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With Copper Boom Slowing, Real Estate Firms Get Creative in Chile

SANTIAGO, CHILE—Faced with a slowing local economy, real estate investment firms in Chile are attempting creative ways to continue to earn a profit.

Prudential Real Estate Investors, which has been active in Chile since 2007, has started developing some of the first rental apartments in the country. MetLife Inc., which entered Chile in 2001 by acquiring the Chilean insurance units of Spanish banking group Santander Central Hispano, is making mortgage loans to investors in the country’s fledgling multifamily business.

Geographic expansion is being eyed by BTG Pactual Chile, a unit of Brazil’s leading investment bank, with the firm considering raising its first regional fund that would focus on acquisitions in Chile, Peru and Colombia.

“If you look at the ratio of office space to population in Santiago, Lima and Colombia, you’ll see that we’re very underpenetrated,” said Carlos Saieh, head of merchant banking for BTG Pactual Chile.

These strategies represent the latest phase in Chile’s real estate industry, which has seen a new breed of investor emerge over the past two decades.
Two decades ago, the Santiago office market was structured like those in other South American cities. Most buildings were carved up among multiple investors who owned separate floors or even individual suites. Big companies generally don’t like to lease space in such properties because they have to deal with different owners if they want the flexibility to expand.

But in the late 1990s, single firms began developing and owning entire buildings, anticipating the type of office space and financial lease structures that appealed to international companies and modernizing domestic businesses.

One of the first towers developed by a single investor was Birmann 24, a 16-story tower completed in 1999 by São Paulo, Brazil-based Birmann SA. Designed by Skidmore Owings & Merrill, it attracted the highest rents in the market and big name tenants like Microsoft Corp. and Hewlett-Packard Co. The building was purchased in 2006 by Union Investment Real Estate of Germany for $65 million.

The building’s success and price tag attracted the attention of other developers, who began following this model. In the past 20 years, the size of the Santiago office market has close to doubled with more than 40 million square feet of top quality spacer.

“Developers realized they would get better value for their assets by doing it that way,” said Cassiano L. de Goulart, senior managing director of consulting firm BSI International Inc. who worked with Birmann on the project and later became Union Investment’s asset manager in the country.

The strategy also worked because Chile was becoming increasingly attractive to foreign real estate investors looking to diversify their portfolios. The country’s insurance companies and banks provided financing at attractive rates.

Further helping demand, real estate investments in Chile aren’t subject to the wild inflation rates seen in other South American countries because rents in the country are calculated in terms of Unidad de Fomento, a currency unit that is adjusted to inflation on a daily basis.

“There’s been a huge transformation of this market,” said Marco Ferrando, director with AVG Property Advisors. “Real estate has become an asset class that has an industry behind it.”

And it isn’t just foreign investors that bought over the past two decades. A domestic real-estate fund business has also grown with firms like Independencia SA and Aurus SA raising money from pension funds, life insurance companies and wealthy families.

“When you go to places like Venezuela and Argentina, a lot of the local capital wants to take their money out to protect themselves,” said Alfonso Munk, chief investment officer for the Americas at Prudential. “Chile is completely the opposite. The domestic capital wants to stay in Chile.”

In recent years, competition among these domestic funds and foreign investors have driven up prices and sparked a frenzy of new office development that’s created a glut of space in the Santiago market.

Making matters more difficult recently, the new supply is hitting just as Chile’s growth rate is declining, due to falling global demand for copper, and political uncertainty is increasing due to reforms being implemented by President Michelle Bachelet.

Today, investment activity has slowed greatly. So far in 2015, there have been few major commercial real estate deals. In 2013, by comparison, deal volume hit $750 million, according to Mr. Ferrando.
The slowdown in deal activity has convinced some domestic funds and foreign investors to move to the sidelines. But others are looking for opportunity, hoping the slowdown will mean lower prices.

Union Investment of Germany, which exited the Chile market in 2013 after it sold its portfolio to Aurus, is been back in the market this year looking for acquisitions, according to brokers and others that have met with Union executives.

A spokesman for Union said in an email: “It’s too early to speak about reentering the Chilean market.”

Others, like Prudential, believe that a big multifamily business is about to start growing in Chile fueled by demand from young professionals who don’t want to be tied down to one area by buying. Early yields on investments have been in the 12% to 14% range, according to Mr. Munk.

“I expect many others to pursue a multifamily strategy,” he said.

Source: The Wall Street Journal

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