Real Estate South of the Border

Opportunities Abound in Argentina, Brazil, Chile, and Mexico.

By Catherine A. Simpson

Is your local market feeling a bit saturated? Then take a look down south—way down south to Latin America. This market of more than 430 million people (including the Caribbean) is attracting more foreign investors as its economies have stabilized and cultural, legal, and political barriers have begun to crumble.

"Things are just changing so rapidly and there’s so much opportunity, it’s just staggering," says Tom F. Howard, CCIM, SIOR, JD, a real estate project manager for Hewlett-Packard Company in Atlanta.

While investors clearly are cautious about investment in Brazil, Argentina, and to a lesser extent, Mexico, after the speculative attack primarily on Brazil’s market at the end of October, most say just to wait it out. The markets will improve—and the opportunities outweigh the risks.

Imagine the Possibilities
Latin American countries are underdeveloped, and are welcoming foreign investors and developers—especially North Americans—who are looking for long-term investments.

"Latin America is ripe with possibilities today for development purposes," says Franc J. Pigna, CIPS, CRE, managing director for Richard Ellis International Property Consultants in Miami. "It is a region that is rapidly growing, has an ever-increasing free-trade-based economy, its political system is rooting itself in the democratic process, and the real estate stock needs to be substantially upgraded to meet with industrialized world standards."

U.S. companies’ expertise is respected, and many countries are counting on that expertise to help them meet their full potential. "There’s not this ‘Yankee go home’ mentality anymore," says Philip Wharton, chief executive officer of Property Information Exchange in New York. "They need capital to grow. There’s a middle class that’s being created that wants housing, wants to shop, wants to travel, and there’s very little of that down there."

Top Markets
While top markets naturally vary throughout the region, in general they include hospitality, resort, and industrial and light manufacturing. Privatization of former government-run utilities also is creating development potential throughout the region.

Argentina. Government-led economic reforms begun in 1989 continue to improve—and now sustain—economic growth. As a member country of the Latin American trade agreement, the Mercado Comun del Sur (known as the Mercosur, it comprises Argentina, Brazil, Uruguay, and Paraguay; Chile and Bolivia are associate members), its trade within Latin America has increased.

While Argentina’s economy is strong, it is still under development. "The economy is stable," says Jorge L. Cantero, CIPS, CRB, GRI, a broker with Apollo Group Realty, Inc., in Miami. "But we are in a global economy and we have seen what happened with the financial situation in Mexico and how it affected South America. And now, we are seeing the crisis in Asia and how it’s affecting other developing countries. The climate and the economy in Argentina are encouraging, but we have to understand that all [developing economies] are susceptible to drastic changes in currency."

But for many, the numbers may outweigh the risks. Argentina offers a population of 40 million people with just 32 shopping centers nationwide, Wharton says. It also lacks sufficient class A office space. "Buenos Aires in particular is an appealing city. The downtown is vibrant—more than Sao Paulo, Santiago, or Lima."

Indicating its confidence in the country and its hospitality market, US Franchise Systems, Inc., of Atlanta, recently announced that it has entered into a franchise agreement to bring 12 Microtel Inn & Suites to Argentina by 2002.

Brazil. Brazil, which has the largest economy and half the population of Latin America, reacted quickly in October and November to stem the tide of foreign money leaving the country by sharply increasing short-term interest rates. The crisis was a blow to the country, which has seen its double-digit growth of the 1960s slow to more moderate rates averaging about 4 percent to 5 percent in the 1990s.

"Brazil is having a tough time right now," says Jim Valenti, JD, who has assembled acquisition, development, and finance teams for hotels, resorts, and office buildings in Chile and Argentina as part of his work as counsel for Nason, Yeager, Gerson in West Palm Beach, Florida, and Immo Capital Advisors, an investment banking company in Fort Lauderdale, Florida. "Because of their overvalued currency, they are in trouble...But the longer-term players, both in the real estate and other areas, I think are not going to be scared off from pursuing otherwise prudent investments down there. It’s just too big a market to ignore."

The size of its market means that the fate of Brazil determines the fate of the economies of the other Latin American countries, Howard says. "It is the engine that drives the southern cone of South America."

That opportunity has spurred plans for McDonald’s to spend $500 million to add about 350 locations in Brazil by 2000, the Wall Street Journal recently reported.

The telecommunications industry will bring further growth. Brazil has a high demand for cellular communications that is "unbelievable—16 million people in range and only two million lines currently in operation," says Peter M. Aberg, senior director in Jones Lang Wootton’s Dallas office.

Chile. Chile continues to be the success story of Latin America. It’s undeniably the most stable economy in the region. It was largely unaffected by recent market fluctuations in Brazil because its economic reforms were instituted more than 15 years ago. "[Chile] has been growing above average at 7 percent per year for the past 15 years," says Fernando Ayala, consul in the Consulate General’s office in Chicago.

The success of Chile’s reforms has not gone unnoticed by other Latin American nations. "It’s a model for other countries," Aberg says.

Because its economy is stable, "Chile offers the most comfort, least risk of [Argentina, Brazil, and Chile], but the smallest upside," Wharton says. "It’s a comfortable first baby step into Latin America...There’s continued growth, continued demand for office, residential, retail. But the opportunity to buy cheaply and build is not there. It’s in Brazil, Argentina, and Peru."

Mexico. The Mexican economy continues to recover from the peso’s devaluation in late 1994 and a more recent devaluation that paralleled Brazil’s to a lesser degree. The subsequent reforms were regarded by many as a successful economic overhaul because of the anticipated 6 percent gross domestic product growth in 1997.

Despite some recent setbacks in late 1997, the market continues to hold a lot of potential. "Industrial growth (in Mexico) continues to be strong and has every reason to continue for many years," says Tim Cline, national director of North American Real Estate Services-Mexico for Deloitte & Touche in Guadalajara, Mexico. "Many of the strongest (mostly NYSE-listed) Mexican companies are building new plants. Most of the Mexican industrial complex is seriously outdated and located in the overbuilt, polluted, and water-challenged locations of Mexico City and Monterrey...Tourism investment is growing again...There is beginning [to be] a new flurry of resort construction with new standards and international investors behind it."

But resorts aren’t the end of Mexico’s development. The country soon could see a wave of retirees hitting its shores. "Soon Mexico will be discovered by the assisted living and other senior living facilities investors," Cline says. "A much higher grade of care can be offered for the buck." The country also could continue to see industrial development as a result of border businesses. "The demand for facilities to service the growing distribution opportunities along the U.S./Mexico border is growing," says Ari Feldman, CCIM, CIPS, an independent consultant based in Mexico City.

Doing Business Differently
Doing business in Latin America can seem downright, well, foreign, from doing business in the United States—from the business of brokerage itself to the availability of market data and the cost of construction and land.

The Business of Brokerage. Forget what you know about the brokerage business. It’s a whole new game in Latin America.

"The brokerage community as it is known in the U.S. is nonexistent," Feldman says. "Consider that [in Mexico] there are no licenses, no governmental regulations, and little law directly associated to private property ownership rights and one can quickly see it’s a game of local knowledge and contacts...Rarely, if ever, is the contract on the basis of business. Oral commitments have a greater value than written ones."

And connections are everything. "Most business is closed," Feldman says. "In the Latin community it is ‘Tell me who you know and I will tell you who you are.’ Culturally, there are two entrees into Latin business: personal contacts or major capital investment ability."

Negotiating techniques differ as well. "If a property is worth, by local standards, one, the owner will likely start the negotiation at three and talk as if he really believes that it’s worth it. The foreign would-be buyer walks away thinking that it’s not worth even talking about. Conclusion: the generally accepted ‘opening offers’ are very much farther apart than what U.S. practice would dictate," Cline says.

Market Data. In the United States, good market data probably fills your mailbox every week. But you won’t find that to be the case with Latin America.

"Local market data is hard to come by, something U.S. investors are accustomed to having prior to making hard commitments," says Juan Muzquiz, CCIM, executive vice president of SRS, Inc., in Middletown, Ohio. "With the increased influence of U.S. real estate expertise, the quantity and quality of demographics and market data should improve over time."

Construction and Land Costs. While the cost of labor is less expensive in Latin America, that doesn’t necessarily translate into less expensive construction costs, due in part to higher land values. "As a general rule of thumb," Valenti says, "construction costs throughout Latin America are higher than what they would be here...It’s not going to be on the cheap. You’re going to end up importing a lot of things. Cost of materials typically is higher. Per-square-foot construction costs tend to exceed that of the U.S. and certainly are not less. The land cost is a big variable. Resort properties [are] more expensive than you would find here."

Why is land valued higher? "Land is the traditional investment vehicle in Mexico (as opposed to the stock market), creating a base value higher than what strictly economic considerations would justify," Cline says. "This is changing quickly, but still exists...Lending institutions are just barely starting to understand cash flow-based lending...That also creates a sort of artificial land value...And water is a major consideration: land with it has value, land without has little."

If you’re considering leasing space instead of building, don’t even think to ask for tenant improvements, a common negotiating ground in the United States. "When you get something, it might be a plain vanilla box. In Argentina, you don’t get heating, air conditioning—no utilities whatsoever. The tenant has to do its own alterations," Cantero says.

The same holds true in other Latin American countries. "The biggest difference is when you lease space," Howard says. "In the U.S., the landlord gives the tenant buildout costs. Down there it’s ‘Here are the keys, do whatever you want to the space.’ "

Legal and Tax Issues. The experienced say don’t even try to tackle the legal and tax issues on your own. As you often would do in the United States, seek the help of a third party—an accounting firm or a law firm. "You definitely need to hire a local," Cantero suggests. "The age of the Lone Ranger in a global economy is totally out of context. Pay experts at the local level to work with real estate attorneys in the local area to go through the maze of government regulations they may have."

But in general, be aware of the differences in these nations. "In most Latin American countries, the system has not developed to emphasize speedy resolutions. The transfer of real estate in Mexico is totally separate from the purchase. Fees for closing that a U.S. national might consider are totally different. There is not a title guarantee system that compensates one for errors in transfer," Feldman says.

That may be changing, though. Chicago Title Insurance Company recently entered into a reinsurance treaty with Grupo Nacional Provincial, one of the largest insurance companies in Mexico, to offer title insurance there similar to American Land Title Association policies.

Other differences occur in due diligence, which is far less thorough than in the United States, Aberg says.

The Financing Search. While financing in the United States is plentiful and inexpensive for the most part, it remains difficult to obtain and is more expensive in Latin America. Most countries lack the strong pension and real estate investment trust funds that the United States has (but those are developing), so banks are the primary financing sources.

"In every instance where I’ve done work in Mexico for non-Mexicans, the financing was coming from outside Mexico and the project sponsors had a very good idea where the financing would be obtained before much in-country work was done," says William C. Witting, CCIM, CRE, a real estate analyst and counselor in Bow, Washington.

Most companies experience some problems obtaining financing in these countries. "The only segment of the market without major financing problems is the largest, NYSE-listed companies with ready access to the international capital markets," Cline says of his experience in Mexico. And, according to Wharton, most of that financing comes from the United States.

The companies that are providing financing to Latin American countries, Valenti adds, are funding project types that mirror what they are financing in their own countries: if they’re financing hotels in the United States, they’re financing hotels in Latin America.

But costs can be high. "Financing is usually much more expensive than it is in the states. In many cases you’ll find that it’s easier for companies to arrange [financing] in the states than to get it locally," says Rex Maingot, director of Latin America and the Caribbean for Chesterton Blumenauer Binswanger in Juarez, Mexico. "That might change now that you see the U.S. banks coming in. It’s in transition."

Getting Started
So you’re interested in the Latin American market, but don’t know how to get started? Use the same process you use in your home market: observe the culture, learn the market, and align with experienced companies. Above all, take the time to learn it well.

"Don’t try to reinvent the wheel," Valenti says. Learning international business is a lengthy process and [has] "a very long learning curve."

And one further caution: "Take a regional approach and don’t put all efforts into one country," Wharton advises.

Cultural Differences. While there are many similarities between the cultures in Latin American countries, be aware that there are differences, too. "People tend to think of [Latin America] as all Hispanic, but that’s not the case. There are big differences in the cultures. The ethnic background of Argentines is different from Chile and Brazil," Wharton says.

How do you learn about the different cultures? Do your homework, Cantero says. "Pick up travel guides, go to the local library and pick up videos on each country, attend local cultural events for that particular country—perhaps join the foreign local chamber of commerce."

In spite of the fact that many people may speak English in Latin American countries, you should be able to communicate to form the close relationships that are needed to do business in Latin America—that could mean speaking Spanish, Portuguese, or both.

"It is important that you either learn the language or have members of your team who speak the language," Cantero says. "Somehow you have to be able to communicate on issues that are small talk. Americans have the misconception that we get down to business. It doesn’t work like that in other parts of the world. They sit down and establish relationships, and business is not discussed until after many meetings. They have to learn to be patient when they approach their customers in asking for the order. That is contrary to the U.S., where we’re told to ask for the order, ask for the order, ask for the order."

Another cultural difference is the pace of the business. "In the U.S., you call today and want an answer this afternoon. In many cases in Latin America that won’t happen. Their response time isn’t the same. But it’s coming and it’s coming fast. The whole place is changing," Maingot says.

Learn the Market. The first step, according to Ayala, is to visit a country’s consulate office, which can provide detailed political, environmental, economic, and trade information.

These and other sources can provide some fundamentals, but to make the contacts, you’ve got to "learn as much as you can about the market and how the market operates," Howard says. "I think I would first look in the states to see who may have done deals down there and talk to other people to see what it’s like to do business down there and who to contact to get a sense of what’s going on down there and what the expectations are."

Wharton recommends looking outside of the real estate industry for experienced companies. "A lot of U.S. companies already are operating down there successfully. Contact people doing business down there outside of real estate."

But you can’t learn it all via textbooks and advice from others who’ve been there. "Ultimately you’ve got to go down there. You’ve got to talk to the people in the market to get an understanding of what’s going on down there," Howard says. "Anybody can do it—there’s no magic to it. It’s really a matter of education and properly setting expectations."

Also consider educational programs geared toward international business. Cantero recommends the National Association of Realtors’ Certified International Property Specialist (CIPS) program, which requires five courses geared toward international business.

Align with Experienced Companies. Forming ties with experienced companies can help you learn the market as well as the nuances of doing business there.

"Align yourself with either a law firm or an investment banking firm which knows the local market that you’re talking about or has affiliates in those markets," Valenti says.

Getting to the contacts in those markets could be easier if you have an entree through a company with a good reputation in the country. "The culture is such that there are a lot of intermediaries. Getting to the principal can be a real problem," Valenti says. "Going through law firms and investment banking firms is the best means of introductions as well as the best means of getting things accomplished through local governments on the regulatory side."

Aligning with a local also could speed the education process. "By the time you learn it yourself, the window will be closed," Valenti says. "Align yourself with those folks who have invested the past 15 to 20 years learning the market rather than trying to recreate what they’ve done."

Consider a Local Partner. You don’t have to go it alone. There are many advantages to forming a local partnership, and most people experienced in the market recommend it for small and medium-size companies.

"Your local partner is going to know everything there is to know on how to get things done," Howard explains. "And, he doesn’t have the distance problem you do."

How can you find a joint venture partner? "It’s very hard," Wharton says. "You’ve got to do a lot of asking around... It’s a small world down there. You have to be very careful who you work with and plan to invest a lot of time in checking people out. Then try to find a small deal to start with so you don’t end up in a big mess with somebody. Test out the relationship."

Given the size and the potential of the Latin American market, more and more companies are finding that the rewards could more than justify their efforts.

Catherine A. Simpson is editor and publisher of the Commercial Investment Real Estate Journal.