By Peter Grant
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 Renta Inmobiliaria
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 Mr. Munk, of 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.
Write to Peter Grant at peter.grant@wsj.com