Korea side of the Line of Demarcation, Joint Security Area

Lastly, we would like to once again thank the organizers for all of their hard work on this flawless trip, and the Chazen Institute and Chairman Dong Bin-Shin for the opportunity to spend our Spring Break learning about South Korea.  You have our most sincere gratitude.  Gamsa hamnida!

Vendor at the Jagalchi Fish Market, Busan
Vendor at the Jagalchi Fish Market, Busan

Yael Silverstein, CBS ‘13

Writing from NYC

Venturing North: Haifa and the Golan Heights

Whenever I travel to a new country, I always appreciate it when I have the time to venture outside of the capital city and witness a contrasting experience of life there.  We’ve had such an opportunity in the second half of the Chazen Israel trip, in which we stopped in the industrial city of Haifa for several hours, followed by an evening at a kibbutz and a morning of exploration at Golan Heights.

Our first stop was a visit to Elbit Systems, the biggest private defense company in Israel with revenues of $2.8Bn, 13,000 employees worldwide, and a lot of R&D and international growth.  Tomer Goldberg ’13 had worked there before school and the company’s portfolio includes airborne systems, unmanned vehicles, homeland security, EW & countermeasures, ISR & EO systems, combat vehicle systems, and naval systems.  The presenters shared an in-depth view of their unmanned air vehicle systems, which have applications such as patrolling long borders to identify penetrations, scanning an area for targets with a radar, or moving target detection; in other words, helping the military to attain better “situational awareness.”  They also demonstrated their Helmet Mounting System, a high-tech helmet with display, tracker, and electronic unit to help pilots target the enemy by maneuvering their heads instead of the entire aircraft, and to also monitor the pilot’s health while in flight to help avoid unnecessary tragedies.  The company has made strategic decisions to focus on the defense market and concentrate their efforts on certain markets by operating as a “multi-domestic” company in the countries where they have contracts; they are also conscious of the relationships they build with their clients and won’t, for instance, take any clients from China given their huge business in the United States.


After visiting Elbit Systems, we stopped by the Baha’i Gardens, a beautifully landscaped garden and memorial to one of their founders buried there (and a UNESCO World Heritage Site).  The Baha’i have a small, transient community in Haifa that comes to the city to study and tend the garden, although they are not eligible for Israeli citizenship.  From our scenic lookout, we were able to view the large port and the coastline facing north towards the Lebanese border.  Haifa was hit by a number of rockets from Hezbollah, but from what I read and heard from our guides, the city, which is home to many international companies, kept operating through the attacks and this hasn’t stopped significant foreign investment.


Next, we visited the Church of the Beatitudes, overlooking the Sea of Galilee.  The view was beautiful but even more remarkable is that these are the spots where in multiple accounts in the Bible, Jesus delivered the Sermon on the Mount, walked on water, and performed much of his ministry.


We arrived in Golan Heights in the early evening and spent the night at a kibbutz, or collective community traditionally based on agriculture (today, they typically have at least one factory or other businesses – this one had developed a number of tourist activities).  Many innovations have developed at kibbutzim and although only 2% of the population lives on them, President Shimon Peres mentioned in his speech that they produce 7% of the country’s GDP. Our itinerary included cozy accommodations and delicious food produced at the community, a dance party on a hill, driving ATVs in the nature preserve, and visiting the eerily calm Syrian border (UN operations in the area are uncertain due to the recent kidnappings) one mile from the kibbutz.

2013-03-21 17.15.29     2013-03-21 16.52.22

As an aspiring wine connoisseur, I personally really looked forward to our visit to Golan Heights Winery.  The winery is one of about 250 wineries in the country (90% of them are in this region), most of which are small boutique operations, but this one produces about six million bottles per year and has won a number of different awards.  We toured the facilities, learned about the winemaking process, and sampled Riesling, Cabernet Sauvignon, and Moscato wines.  The tour guide was engaging and informative for anyone wishing to order wine in a business situation, store it, and open it properly, and also shed light on how to make kosher wines and manage an operation such as this in accordance with the Sabbath.  The winery staff doesn’t work on the Sabbath, and it was also interesting to hear that every seven years, they take a sabbatical in which they do not plant more vines and there are some limits to the amount of pruning that they can do.  Everyone that I talked to really enjoyed the wines and I think that we would agree that Golan Heights Winery is definitely worth a visit if you’re in the area.

2013-03-21 19.27.09          2013-03-21 19.39.15

We returned to Tel Aviv for a couple of days and the group is mostly in the process of heading home to New York City now.  I’ll send a final report on the other side!

Krista Sande-Kerback ’14

Brazil Real Estate in Pictures

To give you all an idea of what the local real estate market looks like, I’ve attached some pictures below.

Sau Paulo's neverending skyline
Sau Paulo’s neverending skyline
Largest model ever (mixed use development by Odebrecht)
JKIguatemi (high end mall in Sao Paulo)

Amazing distressed hotel in the middle of the jungle

Amazing distressed hotel in the middle of the jungle (Sao Paulo)
City Operations Control Center (Rio de Janeiro)
City Operations Control Center (Rio de Janeiro)
Hillside favela (Rio de Janeiro)
Hillside favela (Rio de Janeiro)

That’s it for now.  I will be back in a couple days with some broader reflections on our trip.

James Hoeland ’13

Wrapping up in Rio

Sorry for the lag in posts – internet has been spotty and the leisurely lifestyle in Rio makes it difficult to be productive.  We arrived in Rio Thursday, and quickly got a feel for the difference from Sao Paulo.  The plane’s landing route into Santos Dumont airport takes you right over the heart of Rio de Janeiro, sandwiched between the mountains and ocean, making for a very scenic entry into the city.  Rio also has a much more leisurely and fun-loving feel to it, a point driven home when the hotel welcomed us upon our arrival with a round of stiff Caipirinhas (at noontime).

There have been murmurs among my trip mates that my last blog post did not reflect the amount of fun we’ve been having here, so I will attempt to spice this one up a bit.  In the interest of maintaining some semblance of relation to real estate – the focus of our trip – I will hit you with some interesting tidbits gleaned to this point, split into real estate and non real estate categories.

Real Estate

–          Tenant rights are extremely strong in Brazil, with commercial tenants able to cancel a lease at any point during the term and only pay three months of rent in penalty

–          Given the historical lack of debt availability, about 75% of buildings in Sao Paulo (which is a LOT of buildings) are owned free and clear without any debt

–          Malls are the hot property type these days, with waiting lists of several years for tenants to get into the best malls (except for Apple, of course, who is coveted by all retail

owners everywhere in the world)

–          Rio and Sao Paulo take very different approaches to favelas, the urban slums where significant portions of the population live.  Sao Paulo is attempting to relocate the residents and raze the slums while in Rio, the government is bringing services and infrastructure into the slums, to integrate them with society.  In Rio the favelas are mostly on mountainsides and in fact could be some of the most valuable real estate in the city with incredible views of the bay.

View from the favela
View from the favela

Non Real Estate

–          Brazilian barbecue is awesome

–          Both Sao Paulo and Rio have beautiful graffiti murals all around the cities, many of which depict scenes reflecting local history and culture

Sao Paulo graffiti
Sao Paulo graffiti
Rio favela graffiti
Rio favela graffiti

–          The name ‘Jared’ does not translate in Portuguese


Eating Live Octopus in Busan, Korea

For many of us, half of the fun of learning about a new culture is trying new foods.  For example, for this trip was their first time using chopsticks as an eating utensil.

As another example…for weeks we’ve been told that a mandatory part of our trip would be eatinglive octopusSannakji, in Busan – a delicacy.

And while not all of us were so brave, Pablo deciding to give it a try…

Seeing through the Blinds

As we started to get our bearings in this beautiful but confusing country, the suspicion that we were hearing and seeing a very limited view of Cuba began to surface. In fact, many of the visits seemed to be giving us only general information instead of any real insights.

There were certainly two main themes that seemed to follow us wherever we went:

(1) Cuba is progressing and doing a lot of great things
(2) The US embargo is to blame for any misfortunes Cuba may have in midst of this progress

In almost all of the meetings (ranging from government officials to JVs to rum companies to biopharmaceutical groups) the US embargo was cited as the key challenge. Each time it was mentioned, it felt like an implicit attack.

A few examples:

Our official trip kicked off with a series of speakers and top government officials (economists, minister of higher education, etc.) When asked about Cuba’s challenges, the response was focused on the US embargo. When probed further, one of the economists showed the first signs of emotion and commentary (vs. the constant speeches of general information that we had been hearing until then) in saying that Cuba was moving forward without regarding the US embargo. ‘We cannot wait for the US’ he said not without a strong sentiment of bitterness that everyone in the room could detect.

Another example is on our recent visit to a biopharmaceutical group. After a presentation overtly touting the accomplishments and advances of Cuba’s healthcare system, we asked about what challenges they faced in supplying to hospitals drugs and pharmaceutical products that Cuba did not directly produce. The response, without missing a beat, was that the US would be the nearest and most cost efficient supplier of such drugs without the embargo. The implication: the US is to blame for Cuba’s hospital deficiencies.

Some less antagonistic examples included the Havana Club rum company which talked about the fact that the US market would be a major source of growth for them, or included the building of a billion dollar port whose profitability depended on the lifting of the embargo.

The US embargo was a constant theme in all of our discussions.

Additionally, all of the discussions painted too rosy of a picture. Everyone seemed to be marching to the beat of the same drum with the two talking points mentioned above. While any tour group would do its best to show the best sides of a country, the similarity of the messages we were hearing again and again makes the rosy picture more suspect. It was in this absence of the whole truth or at least the absence of a multi-dimensional perspective that we started to really see Cuba – still in its essence a state-controlled society. Just as the state controlled nearly all aspects of the daily lives of Cubans, the state also controlled what a CBS student tour group saw. Some of the students went so far as to calling it a propaganda trip – which, given the aformentioned ubiquity of propaganda here, is not so surprising.

And so, the question we asked earlier about whether Cuba is really that different/off – was answered precisely by the fact that we were asking that question. The picture of Cuba we were seeing was one which was supposed to make us not see Cuba as being that off – but the fact that this picture was able to be controlled – affirmed how off Cuba actually is. Yes, as I said before – confusing.

Caroline Oh ’13

Real Madrid / Chamber of Commerce

By Shehzad Khan ’14

Thursday was the day I was most excited for prior to starting the visit, and it did not disappoint. First, we went to the Chamber of Commerce where we met with the Secretary of State for the economy. He gave us an insightful macroeconomic picture of Spain that we do not see in the media, sharing some interesting facts about successful Spanish companies that were doing world-class work both overseas and abroad. Additionally, he shed some more light on the current financial crisis and what steps he has taken to improve the situation. It turns out many of the supposedly Italian olive oil companies in America are actually Spanish and are simply branded as Italian in order to satisfy the American consumer’s belief that Italian olive oil is the best. Also, it is a Spanish company that will be building a high speed train between the holy cities of Mecca and Medina, Saudi Arabia.

From there, we went to meet with the CFO of Real Madrid, the world’s most profitable soccer team. He explained the business model of Real Madrid, which was fascinating. After the talk and a question and answer session, the CFO had organized a private tour of the stadium, including the field and locker rooms, as well as the official museum and lunch in one of the VIP restaurants overlooking the field. I felt like a kid in a candy store getting to see the entire stadium and walk out onto the field the same way that the players do. The extent to which they care for the grass on the field 24/7 is an amazing process to witness firsthand and the opportunity to see that was great.

Again, we finished off our day with an amazing 8 course meal at a top restaurant in Madrid. I could get used to living like this!

Cristiano Ronaldo's Shoes

The Man, The Myth, The Legend, Cristiano Ronaldo’s Shoes

Press Box
Our group at the press box for Real Madrid players after the game
Real Group Photo
Group photo on the actual field!
The view from high up
The Lights
These lights keep the grass that doesn’t get sunlight fresh
Joaquin was clearly excited to be there

A Trip To Zara

By Shehzad Khan ’14

Monday, we went to a small town in the northwest of Spain called La Coruna. We were there because this is the home of the infamous retail clothing brand Zara, which is one brand of the company Inditex. Inditex is a multi-billion dollar company and the largest clothing retailer in the world. They have had 20+% margins every year for the past 7 years running, and we were looking forward to learning more about their operation and how they’ve managed to be so successful.

There, we got a tour of their entire operation. First, we saw where the desigerns work to create designs and build prototypes. They sit in the same area as the store managers who are monitoring what pieces are selling well / poorly by store. This data then informs the designers with regards to what tpes of pieces people like in order to know what to focus their design efforts on.

Next, we went to the factory where we saw how the piecese were designed. It is amazing how efficient the system is. Staff uses a computer to determine the optimal number of pieces they can cut out of one rectangle of fabric so that they can waste the least amount possible. That fabric is then put on an assembly line that cuts and sorts the pieces. Once the pieces are assembled, the process of shipping to various stores is a true feat in logistics. Everything is bar coded and lines with clothes hanging autmatically move into each section for the store it is being sent to. This includes packing the clothes into boxes and having the boxes come out in separate areas for separate stores.

Finally, we met the Cheif Communications Officer of Inditex, who gave us a summary of their business model and answered any questions we had. It was a great visit, and I look forward to heading to Madrid this evening to visit some more companies, see some sights, and enjoy some great local food.

Prince Fillipe / Government of Spain

By Shehzad Khan ’14Image

(Our study group outside of Prince Fillipe’s home)

On Wednesday, upon settling into Madrid, we had a special visit set up to meet some of Spain’s top political leaders. First, we went to meet the Prince of Spain, His Royal Highness Prince Fillipe. His role is one of being above politics and representing Spain as a diplomat who handles Spain’s international relations. We went to his sprawling residence by bus, where we saw some of his spectacular home and then had an audience with the prince for about 90 minutes. During that time, we discussed the economy, his time studying at Georgetown, which American politicians he has met, youth unemployment, and intiatives to enhance entrepreneurship in Spain. He is an impressive and well spoken man who was very kind, respectful, and easy to talk to.


(Our hosts Pedro and Joaquin in the Press Room for the Spanish President)

From there, we went to the Spanish equivalent of the White House where we met with four young, up and coming leaders of Spain. These individuals were advisors to the Prime Minister on the economy, public relations, and media analysis. I was impressed to read their credentials: an MBA from MIT Sloan, an MPA from Harvard’s Kennedy School, and the final with top European degrees. These young people showed us a different side of Spain from what we read in the media recently about a fiscally irresponsible country with 26% unemployment. They explained the intiatives being taken to improve the economy, the issues the EU currently faces, and also how the Spanish government operates on a day to day basis. We learned that the number one issue plaguing the EU is a lack of ability to have a unitary monetary policy and how countries like Spain need to print money in order to ease the strains on their economy, but that other countries like Germany are staunchly opposed to doing so. It was extremely insightful.


(Cluster X was well represented on our trip!)

Finally, we finished the night off with an absolutely incredible dinner at a famous Madrid restaurant called Lucio courtesy of our hosts, Pedro and Joaquin. We must have had 10 courses, with each being better than the last, capping off the dinner by meeting the famous owner of the restaurant. It was a great day to say the least.