AMERICAS REAL S napShot! Real estate — Winter 2014 Current developments in the key real estate markets in the Americas • Brazil Positive growth despite uncertainty in the economic environment • Canada The rise of real estate investment trusts (REITs) and real estate operating companies (REOCs) • Chile A slow year for the real estate industry • Mexico Opportunities despite a challenging market • United States Increasing optimism in the real estate market Introduction Welcome to the inaugural edition of KPMG’s Americas Real SnapShot. This document was prepared by a network of seasoned KPMG professionals aligned to different functional groups within the member firms across the Americas region. These specialists have a deep understanding regarding the complex nature of the real estate markets throughout the Americas. KPMG’s Real Estate practice understands real estate and the related financial factors and maintains an extensive database on all regional submarkets. Through both our regional and global networks of interdisciplinary experts, member firms can offer a wide spectrum of real estate-related services for challenging local and international mandates. KPMG professionals extensive experience and advice can help clients achieve added value in the real estate sector. Andrew Weir Global Chair, Real Estate and Construction Greg Williams Head of Americas, Real Estate and Construction © 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. © 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Brazil Positive growth despite uncertainty in the economic environment Macroeconomic overview Office market The Brazilian economy remains sensitive to global economic As a result of the upturn in the economy in 2010 and 2011, instability, which, coupled with the downturn in local foreign investors identified opportunities in commercial manufacturing activity, has raised doubts about the future buildings. At that time, the percentage of upscale property performance of economic indices. offerings was still small compared to the demand. These investments are maturing and a volume of approximately The Brazilian currency has suffered abrupt depreciation in the 1 million square meters is expected to be delivered in 2013. last few months, returning the country’s currency exchange According to a report by Cushman & Wakefield, 680,000 square with the United States to rates observed in 2008. In 2013, meters were delivered in the first three quarters of 2013, depreciation reached 20 percent and exchange rates have compared to the 802,000 square meters delivered in 2012.1 remained unstable, in tandem with the volatility of the international economy. The effects of currency devaluation are This volume of commercial enterprises will enter the market increasing concerns over the impact on inflation, which has at a time of uncertainty, which is why companies have revised been fought by economic policies in combination with their investment budgets, and growth plans have been Brazilian interest rate increases from 7.25 percent to gradually reduced at every new release of economic indices. 10 percent in recent months. Accordingly, the growth in the number of office building, Despite its efforts, the Brazilian Government has admitted the commercial office, distribution center and logistics warehouse 4.5 percent inflation target will not be met and expects it will launches in 2013 provides tenants with a large number of level off at 5 percent. options and greater power to bargain for better rental prices. This situation should remain stable, depending on the Additionally, the government forecasts a 4 percent economic location, or even show a decline in the case of regions growth rate for 2014. However, this forecast is more saturated with enterprises. optimistic than the market report Focus, which is released on a weekly basis by the Central Bank of Brazil. It estimates a Rent in São Paulo mere 1.99 percent growth in relation to GDP in the next year. BRL per month The unemployment rate disclosed by the Brazilian Institute of 146 Geography and Statistics (IBGE) showed a downward trend 139 over the last few years. In 2009, the average rate stood at 130 8.1 percent. In June 2013, it was 6 percent, a level slightly 110 higher than the one observed in 2012, when the annual 90 average was 5.5 percent. That means the index leveled off to a point where it started being called ‘full employment’. Year GDP (%) Interest rate (%) Inflation (%) 2009 -0.30 8.75 4.31 2009 2010 2011 2012 Q2 2013 2010 7.50 10.75 5.91 Source: Brazil Marketbeat Office Snapshot Q2, 2013, Cushman & 2011 2.70 11.00 6.50 Wakefield 2012 0.90 7.25 5.84 2013 2.30* 10.00 5.91 2014* 1.99 10.50 5.99 * Projection January 2014 Source: Central Bank of Brazil 1 Brazil Marketbeat Office Snapshot Q2 2013, Cushman & Wakefield 2 / Americas Real SnapShot!/Winter 2014 © 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Retail market With over 27 new enterprises in operation and an average of Shopping Centers Association (ABRASCE) made new 398 million monthly visitors, the Brazilian mall sector recorded estimates, reducing the number of expected inaugurations a 10.65 percent rise in sales in 2012 compared to the previous from 47 to 41. year, and totaled BRL119.5 billion in revenue. Enterprises have been inaugurated at a 60 percent occupancy The excellent performance in 2012 can be explained by the rate. Four stores out of 10 are vacant when the usual average low unemployment rate, rise in wages and increase in credit, success rate of an inauguration would be above 85 percent. the latter of which continues to extend at reasonable levels. According to ABRASCE, the vacancy rate of the sector in Brazil, which reached 6 percent 5 years ago and fell to 1.47 percent in On the 2013 horizon, the scenario is slightly different. Despite late 2012, rose again and doubled to 3 percent in May. the number of expected shopping mall inaugurations being at an all-time record, including the announcement of 47 new The downturn in the economy, shrinking demand and enterprises, shopping center companies have reviewed their consequent slowdown in retail expansion helps to explain the plans to inaugurate new enterprises and have postponed part aforementioned scenario. of the inaugurations planned for this year. The Brazilian Number of Revenue (BRL Year GLA (million m2) Number of stores shopping malls billion per year) 2008 376 8.645 65,500 64.60 2009 392 9.081 70,500 74.00 2010 408 9.512 73,775 91.00 2011 430 10.344 80,192 108.00 2012 457 11.403 83,631 119.50 Source: Sector data – July 2013, ABRASCE, www.portaldoshopping.com.br Americas Real SnapShot!/Winter 2014 / 3 © 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Brazil Housing market Even at a time of uncertainty in the economic environment, Although the general perception of the economy signals the sales behavior and number of new residential real estate distrust of the future, the real estate industry in São Paulo launches in the city of São Paulo in the first half of 2013 came went in the opposite direction, showing progress when as a surprise. According to the real estate market survey compared to 2012. This was mainly fostered by continued conducted monthly by the São Paulo Housing Syndicate demand for residential real estate, a wide range of credit (SECOVI-SP), sales from January to June 2013 reached extension and interest rates that are still attractive. 17,500 units. The volume was 46 percent higher than the one observed in the same period in 2012, when 11,981 units Real estate debt market were sold. The volume of real estate loans granted in the country is Total sales in the first half of 2013, as measured using the positive. From January to June of 2013, the Brazilian system sales overall value (PSV), amounted to approximately of savings and loans (SBPE) granted BRL49.6 billion in BRL10.6 billion. After a correction using the National Index financing, a 34 percent increase in credit assigned during the of Construction (INCC-DI), that amount corresponds to a first half of 2012 (BRL37 billion). 63 percent growth in relation to the BRL6.5 billion amount observed in the first half of the 2012. It is worth stressing that according to Brazil’s banking regulations, part of the funds raised through savings accounts With respect to real estate value, according to the Knight should be funneled to real estate financing. These Frank Global House Price Index, an index that monitors real investments, as they are fully guaranteed by the federal estate prices in 55 countries, Brazil was the country where government, provide a safe haven for small investors in figures rose the most in 2012 (15.2 percent). It was followed turbulent times. The balance of savings accounts reached the by Hong Kong, up 14.2 percent; Turkey, up 11.5 percent; and record figure of BRL420 billion in June of 2013 and in Russia, up 10.7 percent. These indices led to Brazil’s December 2012 it was BRL389 billion. nomination, for the second consecutive year, as the best market for investment in real estate among emerging markets This movement of funds represented 244,700 units benefiting and second, just below the US, in offering the best capital gain from the contracting that occurred in the first half of 2013, up opportunities, according to the Association of Foreign 14 percent on the 214,300 units contracted in the same period Investors in Real Estate (AFIRE).