Latin America Update

Latin America is comprised of 526 million people - 226 million more than in the United States and Canada combined. Of that, 269 million Latin American residents are considered economically active as compared to 179 million residents in the United States and Canada combined. In Latin America, growth of private consumption increases at a rate of 3.9 percent per annum (vs. 2.5 percent in the United States and Canada). Added to the fact that there are more citizens aged 15 to 19 years old in Latin American countries than in Canada, the United States and Western Europe combined, it is no wonder that multinational investors around the globe have been shifting their attention to this emerging territory.

Although considered by many as one market, each Latin American country has a unique, complex economy with strengths and weaknesses. Although Latin America countries can be volatile and more risky than North America and Europe, its economy is increasingly stable and its growing middle class makes it an extraordinary opportunity. According to Samuel Zell, founder of Equity Group Investments, Inc. and Chairman of the National Association of Real Estate Trusts (NAREIT), Argentina, Brazil and Chile are the "areas with the highest growth potential" in Latin America. Zell's company currently invests in Argentina.

The most noteworthy factor about Latin America today is that it is comprised of democracies. Although these democracies are sometimes fragile, they are nonetheless democracies.

The following are brief overviews of Argentina, Brazil and Venezuela:

Brazil is Argentina's principal economic partner. Therefore, last year's Brazilian devaluations crisis continues to effect many Argentine economic sectors. Additionally, due to the higher cost of conducting business in Argentina, some companies have relocated to Brazil. Last year, GDP dropped between four and five percent. In 1991, the Argentinean peso was pegged to the dollar on a one-to-one basis, in order to create stability by eliminating hyperinflation. Today, the rate of inflation is below that of the United States, and in the year 2000 some deflation is expected. Last year's newly elected government should further stabilize the region. More monetary and political transparency exits today than ever before. Unemployment is still high around 12 percent and could increase to 15 percent by the end of the year. Tourism demand remains healthy with hotels in Buenos Aires showing an increase in Average Daily Rate (ADR) between five and 10 percent and occupancy above 70 percent. Other areas in the country experiencing a surge in tourism are Bariloche and Patagonia.

Regional Market Analysis

There is still scarce availability for equity and debt for commercial real estate. Buenos Aires has 25.8 million square feet of office space - only 2.4 million of that is considered class 'A' space. The lack of class 'A' office space is felt throughout the city - 95 percent of class 'A' space is leased at an average of US$36 to US$48 per square foot. Rental rates are steadily increasing at an average of 5 percent per year for this type of product. Currently, an additional 5.4 million square feet of class 'A' office space is planned and should be available during the next five years. The absorption rate is between one and 1.2 million square feet per year. The office market is divided as 75 percent leased and 25 percent owner occupied.

Hotels in Buenos Aires are performing well. The city has five hotels that meet international standards. Occupancy is between 70 to 75 percent with the average rate ranging from US$175 to US$275. This lack of product has been contributing to the healthy RevPar growth over the last three years. Occupancy may soften in the near future with the recent opening of the Hilton Puerto Madero and the building of several new hotels in the downtown area.

Residential construction has been booming due to the availability of residential mortgages, which offers an 80 percent loan with a 30-year amortization. This relatively new mortgage market has provided financing for new projects and has enabled many Argentines town their own home.

Industrial is still user-owned and has seen very little activity.

Transactions are practically non-existent these days. The reason being the long-term bond yields jumped form 8.5% to 12/13%. Real estate owners are not ready to sell in a depressed market at a 15% cap and prefer holding on their asset until the market improve. The buyers on the other hand have little incentive to buy below the long-term bond yields.

Financing Climate

Developers still locally finance projects. Debt and equity remains scarce with the exception of residential projects financed by banks, which provide mortgages to residential buyers. These projects carry decreased risks by giving control of the buyer's market back to the lender. Foreign banking institutions such as HSBC and Citibank -- bringing more monetary transparency to the market, have acquired many banks.

Trends to Watch

The future of Argentina lies ultimately in the current new government. Many compare Argentina to the Chile of five to 10 years past -- one can expect Argentina to reach investment grade in the next four to five years.

Brazil is the eighth largest economy in the world. It is the largest economy in South America, to the point it dwarfs all other countries in the region. Its GDP is larger than Denmark, Belgium and the Netherlands combined. Like New York, São Paulo is both a city and a state. The state of São Paulo is responsible for 44 percent of all industrial activity in Brazil and 32 percent of the total Brazilian GDP. The city of São Paulo is considered the nation's business center. With its 17 million people, the city accounts for 22 percent of the Brazilian population.

The 1997 worldwide economic crisis, which began in Asia, has greatly affected Brazil. Fearful investors put pressure on the Brazilian economy and, in January 1999, the government was forced to abandon the strong currency anti-inflation anchor of the Real Plan. The Brazilian government announced a one-time, eight percent devaluation of the Real. In 1999, however, a Citibank official commented, "Brazil's reaction to this crisis has been applauded by international investors by virtue of the controlled inflation rate, smaller-than-expected GDP decline, relatively calm foreign exchange, and declining interest rates. The fiscal discipline the government has been showing, along with IMF funding, should continue to restore market confidence in Brazil."

Today, investors are regaining confidence in Brazil. São Paulo is leading the charge being the most economically advanced city in the country. Inflation has been kept under control during the last twelve months. The political climate is also improving with rampant corruption becoming less tolerable as illustrated by the recent example of Luis Estevao -- a senator expelled from the senate and facing prosecution for his involvement in a US$93 million fraud over the construction of a new courthouse in São Paulo.

The only dark cloud floating above São Paulo is unemployment hovering around 20 percent, more than twice the national rate. Such unemployment is followed by crime; the city has a murder rate 10 times higher than New York City. President Fernando Enrique Cardoso recently enacted a law prohibiting the sale of guns outside of the armed forces and the police. However, this does not appear to hamper the boom in business and leisure travel sparked by the currency devaluation, which has made traveling less expensive.

At the end of 1999, torrential rains plagued Venezuela taking thousand of lives and leaving hundreds of thousands homeless. The damage is estimated from US$15 to US$20 billion. Unemployment is around 20 percent and inflation hit 22 percent last year. Although it is forecasted to decrease to 18 percent this year, investment remains scarce.

One sector that has not felt the aftermath of Venezuela's natural disasters is the hotel sector. In the last two years Sol Melia, Embassy Suites, Eurobuilding and the Lido Hotel have opened properties, while the Four Seasons is gearing to open a property in a depressed market with an occupancy rate of 50 percent. The Chavez government is pressing for the expansion of the Maiquetia International Airport that will include a 250-room hotel, shopping mall and parking facility.

The Caracas office market contains 31.5 million square feet of space -- 7.5 million square feet of government offices, 2.8 million square feet of class 'A' space and the remaining are class 'B' and 'C'. Within the next four years, approximately 2 million square feet of new class 'A' space is planned.

Article written by Christian Charre

Jones Lang LaSalle Hotels - Miami