THE REIT WAY

Colombia 2014 | REAL ESTATE & CONSTRUCTION | REVIEW: REAL ESTATE & CONSTRUCTION

As international investors look beyond Mexico and Brazil, the increasingly well-regulated and opportunity-rich Colombian real estate sector is emerging as a viable alternative.

Colombia's solid macroeconomic performance coupled with a low interest rate environment has lent the construction sector pronounced dynamism over 2013 and 1H2014. The willingness of Colombian families to buy new homes was demonstrated by the figure of 148,000 property transactions closed during 2013, a 13% rise compared to 2012 according to official statistics organization DANE.

Other factors that fueled the growth trend were President Santos' plan to build 100,000 free homes for the poor, and the sustained rebound in the construction of non-residential projects. Investment in civil construction grew 20.4% in 4Q2013, rounding off the best year since 2008 with an annual growth rate of 9.8% throughout 2013. As of 2013, the sector employed 1.4 million workers, and as Luis Felipe Henao Cardona, Colombia's Minister of Housing, City, and Territory explains, the Santos administration built 260,000 housing units in 2013, representing an all-time record for the country. It also plans to construct a total of 920,000 housing units, marking an 80% increase when compared to the performance of Álvaro Uribe's government.

Sergio Mutis, the President of Grupo Valor, a leading Colombian construction company that formed a joint venture in 2013 with California-based property fund, Paladin Realty Partners, believes that property development will remain the key engine of national economic growth and of the government's social policy. He explains that, “according to DANE statistics, construction has two branches, namely civil works and infrastructure and buildings. Taken together, these categories account for 7% of GDP. But if you added to that all industrial and services activities related to construction, the number could reach 20%."

In Latin America's private equity markets, Brazil and Mexico have attracted the majority of capital inflows, but there is growing interest in the Colombian market, bolstered by an expanding middle class, strong economic growth, and greater investor appetite for exposure to the region. Of the aggregate capital targeted by all Latin America-focused funds, 16% is targeting Colombia, amounting to a total of $627 million. The local private pension fund investors active in the Colombian market are Scotiabank's Colfondos, Porvenir, GrupoSura's Proteccion, and Old Mutual's Skandia, and between them they manage almost $79 billion. Current regulations allow pension funds to invest 5% of their assets under management in local private equity managers.

The largest fundraising effort of 2013 was led by the Terranum Group, which closed its $236 million real estate fund, attracting a broad range of investors including pension funds in Peru and Colombia, institutions in the US and Europe, and a select group of Latin American family offices. During 2013, the Colombian government implemented a series of regulations clarifying the legal framework for private equity and venture capital funds, which is set to ensure legal stability and hence raise confidence among investors. One of the most important changes brought by Decree 1242 was the creation of Collective Real Estate Investment Funds, or closed collective investment funds that must manage portfolios that are at least 75% comprised of property assets. The main novelty here is that the investment decisions of there funds can only be managed by a registered fund management company, or else be delegated to an external manager registered in Colombia such as a stock brokerage company, a fiduciary company, an investment management company, or a foreign company under the supervision of a relevant authority regulating the management of third-party portfolios.

Ángela Gómez Calderón, General Manager of Estrategías Comerciales y de Mercadeo, believes that real estate investment trusts (REITs) are finally granting retail investors access to the hotel industry, a particular segment of the real estate sector that is experiencing attractive growth. According to Estrategías Comerciales, these REIT stocks currently offer a return on investment of between 9% and 15%, depending on the hotel and location. In this line, the first quarter of 2014 has seen the Terranum Group and Equity International acquire the largest hotel chain in Latin America, Decameron Hotels & Resorts.

Olli Fischer, CEO of Exact Invest, a Danish real estate private equity fund, points out that the REIT or fiduciary system, “creates the opportunity for developers to develop and sell and build relatively large projects with relatively little equity. That in turn generates the smaller stratified offices and now there is a lack of larger office space, so funds are currently interested in investing their own resources in order to create and finance large new projects in order to cover that gap." In fact, as Claudia Robledo of CREA Management explains there are “big funds with a lot of money that cannot find a product they want to invest in," which presents an interesting opportunity for funds to develop single-owned office or industrial properties, and for advisors to structure deals bearing the commercial risk that neither funds, nor construction companies are willing to assume. For institutional investors, there is also great demand for quality office buildings of single ownership in cities such as Barranquilla, Cali, and Bogotá. There is also an interesting potential in logistic or industrial park developments in free trade zones (FTZs). Whilst the percentage of the portfolio allocated to real estate in mature markets amounts to roughly 10% of pension fund investments, what Colombians have invested in real estate today does not exceed 3%, according to Andrés Alvarado, CEO of Abacus Real Estate, which manages gross assets of approximately $70 million in its Corporate Sustainable Properties Fund.

Real estate is a highly interest rate-sensitive investment and the low interest rate environment is proving essential to ensuring that a greater number of households have access to housing solutions. On average, interest rates stood at 10.8%, while the issuance of home mortgages grew by 19% in 2013.