In the quest to gain 10 years of experience in Latin America, in 2 years' time, I've just completed 6 months in Colombia. My thoughts on the country, and real estate opportunities, are outlined.
I’m writing to you now from my new home in Sao Paulo, Brazil. I arrived here on July 4th after six months in Colombia where I spent significant periods of time in Cali, Bogota, Medellin and Santa Marta. In this edition of the Emerging Real Estate Digest are shared my observations on Colombia as a whole, and state of its real estate market.
Spoiler: foreign investors should be setting aside capital to invest now in Colombia’s real estate, but in nimble, aligned and “smart” structures. Unfortunately, all indications are that they won’t and instead have chosen to wait to re-enter when conditions are less favorable and where much capital will be chasing a few large deals, prices higher, and achieving adequate returns more difficult.
Society and People
It’s difficult to make broad generalizations of any society, especially after only six months of observations. With that caveat in place, there are a few items I deem worth mentioning.
Colombia is a stratified society with an entrenched “elite” who rule the country and its institutions. The elite aren’t generally admired by the public, and most recognize that their wealth and positions were largely derived either from colonial advantages gained by previous generations, or from the drug trade which for decades has been a principal export of the country. As of Q3 2023 Cocaine overtook oil as Colombia's largest export.
Where governing systems are perceived as being led by an illegitimate elite, despair and hopelessness tend to reside in the people. A life of crime is a viable option for poor young people, rather than participating in advancing society. The middle class and mid-level professionals know that the way to get ahead is to rise up the patronage network, to not rock the boat, and to wait for your turn. Bucking the system will result in punishment and ostracism. The system the elites built in Colombia is designed to protect their position and keep the lower classes from challenging their rule.
Recently, a left-wing leader has taken the reins of power and his political base is largely driven by the angst in the lower classes who know that the system is rigged in a way that is against their interest. Poor governance of this administration only makes the problem worse, but frankly I can’t blame the poor for revolting and electing such a leader to manage Colombia. Colombia is in a tough political situation.
Real Estate Market Liquidity Crunch
Colombia’s real estate market is in a liquidity crunch.
(1) Banks are pulling back. Many are not honoring some funding commitments made during better times and closing credit lines held by developers. New projects are unlikely to receive much interest from banks who are playing a wait-and-see game and avoiding more real estate exposure.
(2) Private equity funds aren’t being funded. The new leftist government decided to redirect pension savings away from private equity funds in the country, many of which are real estate funds. This is probably a good policy move, but it does have the effect of further curtailing liquidity.
(3) Foreign buyers are reluctant. Foreign investors in the real estate sector have been burned by Peso weakness, political uncertainty and shrinking return premiums on Colombian real estate assets.
(4) Retail investors aren’t interested. Not only are retail investors suffering through a relatively poor economy, many have recently lost sizable amounts of wealth through their participation in Colombia’s first REIT IPO. Emerging Real Estate has written about this failed listing, as well as the REIT industry in Colombia in general.
Opportunities
If I had $200 million to invest in Colombia’s real estate sector, this is where I’d look.
(1) Buying properties from retailers and banks. Retailers and banks shouldn’t hold such vast real estate holdings as they do in Colombia. One bank, Davivienda, recently sold its holdings and Exito and Bancolombia should do the same. The risks of these practices are discussed in a previous article and they include antitrust issues, competitive tensions between the landlord and tenants, and reduced operational efficiency all around. Exito controls 15 malls comprising 5.2 million ft² of GLA in Colombia. Bancolombia controls 168+ significant properties (including 18 major malls) through its 80% controlling interest in the FIC, but it has considerably more properties held in other structures.
(2) Buying from REITs and private equity. REITs and private equity funds have lost much of their access to capital, as previously described. However, most have significant future commitments which they will likely only be able to meet through dispositions. The issue for them is lack of buyers, and that they value their properties at significantly lower cap rates than are presently achievable in the market. One reason for the inflated property values is that the management fee paid to the external manager is based on the fund’s NAV. This also partially explains why the external managers rushed into funding deals without future commitments secured.
(3) lending to REITs and private equity. Short-term lending is likely to be lucrative, for the reasons already mentioned, and less risky than owning the assets. Emerging Real Estate has previously written about the credit opportunity emerging in Latin America.
(4) Deals with developers. This applies mostly to multifamily developers who fund projects through obtaining presales for most of the units, then receiving a three- to four-year loan from the bank to construct the building. After construction, the units are sold, bank paid off, and profits retained by the sponsors and investors. Unfortunately, banks and investors are pulling some funding commitments. Purchasers are defaulting at high rates due to higher interest rates (16%+) which have suddenly made home ownership too expensive for the masses. Defaults are also occurring because the current government shifted resources away from mortgage subsidies for some income groups.
