Wednesday 7 December 2016

UBS takes the plunge in Brazil as real estate market takes a tumble

Francisco Marcelino and Cristiane Lucchesi

Published 13/10/2016 | 02:30

Office vacancy rates in Rio de Janeiro have soared above 22pc while rental rates have slumped
Office vacancy rates in Rio de Janeiro have soared above 22pc while rental rates have slumped
Office vacancy rates in Sao Paulo have also soared above 22pc while rental rates have slumped

UBS Group AG is betting on Brazil real estate.

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The Swiss bank is starting a business to help investors capitalise on reduced property prices after a two-year recession, the firm's Brazil chief executive officer Sylvia Coutinho said in an interview in Sao Paulo. Specialised consultancy Real Estate Capital will work exclusively with the team, and REC CEO Moise Politi will head the initiative, Coutinho said.

UBS is joining banks, including JPMorgan Chase & Co. and Grupo BTG Pactual, in wagering on the Brazilian real estate market after the worst recession in more than a century cut the value of the nation's currency in half since July 2011.

The office vacancy rate in Sao Paulo and Rio de Janeiro soared above 22pc in the second quarter, a record high, while rental prices slumped, according to real estate consultant Engebanc.

Sao Paulo ranked 50th in a global list of the most expensive office markets in June, down from as high as eighth in 2012.

"The real estate sector suffered a lot in Brazil in recent years with inflation, high interest rates and unemployment," Politi said.

"The market is hindered now. No one is selling, no one is buying, there is no financing, a lot of delinquencies, and residential property inventories are at a record high," he said, adding that investments will help bring liquidity back to the market.

The new business will start by offering real estate funds and advice for institutional clients and family offices, and then extend those services to wealthy individuals, Coutinho said. UBS could also manage single investments for a client, and may co-invest as improving political stability reduces risks, she said, adding that the team will focus on properties that are already built.

The funds will pursue three main strategies: investing in real estate debt, buying equity in an office or other property that generates rent and price appreciation, and purchasing residential properties from distressed sellers. Returns can be as high as inflation plus 10pc to 12pc a year, according to Politi.

"The relation between risk and returns is pretty reasonable," he said.

"The risks are lower than perceived because the sector has very low leverage in Brazil."

The Brazilian team, with seven people from UBS and 10 from Real Estate Capital, will be linked to UBS's global real estate business, which will help sovereign wealth funds and large institutional investors that are trying to get into the local market, Coutinho said.

The venture fits the strategy of focusing on core businesses at UBS, which is one of the three biggest real estate managers in the world, according to Coutinho. The bank's asset- management unit oversees about $77bn of real estate assets in 29 countries.

Politi (58), has worked in the Brazil real estate market since 1994, and was one of the founders of Brazilian Finance & Real Estate SA. That company was bought by BTG Pactual and Banco Panamericano SA in 2011 for $502m, when it was among the biggest issuers of securities backed by real estate and one of the largest real estate asset managers in the region. Politi left BTG in April 2015 and six months later joined Real Estate Capital.

The average office rent asking price in Sao Paulo was 87 reals per square metre ($27 per sq m) at the end of the second quarter, down from 90 reals a year ago and from 95 reals a year before that, according to data from real estate brokerage and research firm, Jones Lang La Salle.

For top-notch offices in Sao Paulo's exclusive Faria Lima area, the prices fell in the same period to 122 reals per square metre, from 130 reals a year before and 138 reals the year before that.

Brazil's current abundance of empty offices has seen construction activity plunge, with delivery of new buildings expected to total just 24pc of that delivered in previous years, according to a report from real estate research firm Cushman & Wakefield.

Adriano Mantesso, the chief executive officer at FII BTG Pactual Corporate Office Fund, says the lack of supply will become acute in about four years, possibly leading to a repeat of the record-low vacancy rates seen in 2010, when rent prices soared to levels in line with the ones charged in top financial centres such as New York and London due to the lack of available space.

Mantesso's fund has 2.3bn reals ($692m) in assets, making it the largest in Brazil. The fund has returned 36pc this year when including reinvested dividends, above the 26pc gain for Bovespa Real Estate Investment Fund Index.

There are 71 funds that invest in real estate in Brazil and are traded in the BM&F Bovespa exchange with 20 billion reals ($6.25bn) in assets.

(Bloomberg)

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