Research

It was French writer Jean-Baptiste Alphonse Karr that said more than 250 years ago, “the more things change, the more they stay the same.” It was fascinating to watch that in 2020, a year where the whole world changed, one thing certainly remained the same: demand for housing in Latin America, especially in the low-income segments. The combination of huge existing housing deficits, incremental demand outpacing supply by large margins, affordability with long-term mortgages at historically low rates, and government support, continue to buoy this market through the most challenging of times. For-sale housing has been the cornerstone of Paladin Realty’s Latin American investment strategy since it entered the market in 1998, for exactly these reasons.

In Brazil, a new record was set in 2020 for residential sales in São Paulo. According to SECOVI (one of the principal sources of residential sales data in Brazil), 51,417 units were sold in Brazil’s largest city in 2020, setting an all-time record. This figure was 5% higher than the previous record of 49,244 units, set in 2019. Some of the purchasing may have been investors searching for hard assets amidst the economic uncertainty and record-low interest rates, but much of it speaks to the demand-driven opportunity that housing presents: Brazil is a country that requires an estimated 1.5 million new housing units per year, which is met with a supply that is estimated at less than 500,000 homes. Paladin Realty launched Praça Marajoara in September 2020, a lower-income development with an average price-point of US$85,000, and had sold 66% of its 204 units by year end. Paladin’s prior two launches in São Paulo, ARQ, a middle-income project in Vila Mariana and CORE a mixed-use project in Pinheiros, ended 2020 with 71% and 99% of their residential units sold, respectively.

Paladin U.S. Research – California Residential Rental Regulations

Regulations affecting residential rental properties in California are varied and complex. Several current and proposed statewide and local ordinances will affect Paladin’s apartment investments in Southern California and, like the regulations themselves, the results will be varied and complex. On the one hand, Paladin believes these regulatory requirements and risks create additional stress on smaller “mom and pop” owners of apartments who may be ill-prepared to deal with these rules. As a result, many of these owners may decide to exit the market, providing investment opportunities for sophisticated investors who have more expertise underwriting and navigating such regulatory complexities. On the other hand, such regulations may reduce the potential returns from existing investments. Paladin believes that careful underwriting of the risks, along with the solid execution of value-added business plans to mitigate the effects, will continue to generate attractive risk-adjusted returns for our investors. Additionally, asset pricing will eventually adjust to reflect the realities and limitations of any such regulations.

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Latin America Research: 2019 Outlook – Macro & Property Trends

Latin America’s leading economies of Brazil, Mexico, Colombia, Peru and Chile continue to benefit from a convergence of long-term demographic, economic and political trends that are expected to support sustainable growth over the next several years. These positive long-term trends include attractive demographics, a growing middle-class, greater mortgage availability and large housing deficits, all factors which should continue to result in resilient demand for housing and the development of other real estate products. Political risk has receded in the region as newly elected market-friendly leaders prevail in Brazil, Colombia and Peru; some uncertainty remains in Mexico with questionable initial policies of its new President. Brazil’s economic and political outlook improved sharply in 2018 with the election of a pro-business President, who is already pursing a reform agenda. GDP is expected to grow in the 2%+ range in 2019 and beyond. Mexico and the three leading countries of the Andean region (Colombia, Peru and Chile) are each poised to grow 2-4% in 2019 and beyond, with economies increasingly driven by domestic consumption and intraregional trade. In Mexico, while the conclusion of NAFTA renegotiations in 2018 removed some uncertainty, the new President’s early actions have given mixed messages at best and Paladin remains cautious on Mexico until the new President’s policies become more clear and constructive.

 
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2018 Investment Outlook – Brazil

Over the past few years, Brazil has weathered significant social, political and economic shocks, driven by both internal and external factors. The slowing of China’s economy and the end of the global commodities “super-cycle” boom in 2012 hit Brazil’s terms of trade hard, causing its currency to depreciate by nearly 70% from 2012 through 2015.  Lower commodity prices also strained the government’s finances, curtailing spending and precipitating the end of former President Dilma’s populist rule in 2016. Business and consumer confidence collapsed as the country entered its deepest recession on record, contracting by more than 7% in real terms during the 2015-16 period.  Fixed investment slowed.  Unemployment increased to over 10%.  Inflation hit double-digits in 2015 as imported goods were suddenly more expensive in local currency. Local interest rates increased to 14.25%.  International newspapers predicted that the 2016 Olympic Games in Rio would be a bust and that a mosquito-borne virus would wreak havoc on the country.  The country’s highly unpopular President Dilma was impeached and removed from office in 2016.

 
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Latin America Research: Brazil Political Risk

A few weeks ago, on May 18th, as part of a plea bargain deal in Brazil’s ongoing Lava Jato corruption probe, the head of international food giant JBS released audio tapes in which Brazilian President Temer allegedly condoned the payment of hush money to former speaker of the house, Eduardo Cunha. The tapes would appear to implicate Temer in the far reaching political corruption scandals that have led to the removal and jailing of many high-ranking politicians and businessmen in Brazil. The Bovespa stock exchange dropped 10% the day the audio tapes were released, triggering circuit breakers halting all trading. Brazil’s currency also dropped by about 10%. While this new revelation will likely delay certain of Temer’s reform efforts in the short term, the overarching theme is that this continual rooting out of corruption bodes well for Brazil’s long-term future…

 
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