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

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


Getting Around in Sao Paulo – Infrastructure and Urban Development

Upon arriving in Sao Paulo, two things are immediately obvious during the ride from the airport to the city center.  First, infrastructure investment has greatly lagged behind the city’s economic growth and expansion.  And second, while there are several shiny new towers dotting the skyline, there is an enormous stock of 1970s and 1980s high rise buildings, which extend as far as the eye can see in every direction.  The combination of these two factors has had a direct impact on how Sao Paulo has developed and the challenges that the city faces in its future growth.

Getting from Guarulhos International Airport into the city can be a challenge for several reasons.  As of yet there is no subway or train system that links the airport with central Sao Paulo, and in the absence of such systems the roads can become clogged with traffic.  What would normally be a forty-five minute drive can turn into a two hour ordeal pretty easily.  Congestion in the city center can also be very severe on weekdays.  The subway and connecting train system only serve a limited portion of the city, and the concentration of businesses in several nodes throughout the city creates a traffic gridlock along routes between these nodes.  Our trip organizers and tour guides have been very thoughtful in allowing enough time between meetings to account for the traffic, but the unpredictability in traffic conditions introduces a huge amount of inefficiency into daily life.  On a couple occasions, bus rides where we have allocated forty minutes have turned out to be fifteen minute rides because traffic was not as bad as expected.  On another occasion, we spent twenty-five minutes doing a U-turn because there was no way to make a left turn at a traffic light.  Many of the real estate professionals we have been meeting with have pointed to enhanced infrastructure as a key requirement for the continued growth of the city, development of industry, and attraction of professional talent.

While I often think of Brazil as an emerging country given its association with the BRIC nations, from a pure building stock perspective, Sao Paulo has a staggering amount of older high rise buildings.  The quality of these buildings, though, has not kept up with top international standards, leaving developers to continue moving away from the old city center in search of new development sites.  Through the last decade or two, the city’s commercial center has steadily moved southwards as newer, higher quality buildings have been constructed.  The shifting center of gravity has exacerbated some of the infrastructure shortages, as the new areas are not as well connected by subway.  It may also to some extent create a short term investment mentality whereby building owners desire to cash in their investment quickly before the momentum shifts away from their site.  While it would seem that redevelopment of older parts of town would be a potential opportunity given the stronger transportation connectivity and central location, concerns over safety in these neighborhoods and the ingrained mindset of moving away from these older areas has so far prevented such redevelopment.

Despite only having spent three days in Sao Paulo so far, I am struck by the immense concentration of economic activity within the city, the positive energy among the local population, and the vibrant culture and lifestyle.  An improved infrastructure network and more cohesive long term city planning would provide a tremendous boost in enabling the city to continue developing to its full potential.

James Hoeland ‘13

Gearing up for Buildings in Brazil

The Real Estate Association is all set for its annual REA/Chazen spring break trip.  After exploring Asia’s leading economy in China last year (, this year’s destination is Brazil, South America’s leading economy and one of the most active real estate markets globally.  Twenty-eight students and two faculty members will be touching down in Sao Paulo over the next couple days, and the group is excited to begin the trip and gain a better understanding of Brazil’s real estate industry from a ground level perspective.

Over the span of a week, we will visit both Sao Paulo and Rio de Janeiro, and will be meeting with fourteen companies representing a full of spectrum of functions (investment, development, services) and product types (commercial, retail, logistics, infrastructure) within the real estate industry.  Some of the highlights on the itinerary include meetings with Tishman Speyer and BR Malls (Brazil’s largest shopping mall owner and operator).  Another important component of the learning will be through site visits.  The group will be visiting Infinity Tower with GTIS in Sao Paulo, the Rio Olympic Park with AECOM, and is planning on extensive first hand investigation into local food and entertainment offerings (purely for research purposes, naturally).

In preparation for the trip, we have had the opportunity to hear from a couple CBS students who are either from Brazil or who have lived there previously, and received a Brazil reading packet covering economic and social articles.  Some recurring themes that have emerged are that political stability starting from the mid-1990s has created a much more favorable economic development and investment environment, but that the resulting growth has occurred unevenly.  The result is severe income disparity, opportunities for corruption, and a highly divided socioeconomic structure.  One article in the reader even mentioned a court clerk in Brasilia, the nation’s capital, who was earning more than Brazil’s Supreme Court chief justice!

I will be heading to Sao Paulo tomorrow and am looking forward to comparing what I’ve read and heard with what I see on the ground.  So long for now but I’ll be back blogging up a storm in a few days.

James Hoeland ‘13