Latin America offers potential returns for shrewd investors

Real estate investment opportunities in Latin America offer promising returns for foreign investors, including those in the United States, provided they "identify the issues related to investments before they define the opportunities," according to Samuel Zell, chairman of Equity Group Investments LLC in Chicago.

Zell, whose company has invested in properties in several Latin American countries, discussed investment and development opportunities at a recent Latin America real estate conference sponsored by the Urban Land Institute. The conference, featuring Zell as keynote speaker, was held in Miami Beach, Fla.

Despite some shortcomings, the long-term outlook is "exciting" for Latin American real estate investments, Zell said. "The population growth, abundant natural resources and proximity to the United States will lead to Latin America becoming as integrated in the economics of the United States as Europe has been for much of the past century," he said.

According to Zell, a key issue facing investors in Latin America is the need to thoroughly understand the "rules of law" in various countries that could affect business ownership, investment and transactions. "The ability for an outside investor to intelligently and competently invest out of his home country depends on his confidence in the rules of law, and in what the rules mean," he said.

For instance, in Brazil, he noted that the improved political scenario has boosted investor confidence, setting the stage for increased investment and development activity. Although the rules of law affecting real estate operations are less defined than in Mexico (which he labeled the No. 1 Latin American investment market), Zell said Brazil is poised to be a dominant market. "Brazil is a growing country with lots of natural resources and it should have a brilliant future," Zell said.

However, one factor hampering development and redevelopment in Brazil is an abundance of obsolete space, including the Sao Paolo market, he said. "Go there and what you are struck with is that there has been little tearing down of older buildings and building of new ones. A lot of inefficient inventory has been kept in place, and this could inhibit the market's ability to prosper," Zell said.

Another issue affecting real estate investment throughout Latin America involves the inability to obtain basic market information, such as vacancy rates or leasing rates, he noted.

The scarcity of data is in stark contrast to the United States, where complete data on individual markets is instantly available, he said. "In many (Latin American) countries, information we would call market information is viewed as an invasion of privacy by owners who have no interest in creating a market and don't want to share the information," Zell said.

"If Latin America is to become a sophisticated investment environment, it must understand that real estate is a commodity and that efficient markets rely on (the open exchange of ) information. The Latin American market needs organization. Until it can provide quick access to information, it will be a second or third choice for investors."

Two other factors that can pose obstacles for investors in Latin America's real estate are insufficient market liquidity and uncertainty over tax obligations, Zell said. He predicted liquidity in the real estate markets would not improve notably until more Latin American companies cross borders and focus on large segments of the industry, creating enough scale to attract institutional investors worldwide. The confusion over taxes is keeping the "flow of funds at a lower level than it should be," he said.

In addition to an analysis of Brazil's market, Zell provided brief analyses of other Latin American markets:

Mexico "There is a lot of demand for lower-income housing and for retail. As Mexico evolves, the magic word is consumerism. The fact that there are multiple cities to invest in provides a unique opportunity."

Argentina "The current scenario represents no rules and cheap opportunities."

Chile "Chile is probably the most stable. The good news is that it has rules of law and a strong business community. The bad news is, it's small." (Zell predicted that Chile could be the next country to enter into the North American Free Trade Agreement.) "If you invest today with the hope that NAFTA comes, then you are likely to be rewarded."

Peru "Peru is one of the best-kept secrets. It has the best growth rate (4 percent) and a low inflation rate (less than 1 percent). Its political system is stable, and it is trying to build a solid economic investment base."

Venezuela "Venezuela represents a unique investment opportunity due to its oil exports. But its political process has left a lot to be desired."

In general, markets throughout Latin America must take key steps to eliminate "deal fatigue," Zell said. "It has to become easier to invest there and exit there. It presents an extraordinary impediment to investment when putting deals together goes on and on this does not contribute to the creation of a fluid market, which is the ultimate goal of the real estate business," he said.

Currently, real estate investment in Latin America involves vast differences in the investment climate between individual countries, resulting in many small, varied investment opportunities, Zell said. As a result, it is incumbent on the real estate industry in Latin America to create more liquid investment vehicles that cross country borders, he noted.

Despite the barriers, Zell said he remains optimistic regarding Latin America's potential to attract foreign investors in its real estate industry. "Looking long term, it will be an exciting place to play," he said.