Smart Investments in Real-Estate

Gabriel Gaete, Investment Unit - Head of Financial and Administrative Operations, SEMAICA

Gabriel Gaete, Investment Unit - Head of Financial and Administrative Operations, SEMAICA

Probably the most common asset that one can look at and feel on a day-to-day basis is real estate. This asset has historically been incorporated into the portfolios of many investors. However, in Latin America, there are underlying drivers that rule. The region has experienced the sophistication and technicality to manage it as a wealth management branch, and that is why when considering investing in this asset, relying on experts in the industry can be essential for a successful result.

Those who seek to preserve their wealth, aspiring for liquidity and a bond-type risk-adjusted return, probably will choose commercial real estate investments, which means, renting an asset, and holding it until the sale is required. The fundamentals of the investment will focus on analyzing whether the stabilized cap rate (net operating income divided by the cost of acquisition) is the desired one if the area is the consolidated zone for the type of use if the demand exceeds the supply if the contracts adequately manage the risk of vacancy, maintenance, and operation or if the replacement cost has hedged inflation. Finally, if maintenance has been adequate so as not to incur corrective capex. There are more fundamentals to analyze, but these may be some of the most important ones.

Commercial real estate investments have some attributes: periodic dividends, it is collateral against leverage, and perhaps a more noticeable one: the asset exists; and that tangible is going to have a salvage value, either for the land or for the replacement cost.

On the other hand, those seeking higher returns can opt for real estate development. This option has an additional inherent risk: the asset does not exist; it must be built. However, this option is more likely to yield double digits and there will be those who seek to incorporate that risk into their portfolios.

Unlike commercial real estate investments (more predictable cash flow assets), development is based on a hypothesis of future conditions, such as whether the spread between cap rates will be significant if the price of the land and the cost of construction are adequate compared to the price that the market can pay, if there will be the sufficient technical background for construction or if the permits will allow the development.

" Commercial real estate investments have some attributes: periodic dividends, it is collateral against leverage, and perhaps a more noticeable one: the asset exists; and that tangible is going to have a salvage value, either for the land or for the replacement cost "

Having mentioned some of the drivers of a real estate investment, probably the success of an investment is that the team has conviction. Do they understand the entirety of the components of this asset?

Understanding that there are different uses is part of approaching the asset. A logistics center/warehouse is not comparable to a corporate office building or senior living, retail, hotels, and/or multi/single-family. Each of these has drivers and expertise for development, administration, and operation.

In Latin America, the variability in the drivers between countries is important. Not too many decades ago, construction companies were the ones making real estate development (with their equity) by putting a markup on its cost or by leasing the asset. They will do that until they ran out of capital. Now there are developers, brokers, asset managers, private/public investment funds (REITs), property managers, and fiduciary actors, whose approach to real estate has upgraded from binary investments (leased or not leased with full ownership of the asset) to diversified investments (occupancy percentage all over a portfolio by partial ownership of the asset) and therefore accomplish investors yield-liquidity necessities with the correct asset (e.g. Insurance companies or retirement funds).

In the region, an investor will find different currencies, inflation rates, interest spreads, banking/financial legislation, difficulties to do due diligence, lack of information, different perceptions about rent vs. ownership, and bias, among other variables whose disparities can be significant between countries. How, despite countries having different macroeconomic/legislative characteristics, can lease a type of real estate asset at the same value per square meter? There will be a clear cost of opportunity if an investor evaluates from the outside, however, why continue to invest under these premises in a country that does not have the best conditions? Those questions can probably lead to a more informed decision, and one answer is that locals are the ones that understand best the asset.

The management teams that I have been able to meet and on which we have focused as prospects to invest the firm's assets in Latin America have been the ones that, not only had a reliable track record (which shows success in past circumstances), but they have their future projection clear. They are clear about where they add more value than others and recognize where they do not. They openly expose risks and probabilities that the investment will not turn out well. They can answer almost all questions and integrate all real estate specialties. Also, they have had a high market share locally before expanding to other countries (in LatAm that is a real challenge).

As a result, these management teams have a worldwide standard, and managers from more developed markets have sought to participate in projects together. They have to simplify complicated issues for their clients and find the solution that best meets the wealth management mandate. They understand that some countries in the region may be underfunded, so there will be many opportunities and that is why those who seek a good output for their future generations or are retail investors, have an affinity for bricks, and seek to diversify into Latin America, finding the local specialist is the way to go.

Construction

Retail

Financial

Logistics