CNBC Business | Latin fever

Latin fever

With real estate bubbles bursting across Europe, investors are heading for booming Latin America, says Sorrel Downer

Sweltering in a battered taxi in the heart of a street market in Panama City, it's easy to forget that this is a top destination for some of the world's most powerful commercial real estate investors. But, owing to the turbulence in the North American and European property markets, Panama, along with Mexico and Brazil, is beginning to look like a safe port in the storm. As European investors look to reduce risk through diversification and higher returns, Latin America is coming under closer scrutiny.

The service, natural resource and manufacturing sectors got the lion's share of the €67bn in foreign direct investment poured into the region last year, but there has been sustained growth in the real estate sector that doesn't look like easing off, and it's real estate that is regarded by many analysts as one of Latin America's best performing assets.

"Commercial property investment rose 87% last year to hit a record $19.6bn," says David Hutchings, head of European research at Cushman & Wakefield, "and despite the credit crunch and the slowing US economy, we expect a further record to be set in 2008."

Obviously, across a vast region there's huge variation in potential and returns, but the overall trend in the last five years has been of increasing political and economical stabilisation. Population growth (particularly within the increasingly affluent middle class), burgeoning commerce, plans for urban renewal and expansion, access to capital, flourishing tourism industries, local demand for holiday homes and an influx of foreign buyers, have combined to trigger a construction boom, which foreign investment is helping to fuel.

To date, most of that investment has been North American, but inevitably, given its long-standing ties, Spain follows in second. As the Spanish property market has dipped, the scale of investment has grown, with some of the country's major players laying foundations across the region, with Fadesa, Grupo San José, Grupo OHL, Grupo Lar, Sotogrande SA and Anida (the real estate arm of BBVA bank) leading the way. OHL recently invested €970m in a tourism complex on Mexico's Caribbean coast, while Fadesa's €3.8bn project in Mexico's Baja California, a resort and residential mix comprising some 6,500 houses, multiple hotels and golf courses and aimed at North American purchasers, is probably the most sizeable of any foreign investment in the sector. Portugal has long-standing links with Brazil, and also Mexico, Chile and Argentina, where investors are active; but it is the Netherlands that is the region's third biggest investor. Part of the reason for this, says Jonathan Thompson, international head of real estate at KPMG, is that "Dutch pension funds are very mobile, and they have some very big funds". There has been increased interest from fund management companies in Germany. DIFA-Global was the first to invest in Mexico City with the acquisition in 2005 of a 55-storey office block, Torre Mayor, in the busy international banking district.

However, the UK has been slow to go to Latin America. "Sitting here in London," says Thompson, "very few people in charge of funds have Latin America on their radar, mainly because there's very little experience of doing business there, and more interest in Asia and Russia. But people are putting a toe in the water. We're starting in Brazil because of the size and stability, but also looking at places like Costa Rica and Panama - countries where there is genuine wealth, inflation is under control and there's a boom in real estate underpinned by a growing middle class."

"The region had been slower to catch the global imagination than emerging markets in Asia and Europe," agrees Hutchings, "but it is now making up ground, fast. Some [investor] hesitation came as a result of the region's poor historic record for macro stability and failing to deliver on the promise of reform." Now most countries are proving their reform agenda has real teeth, international investors are eager for opportunities.

Demand for office, resort and retail development fluctuates from place to place, but recent efforts by many of the region's governments to ease access to private financing and cheaper mortgages has unblocked the bottleneck and created a large, ongoing and widespread demand for affordable housing.

As the most mature market in the region, Mexico matches high demand with high supply, and yields have fallen as a result. However, the demand for upmarket residential real estate for affluent nationals and expats is drawing investors to Oaxaca, prime areas of the Baja California Peninsula, and the Mayan Riviera on the Yucatán. The influx of wealth to the package tourism stronghold of the Yucatán Peninsula has created a demand for top-end resorts, malls and leisure facilities, necessitating an infrastructure upgrade; while growth in trade and commerce in urban areas has created a demand for industrial space and offices.

"Brazil, however, is the key driver for regional interest," says Hutchings. Goldman Sachs grouped it with Russia, India and China in 2001 as the nations tipped to be the world's four leading economies by 2050, collectively called BRIC. The fact that President Lula da Silva is happy to take the slow road to this top spot is reassuring to investors looking for more than just a quick turnaround. According to the Brazilian-American Chamber of Commerce, investment in tourism along the beaches of north-east Bahia has been the catalyst for residential real estate development. The volume of foreign investment in Brazilian real estate projects surged 410% from January to November 2006, reaching a total of $1.35bn compared to $296m during the same period the previous year. Unusually, the investor base is primarily European (Portuguese, Spanish, Italian and Scandinavian capital heading the list, with more recent, substantial interest from British companies).

While FDI in Brazil rose by 84% last year, neighbouring Argentina saw a rise of just 12%. The economic collapse and devaluation of the peso in the early 2000s is still having an impact, but a lack of transparency, summed up by The Economist as "fixing prices ...and baldly lying about the inflation rate", has been a major deterrent. There are investment success stories, though. When Argentina was in its financial trough, George Soros headed an investment group that paid peanuts for the IRSA real estate company now allegedly valued at over €185m. Property prices are rising (50% in five years) and are still well below anything comparable in Europe. Grupo San José is just one of several Spanish companies prepared to seize the opportunity. It recently invested €485m in the largest urban development project Buenos Aires has seen in 50 years - a neighbourhood including clinics, schools and shops, and 20,000 houses.

"The country offers a range of opportunities for attractive investment across all sectors, but with offices particularly attractive in the short term," says Cushman & Wakefield. "The big challenge going forward is to achieve sufficient credibility as a country in order to capture investment and pension funds."

Heading north, Colombia's star is rising. Despite its politically turbulent past, no-go zones and a perceived potential for personal risk that has dented investor confidence, Colombia's economy is growing at 6.8% and is among the most stable in Latin America. Over 700 multinational companies have investments here, and now there is a government push to promote investment opportunities in industrial, commercial and residential real estate, the latter to be aimed at foreigners as well as locals. Tax incentives for tourism projects (valid until 2032) have lured €105m of foreign investment, resulting in 7,500 new rooms. As elsewhere in the region, tourism is driving demand for residential real estate, especially so in the colonial gem of Cartagena.

Cartagena's success helped investors see the potential of real estate in Panama City's old quarter, now undergoing renovation, funded partly by foreign capital. But then Panama is full of positive signs: the expansion of the canal, proposals for refineries, and the development of banking, communications, tourism, and call centre industries evoke a certain optimism. Already, there are so many prestigious tower block developments underway along the shoreline of the Bay of Panama that there's talk of a glut. But enterprising investors are finding solid alternatives: financing office developments, for example, sometimes on a large scale such as the €435m 'mini-town' project on a former military base in the Canal Zone for which UK firm London & Regional Properties beat off 16 international competitors; or residential investments in exclusive gated communities and resorts up the coast, on the Azueros Peninsula, and on the Pearl Islands, or retirement communities in the temperate mountains around Boquete.

New arrivals to Panama will find themselves in hot competition with homegrown investors, as well as the North American firms squeezed out from Costa Rica, where land prices have rocketed and prime beachfront land parcels have been snapped up. Already, the most intrepid are moving on from Panama investigating the largely untapped markets of Nicaragua and Honduras.

In the more unstable Latin American markets, the key, it seems, is to closely monitor the political situation and be in a position to move quickly to invest or disinvest. It's not for everyone. Spanish firms worn down by the vicissitudes of Venezuelan politics are selling their assets and opting for less excitement.

Aside from Mexico and Brazil, says Mauro Guillén, director of the Lauder Institute, "Latin America is very volatile, which can make it attractive. Prices are still low and there is a great deal of potential. You have to look at the region as another option for diversification, without placing too much weight on it."