U.S. REAL ESTATE FIRMS BULLISH ON BRAZILIAN MARKET

UNCLAS SECTION 01 OF 02 SAO PAULO 000485 SIPDIS STATE FOR WHA/BSC, EEB/CBA DEPT OF TREASURY FOR JHOEK, BONEILL E.O. 12958: N/A TAGS: EINV ECON EFIN ETRD BR SUBJECT: U.S. REAL ESTATE FIRMS BULLISH ON BRAZILIAN MARKET ¶1. (SBU) Summary. On August 22, Ambassador Sobel met with senior executives of U.S. real estate firms operating in Brazil to discuss the competitive environment in the sector. The group, which included residential, commercial and industrial real estate developers, as well as real estate investors and service providers, were universally positive about the market opportunities in Brazil. They expressed concern, however, about the tax environment and recent indications that Receita Federal may move to consider the State of Delaware a tax haven. They also indicated that while U.S investment is clearly increasing, American investors seem to be behind the curve in investing in the Brazilian real estate market when compared to other international players. End Summary. MARKET ENVIRONMENT ¶2. (SBU) All of the firms represented indicated that they were optimistic about the opportunities in the Brazilian real estate market. They conducted an informal poll of the amount of capital that their firms had committed in the Brazilian market and concluded that, between them, they had $3 billion invested. More surprisingly, they expected to raise an additional $4 billion in the next year, and anticipated that despite historically moderate U.S. participation, about 70% of this investment capital would come from U.S. investors. When asked about the types of investors they are seeing in the marketplace, the group mentioned sovereign wealth funds, pension funds, endowments and family offices. They also remarked that they saw a number of investors from Asia, Dubai and South Africa. From North America, the companies that are most visibly committing capital to the Brazilian marketplace are Equity International, Brookfield Property, Developers Diversified Realty (better known as DDR) and Canadian company, Ivanhoe Cambridge. Fernando de Faria, Director for CBRE/CB Richard Ellis mentioned that his firm was targeting pension funds as a major source of funding for the near term. Douglas Munro, Senior Vice President and Country Head for Hines Brazil,concurred and mentioned that the bulk of Hines' recent financing comes from CalPERS (California Public Employees' Retirement System). ¶3. (SBU) Cushman & Wakefield's CEO for Latin American Operations, Celina Albuquerque Antunes, noted that the Brazilian market remains highly fragmented and that many U.S. investors complain that they have limited investment options. She added that many U.S. investors seem "out of their comfort zone" when investing in Brazil. Cushman & Wakefield, which employs over 3,000 employees in Brazil, has made a business out of finding investment opportunities that may be overlooked or too small to be noteworthy to a large investor and "packaging" these opportunities into a marketable investment product. Jose Paim de Andrade, Founder and CEO of MaxCap Real Estate Investment Advisors, reinforced Antune's assertions and asked for help from the U.S. Mission in educating American investors about the benefits of investing in Brazil. He noted that one of the biggest challenges to attracting U.S. investment to Brazil is lack of knowledge of the marketplace. He stated that MaxCap spends a significant amount of time educating U.S. investors, but that it would be preferable for basic information about investing in Brazil to come from an independent third party. De Andrade represented the sole Brazilian company at this meeting and was included because of MaxCap's June joint venture with Merrill Lynch to acquire and develop real estate projects in Brazil. Interlocutors noted that Morgan Stanley, JP Morgan, Citibank and Goldman Sachs all have real estate investment funds as well. Munro summed up both Antunes and de Andrade's comments by noting that, while Brazil has really "cleaned up its act" in the areas of corporate governance and oversight, this information has been slow to reach the American investing public. ¶4. (SBU) When asked about the market segments, several executives commented on the rising values of residential real estate in Brazil. Munro noted that the largest residential real estate companies in Brazil currently trade at 4 to 5 times net book value. He compared this to Mexico, where the same market segment trades at 2 to 3 times book value and the U.S. where, as a result of the real estate slump, values at or below book value are not uncommon. He also noted that at today's market values, both Brazilian and U.S. homebuilders have roughly the same value ($19 billion). This is particularly noteworthy because the market value of Brazilian homebuilders just three years ago was a fraction of that of the U.S. Munro commented that pent up demand in the Brazilian residential sector has resulted in these inflated values. With the improved stability of the Brazilian economy, increasing access to credit and lengthening maturities for Brazilian mortgages, home ownership is now within the grasp of the Brazilian middle class. Although these real estate executives indicated they were "starting to see" a slowdown in the velocity of residential home sales, they expect this market to SAO PAULO 00000485 002 OF 002 remain overpriced for the near to medium term. Brazilian mortgages account for an embryonic 1.5% of GDP - still far below the U.S. and Mexico indicating significant room for additional growth. ¶5. (SBU) The executives agreed that the hospitality and second home markets are attractive segments in today's economic environment as are planned communities. These areas are particularly "hot" in the Northeast of Brazil where U.S. investors have yet to make serious investments. They remarked that they are seeing Spanish and Portuguese investors targeting Natal in Rio Grande do Norte and British investors targeting the Northeast in general. They are hopeful that with the advent of direct flights from Northeastern Brazil to the U.S., American direct investment will increase. Munro noted that, in his opinion, the visa requirement for Americans entering Brazil was discouraging significant investment. CHALLENGES 6 (SBU) Despite their overall bullish sentiment on Brazil and the real estate market, the real estate executives mentioned several areas of concern. Most of the companies represented at the meeting are incorporated in the State of Delaware. Recent rumblings from Receita Federal that the State of Delaware may be declared a tax haven could negatively affect their businesses. They also mentioned differences in the way taxes are assessed by Receita Federal as a significant impediment to generating U.S. investment. Currently, Brazilian pension investors do not pay taxes on returns made from their investment holdings, while foreign companies are assessed taxes on this income - many investors balk at the uneven playing field. ¶7. (SBU) Moving beyond tax issues, the arcane Brazilian real estate laws were highlighted as detractors to foreign investment. Munro gave the example of Brazilian leasing laws and referred to the current system as "socialist leasing." Current leasing laws, purportedly passed in the 1930 and 40s, allow lessees to break a long term lease on just three months notice. While this may be acceptable in the residential market, in the age of build-to-order factories and specialty-use industrial sites, it can take years to find new tenants. Munro likened the existing law to a "one size fits all" policy which does not make sense in the modern world. ¶8. (SBU) Finally, the group agreed that Brazilian infrastructure development was not keeping pace with the rate of economic growth overall. They noted that, while they were starting to branch into other regions, they continue to focus on the major urban areas of Sao Paulo and Rio de Janeiro because the infrastructure can support the needs of industrial and commercial clients. ¶9. (SBU) Comment: Though all of the senior executives present were positive about the opportunities presented by the Brazilian real estate market and the prospects for U.S. firms, they simultaneously lamented the historically slow growth of U.S. investment. They seemed confident that this trend is changing but highlighted the need for educating U.S. investors and requested Mission support in this area. End Comment. ¶10. (SBU) This cable has been cleared by the Embassy in Brasilia and Ambassador Sobel and coordinated with the Foreign Commercial Service and the U.S. Treasury Financial Attach for Sao Paulo.