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Cablegate: U.S. Real Estate Firms Bullish On Brazilian Market

VZCZCXRO4849
RR RUEHRG
DE RUEHSO #0485/01 2611145
ZNR UUUUU ZZH
R 171145Z SEP 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8518
INFO RUEHBR/AMEMBASSY BRASILIA 9650
RUEHRG/AMCONSUL RECIFE 4191
RUEHRI/AMCONSUL RIO DE JANEIRO 8847
RUEHBU/AMEMBASSY BUENOS AIRES 3246
RUEHAC/AMEMBASSY ASUNCION 3493
RUEHMN/AMEMBASSY MONTEVIDEO 2771
RUEHSG/AMEMBASSY SANTIAGO 2493
RUEHLP/AMEMBASSY LA PAZ 3906
RUCPDOC/USDOC WASHDC 3172
RUEATRS/DEPT OF TREASURY WASHDC

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.

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