How LatAm retail real estate is holding up amid economic slump

Monday, March 20, 2017

The retail sector in Latin America has seen significant growth during the past decade and some of the biggest retail groups are now also major players in the real estate sector.

BNamericas recently sat down with Jose Vertiz, a director in Fitch Ratings' Latin America corporate finance group, to talk about the sector's performance during the past years of economic downturn in the region, as well as the importance of bank financing for the corporate players in the sector.

BNamericas: What is the importance today of the real estate sector – specifically that which you cover – to the economies in the region?

Vertiz: In the real estate sector that we cover we are basically talking about shopping malls, with the exception of Mexico, where the real estate focus is on the industrial sector.

The sector is important for the economies of several countries in Latin America because it is a sector that has seen significant growth in the past 10 years. This has especially been the case in Chile, Colombia, Mexico and Peru, and also in Brazil before the crisis.

The expansion of this sector has mainly been due to the strong growth of consumption in the region during the past decade, which in turn has been the result of Latin America's growing middle class.

BNamericas: Are there any important differences between the countries that you mention?

Vertiz: In Chile and Peru, we have a model where the real estate operators are closely linked to the retail operations, which the Chilean groups Falabella and Cencosud are good examples of as they operate in both Chile and Peru.

Brazil is different in that the supermarket operators are only focused on the supermarket business, and not so much on the real estate side.

The real estate sector in Mexico is also different because the model is focused on the industrial sector instead of shopping malls. This is due to the country's strategic location and closeness to the US economy and the advantages that Mexico has in terms of labor and wages.

BNamericas: How exposed is this sector today in Mexico, considering the threats of protectionist measures from the new US administration?

Vertiz: We are a little bit worried about the potential impact from such measures, but we do not expect any major changes in the short term because contracts in the real estate sector are usually signed for periods of five or six years, The industrial and the auto-manufacturing factories make their decisions on a medium or long-term basis with investment horizons of between three to five years. There could of course be changes, including lower investments, but those will be gradual changes and it will not be something that happens from one day to the next.

BNamericas: Most economies in Latin America have been growing at very slow rates in the past years and some have even been in recession. How has the real estate sector that you cover held up in this adverse environment?

Vertiz: The Latin American real estate sector is very predictable due to contracts that are fixed and long-term in nature. This makes the sector very resilient to the different economic cycles since they have stable revenue streams for periods of between five and seven years. The sector also has attractive margins since an increase in costs can be transferred to tenants.

For this year we have a stable outlook on the sector for the reasons I just mentioned, and we believe it has important growth potential for the next 10 years due to the low penetration of shopping malls in Latin America.

BNamericas: What role do Latin American banks play in this sector?

Vertiz: The region's real estate operators usually turn to banks in the initial stages of their projects and they have very good access to financing from banks since they have good assets and collateral.

As these companies and projects grow and gain scale their financing options tend to broaden and they can then turn to the capital markets for funding, both at home and abroad. This is a positive evolution because financing from the capital markets does not require collateral and this frees up assets for the operators - and gives them greater financial flexibility.

BNamericas: So, do they only turn to banks when they are starting out or when they are launching a new project?

Vertiz: They tend to always use both of these financing options because a mix of bank and capital markets financing increases their financial flexibility. For example, it is common for these companies to issue bonds to meet long-term financing needs while turning to banks for their needs of short-term financing.

BNamericas: How do international investors tend to participate in this fast-growing and profitable sector?

Vertiz: They usually participate indirectly through the purchase of shares or bonds from companies like Falabella and Cencosud. The problem of participating directly is that Latin America has very little land available in terms of prime locations, with the large local players having already acquired this land.

About Jose Vertiz

Jose Vertiz joined Fitch in 2008. His responsibilities include rating Latin American companies in the transport, real estate, homebuilding, retail, and construction sectors.

Before joining Fitch, Vertiz was VP at Citibank in New York, where he worked for the Commercial Banking Group. Before Citibank, he spent six years at Apoyo Asociados Internacionales, Fitch's affiliate company in Peru, where he served as a senior financial analyst in the corporate finance area. 

Vertiz earned a BA in economics from Pontificia Universidad Catolica del Peru (Lima). He also has an MBA from Fordham University's Graduate School of Business (New York), with a major in finance.

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