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Brazil's empty factories may be Blackstone's buying opportunity

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Images of empty factories send an unmistakable message to Brazilians: they are deep in the worst recession in at least a century. To Blackstone Group LP, there's another takeaway: time to think about buying industrial property.

[SAO PAULO] Images of empty factories send an unmistakable message to Brazilians: they are deep in the worst recession in at least a century. To Blackstone Group LP, there's another takeaway: time to think about buying industrial property.

The world's largest private-equity property investor, with US$100 billion in real-estate assets, sees investment opportunities in Brazil's industrial and logistics assets following two years of shrinking production, plant closings and growing idle capacity.

"Yes, there are a lot of challenges happening today in Brazil, economic and political uncertainties,'' Ken Caplan, Blackstone's chief investment officer for real estate, said at a real estate event in Sao Paulo last month, pointing to warehouses as a potential investment.

"But it is this type of environment that tends to generate really interesting and compelling opportunities for those that have the conviction and courage to invest through it."

More than 4,000 industrial plants ceased operations last year in Sao Paulo state,  according to the regional Board of Trade, as the country's economy shrank 3.8 per cent. Economists expect a further 3.9 per cent contraction this year. The Brazilian unit of Controladora Mabe SA, based in Mexico, shut its doors this year, halting assembly of traditional Brazilian brands such as Continental refrigerators and Dako stoves and laying off almost 2,000 workers.

Logistics and industrial real estate are built and managed by third parties for production companies and warehousers. Properties can range from multi-use sites, in which several tenants split the costs, to build-to-suit facilities for a specific task or corporation. The arrangements can include sale-lease-back agreements, in which an investor buys a factory and rents it back to the previous owner.

Vacancies

While vacancies in logistics facilities as a whole are high and growing, they are much lower in state-of-the-art properties held by big institutional investors, TRX Group co-founder and Vice President Jose Alves Neto said in an interview. TRX has a portfolio of 5.4 billion reais (S$2.06 billion) in logistics and infrastructure facilities, and continues to raise capital and invest in these types of assets.

"Brazil's industrial and logistics park is really old and obsolete,'' Alves Neto said.

"Only recently it started modernizing, and outsourcing is only starting. In this environment there is plenty of opportunity for buyers and sellers.''

The total area of Class A warehouses in Brazil, the highest quality, increased 4.7 per cent to 12.1 million square meters in the first quarter from the end of last year, according to a study from real estate consultant Engebanc published on April 28. The vacancy rate went up to 24.1 per cent, from 20 per cent.

Fielding Offers

Log Commercial Properties, the logistics unit of MRV Engenharia e Participacoes SA, has been approached by investors interested in parts of its 2.5 billion reais in real estate, mainly in multi-tenant properties that are already occupied.

"We are getting a lot of proposals, mainly from international players, interested in taking advantage of the foreign exchange rate,'' Log chief executive officer Sergio Fischer said in a phone interview.

"We sold assets in the last three years," though none that were already operating. "We are in no rush,'' he said.

Brookfield Property Partners LP is another big global real estate company attracted to the country's young logistics sector, while continuing to invest in office space. Brookfield has 40 billion reais invested in Brazil, mostly in real estate but also in infrastructure, renewable energy and private equity, Roberto Perroni, CEO of Brookfield Property Group Brasil, said at the same event. The company works with a horizon of seven to 10 years when investing in the country.

Good Moment

"In our opinion, it is a good moment to invest in Brazil,'' Mr Perroni said. "We've been in the country for more than 100 years and we know the economy and politics has its ups and downs, but invariably, after a certain period, Brazil resumed growth.''

Logistics provider JSL SA, Brazil's biggest trucking company, managed to increase revenue last year despite the country's tumbling industrial output. New customers and the absence of big competitors in such a large market accounted for the gain, chief financial officer Denys Marc Ferrez said in an interview.

"The diversity of our business helped us grow,'' Mr Ferrez said. "Part of the operations suffered, but I had new contracts that more than compensated for that.''

Meeting of Minds?

A gap between what investors are willing to pay and what sellers expect is keeping some deals on hold, Marcelo Costa, CEO of Engebanc, said in a phone interview.

"There are no distressed assets in Brazil. If it is too cheap, it is because it is a bad-quality asset."

Logistics and industrial property prices aren't trading at distressed prices, Mr Costa said, mainly because most owners aren't deep in debt. Leverage levels are much lower in Brazil than in more mature markets such as the US, and prices have already reached a bottom or are close as Brazil's political crisis heads to an end with President Dilma Rousseff probably being ousted, he said.

"The window to invest in Brazil is closing," Mr Costa said.

"The moment to invest is now. Whoever misses this window will have to wait for another 10 years, when the next crisis happens."

BLOOMBERG