VZCZCXRO4849
RR RUEHRG
DE RUEHSO #0485/01 2611145
ZNR UUUUU ZZH
R 171145Z SEP 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8518
INFO RUEHBR/AMEMBASSY BRASILIA 9650
RUEHRG/AMCONSUL RECIFE 4191
RUEHRI/AMCONSUL RIO DE JANEIRO 8847
RUEHBU/AMEMBASSY BUENOS AIRES 3246
RUEHAC/AMEMBASSY ASUNCION 3493
RUEHMN/AMEMBASSY MONTEVIDEO 2771
RUEHSG/AMEMBASSY SANTIAGO 2493
RUEHLP/AMEMBASSY LA PAZ 3906
RUCPDOC/USDOC WASHDC 3172
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 SAO PAULO 000485 
 
SIPDIS 
 
STATE FOR WHA/BSC, EEB/CBA 
DEPT OF TREASURY FOR JHOEK, BONEILL 
 
E.O. 12958: N/A 
TAGS: EINV ECON EFIN ETRD BR
SUBJECT: U.S. REAL ESTATE FIRMS BULLISH ON BRAZILIAN MARKET 
 
¶1.  (SBU) Summary.  On August 22, Ambassador Sobel met with senior 
executives of U.S. real estate firms operating in Brazil to discuss 
the competitive environment in the sector.  The group, which 
included residential, commercial and industrial real estate 
developers, as well as real estate investors and service providers, 
were universally positive about the market opportunities in Brazil. 
They expressed concern, however, about the tax environment and 
recent indications that Receita Federal may move to consider the 
State of Delaware a tax haven.  They also indicated that while U.S 
investment is clearly increasing, American investors seem to be 
behind the curve in investing in the Brazilian real estate market 
when compared to other international players. End Summary. 
MARKET ENVIRONMENT 
¶2.  (SBU) All of the firms represented indicated that they were 
optimistic about the opportunities in the Brazilian real estate 
market.  They conducted an informal poll of the amount of capital 
that their firms had committed in the Brazilian market and concluded 
that, between them, they had $3 billion invested.  More 
surprisingly, they expected to raise an additional $4 billion in the 
next year, and anticipated that despite historically moderate U.S. 
participation, about 70% of this investment capital would come from 
U.S. investors.  When asked about the types of investors they are 
seeing in the marketplace, the group mentioned sovereign wealth 
funds, pension funds, endowments and family offices. They also 
remarked that they saw a number of investors from Asia, Dubai and 
South Africa.  From North America, the companies that are most 
visibly committing capital to the Brazilian marketplace are Equity 
International, Brookfield Property, Developers Diversified Realty 
(better known as DDR) and Canadian company, Ivanhoe Cambridge. 
Fernando de Faria, Director for CBRE/CB Richard Ellis mentioned that 
his firm was targeting pension funds as a major source of funding 
for the near term.  Douglas Munro, Senior Vice President and Country 
Head for Hines Brazil,concurred and mentioned that the bulk of 
Hines' recent financing comes from CalPERS (California Public 
Employees' Retirement System). 
¶3.  (SBU) Cushman & Wakefield's CEO for Latin American Operations, 
Celina Albuquerque Antunes, noted that the Brazilian market remains 
highly fragmented and that many U.S. investors complain that they 
have limited investment options.  She added that many U.S. investors 
seem "out of their comfort zone" when investing in Brazil.  Cushman 
& Wakefield, which employs over 3,000 employees in Brazil, has made 
a business out of finding investment opportunities that may be 
overlooked or too small to be noteworthy to a large investor and 
"packaging" these opportunities into a marketable investment 
product.  Jose Paim de Andrade, Founder and CEO of MaxCap Real 
Estate Investment Advisors, reinforced Antune's assertions and asked 
for help from the U.S. Mission in educating American investors about 
the benefits of investing in Brazil.  He noted that one of the 
biggest challenges to attracting U.S. investment to Brazil is lack 
of knowledge of the marketplace.  He stated that MaxCap spends a 
significant amount of time educating U.S. investors, but that it 
would be preferable for basic information about investing in Brazil 
to come from an independent third party.  De Andrade represented the 
sole Brazilian company at this meeting and was included because of 
MaxCap's June joint venture with Merrill Lynch to acquire and 
develop real estate projects in Brazil. Interlocutors noted that 
Morgan Stanley, JP Morgan, Citibank and Goldman Sachs all have real 
estate investment funds as well.  Munro summed up both Antunes and 
de Andrade's comments by noting that, while Brazil has really 
"cleaned up its act" in the areas of corporate governance and 
oversight, this information has been slow to reach the American 
investing public. 
¶4. (SBU) When asked about the market segments, several executives 
commented on the rising values of residential real estate in Brazil. 
 Munro noted that the largest residential real estate companies in 
Brazil currently trade at 4 to 5 times net book value.  He compared 
this to Mexico, where the same market segment trades at 2 to 3 times 
book value and the U.S. where, as a result of the real estate slump, 
values at or below book value are not uncommon.  He also noted that 
at today's market values, both Brazilian and U.S. homebuilders have 
roughly the same value ($19 billion).  This is particularly 
noteworthy because the market value of Brazilian homebuilders just 
three years ago was a fraction of that of the U.S.   Munro commented 
that pent up demand in the Brazilian residential sector has resulted 
in these inflated values.  With the improved stability of the 
Brazilian economy, increasing access to credit and lengthening 
maturities for Brazilian mortgages, home ownership is now within the 
grasp of the Brazilian middle class.  Although these real estate 
executives indicated they were "starting to see" a slowdown in the 
velocity of residential home sales, they expect this market to 
 
SAO PAULO 00000485  002 OF 002 
 
 
remain overpriced for the near to medium term.  Brazilian mortgages 
account for an embryonic 1.5% of GDP - still far below the U.S. and 
Mexico indicating significant room for additional growth. 
¶5.  (SBU) The executives agreed that the hospitality and second home 
markets are attractive segments in today's economic environment as 
are planned communities.  These areas are particularly "hot" in the 
Northeast of Brazil where U.S. investors have yet to make serious 
investments.  They remarked that they are seeing Spanish and 
Portuguese investors targeting Natal in Rio Grande do Norte and 
British investors targeting the Northeast in general.  They are 
hopeful that with the advent of direct flights from Northeastern 
Brazil to the U.S., American direct investment will increase.  Munro 
noted that, in his opinion, the visa requirement for Americans 
entering Brazil was discouraging significant investment. 
CHALLENGES 
6  (SBU) Despite their overall bullish sentiment on Brazil and the 
real estate market, the real estate executives mentioned several 
areas of concern.  Most of the companies represented at the meeting 
are incorporated in the State of Delaware.  Recent rumblings from 
Receita Federal that the State of Delaware may be declared a tax 
haven could negatively affect their businesses.  They also mentioned 
differences in the way taxes are assessed by Receita Federal as a 
significant impediment to generating U.S. investment.  Currently, 
Brazilian pension investors do not pay taxes on returns made from 
their investment holdings, while foreign companies are assessed 
taxes on this income - many investors balk at the uneven playing 
field. 
¶7.  (SBU) Moving beyond tax issues, the arcane Brazilian real estate 
laws were highlighted as detractors to foreign investment.  Munro 
gave the example of Brazilian leasing laws and referred to the 
current system as "socialist leasing."  Current leasing laws, 
purportedly passed in the 1930 and 40s, allow lessees to break a 
long term lease on just three months notice. While this may be 
acceptable in the residential market, in the age of build-to-order 
factories and specialty-use industrial sites, it can take years to 
find new tenants.  Munro likened the existing law to a "one size 
fits all" policy which does not make sense in the modern world. 
¶8.  (SBU) Finally, the group agreed that Brazilian infrastructure 
development was not keeping pace with the rate of economic growth 
overall.  They noted that, while they were starting to branch into 
other regions, they continue to focus on the major urban areas of 
Sao Paulo and Rio de Janeiro because the infrastructure can support 
the needs of industrial and commercial clients. 
¶9.  (SBU) Comment:  Though all of the senior executives present were 
positive about the opportunities presented by the Brazilian real 
estate market and the prospects for U.S. firms, they simultaneously 
lamented the historically slow growth of U.S. investment.  They 
seemed confident that this trend is changing but highlighted the 
need for educating U.S. investors and requested Mission support in 
this area.  End Comment. 
¶10.  (SBU) This cable has been cleared by the Embassy in Brasilia 
and Ambassador Sobel and coordinated with the Foreign Commercial 
Service and the U.S. Treasury Financial Attach for Sao Paulo.