According to a new report by Paladin Realty Partners, a Latin American institutional investment manager dedicated primarily to funding affordable-middle-class home building projects, economic growth in Latin America's leading economies of Brazil, Mexico, and Colombia has significantly moderated since showing resilience during the global financial crisis of 2008-09 and experiencing a robust recovery in 2010-11. Brazil's GDP contracted by 3% in 2015 and is forecast to contract by another 3% in 2016, compared to 0.1 percent growth in 2014. 1 Brazil is in the midst of its most severe recession since 1990, which, while painful, will force the country's economy to make necessary adjustments and reforms. According to Paladin, Brazil's recession will last through 2016, with a gradual resumption of growth in 2017 as inflationary pressures subside. The Andean region's and Mexico's growth prospects are much brighter; each country's GDP increased by 2% to 3% in 2015, with slightly higher growth (3 percent to 4% ) forecast in 2016 and 2017. buy and sell qatar
According to Paladin, the end of the commodities super-cycle boom has harmed growth in South America's economies in recent years, as China's economy slows and continues to shift from investment-led growth to a more consumption-oriented economy. Furthermore, investor trust in all emerging markets, including Latin America, has been harmed by expectations of increasing interest rates in the United States. Much of this fear, we assume, has already been priced into the currencies and markets.
Despite slowing development, Latin America remains an appealing, defensive option for investors seeking opportunistic returns (20%+ Gross IRRs), low leverage, and downside security - whether as part of a global diversification or tactical growth strategy. Given the region's appealing demographics, which include a population exceeding 400 million in Paladin Realty's five target countries of Brazil, Mexico, Colombia, Peru, and Chile, Latin America provides one of the most compelling long-term, large-scale growth opportunities in the world today. Most notably, demand for modern real estate (particularly low- and middle-income housing) is being bolstered by a number of visible and long-term market trends, including demographic tailwinds, steady household development, and a middle-class that is expected to rise over time as productivity and economic growth improve.
The region's inefficient capital markets, as well as the restricted supply of debt and equity capital for real estate, continue to restrict development and investment operation. As a result, select real estate investment strategies with significantly lower leverage than other opportunity funds can be optimized for superior returns. Indeed, leverage on Paladin's previous Latin America investment vehicles averaged 10-20% of cost, providing opportunistic investors with attractive risk-adjusted target returns and more certain capital preservation. Furthermore, over the next few years, Brazil's sluggish economy, distressed public homebuilder industry, high interest rates, and oversupplied Class A+ office market will create unique opportunities for select distressed and deep value-added transactions. When one considers that local currencies are at their most attractive levels in more than a decade, the Latin America thesis becomes even more convincing (especially for USD-based investors).
The thesis behind many high-return real estate strategies in more developed global markets, such as the United States, Europe, and Asia, which depend on high levels of low-cost debt to generate opportunistic returns, contrasts sharply with the aforementioned Paladin Realty proposition.
According to Paladin COO Fred Gortner, who spoke to World Property Journal, "Despite slowing growth, Latin America offers a compelling defensive investment strategy for pursuing opportunistic returns. The region has excellent visibility, significant size, and project-level economics that are far superior to the rest of the world, including high profit margins and low leverage. Mexico's and the Andean region's real estate prospects are bright, thanks to steady GDP growth, favorable demographics, and high pent-up demand. The Brazilian recession is generating distressed opportunities to buy high-quality assets for a fraction of their replacement cost. Finally, today is one of the most appealing entry points for USD-investors in the last two decades."
Latin America's Overall Investment Thesis
Despite recent slowing growth, Brazil, Mexico, Colombia, Peru, and Chile continue to benefit from a convergence of long-term demographic, fiscal, and political trends that are expected to sustain long-term growth in demand for housing and other modern real estate products over the next two decades.
Favorable demographics, as the region's young and rising populations (over 400 million people in these five countries) join the workforce, are among these Latin American trends. Latin America today bears a striking resemblance to the United States in the 1960s and 1970s, when the "baby boomers" fueled decades of economic development and wealth formation.
Demographic forces and two decades of improved global, fiscal, and monetary policies are driving long-term development. Such economic growth has aided in the development of a favorable climate for both domestic and foreign investors. Thanks to well-capitalized banking systems, strong foreign exchange reserves, flexible exchange rates, and cautious fiscal policies, the region remained resilient throughout the global financial crisis and recession of 2008-2009. Although the region's GDP growth has slowed since then, the Andean region and Mexico are projected to rise at a rate of 2% to 4% for the next few years. Brazil is expected to return to growth in 2017 after a period of recession. In terms of growth opportunities, Latin America continues to be one of the best-performing regions on the planet.
Long-term affluence, as personal wealth and incomes increase in tandem with productivity gains and economic growth. For example, over 40 million people joined Brazil's middle class in the decade following 2002, prior to the current recession. 3 A similar story is currently unfolding in Mexico and the Andean region, which have a total population of 200 million people, which is comparable to Brazil's. Increased availability of long-term (30+ year) mortgages has made housing more affordable for millions of potential new buyers compared to a decade ago.
Present and potential demand for low- and middle-income housing is substantial. Due to relatively underdeveloped capital markets and a persistent shortage of capital to generate sufficient supply, there is an estimated housing deficit of more than 15 million units in Paladin's five target markets alone, a supply level that cannot even meet annual household formation increases, let alone solve the current housing shortage.