REPORT

Latin America GRI

Real Estate 2023

J UNE 2023

Text: Sarah Garnett

Layout: Gabriel Pereira
 REPORT

CONTENTS

Macroeconomic Outlook..............................................................................................................................................04

Real Estate Trends.............................................................................................................................................................06

Financing & Investments..............................................................................................................................................09

Technology & Innovation: A New Cycle.................................................................................................................13

The Acceleration of ESG in Business......................................................................................................................15

Image gallery..........................................................................................................................................................................16
 REPORT

GRI CLUB

GRI Club is changing the game for networking and providing key market insights with
its event coverage that transforms the intimate discussions of C-level executives into
digestible reports.

GRI Club events are a way to pick the brains of the leading figures in real estate. This report
was created after Latin America GRI Real Estate 2023 in New York, which gathered over
300 of the top decision-makers in the business at an exclusive event.

CEO and Managing Partner of GRI, Gustavo Favaron, highlighted the speed of changes
in the real estate market and opportunities in the commercial sector. Favaron discussed
uncertainties in Europe and the US, and whether they will positively or negatively impact
Latin America. He encouraged attendees to share ideas freely and think critically to come
out on top in the real estate cycle.

With a special focus on the $1.5 trillion of financing that needs to be refinanced in the US
by 2025, Favaron highlighted the importance of understanding the market cycle in order
to succeed in real estate.

“When it comes to opportunities in the global economy, there are

several macro themes and asset classes worth considering. According
to JPMorgan’s Long-Term Capital Market Assumptions, equities
in the Western world are predicted to yield around 7%
per year over the next decade. While this may seem a bit
high, it’s worth noting that their track record has been
pretty good.

Additionally, bond yields have risen, which means

that cash and bonds are looking like more attractive
options than they did before. However, one asset class
that hasn’t shifted too much is real estate. Despite
the current economic climate, there is still a long-
term forecast for real estate to perform well. All in
all, it’s an interesting time to be investing, and
opportunities abound for those willing to take a
closer look at their options.”
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MACROECONOMIC OUTLOOK

The Shift in Monetary Policy

The end of the era of easy money is upon us, and it’s time to start thinking about what that
means for investors. The past decade was marked by weak financial systems, deflationary
pressures, and massive unemployment - forcing central banks to take hyper-aggressive
measures, including zero and negative interest rates, and large-scale bond purchases.

But things have changed. The financial systems on both sides of the Atlantic have improved,
labor markets are tighter, and regulation has improved to prevent similar issues from arising
again. While some structural forces could drive inflation in the coming years, we’re in a more
balanced world with some deflationary and inflationary pressures.

Current policy rates in both Europe and North America are well above what they should be
sustained at, and central banks will have to cut at some point. However, market predictions
that the Fed will cut rates significantly in the next couple of months is wildly optimistic. The
Fed may hike one more time, but they’re likely to hold rates steady for at least three to six
months, probably until the end of the year, to see if disinflation takes hold. This means there
could be a gradual adjustment to assets that were priced based on the very low interest
rates of the last decade. It’s a healthy adjustment to a decade that was truly distorted.

Policy rates may stay high for longer

% eop

Source: J.P. Morgan. *As of December 31, 2022. **As of March 31, 2023.
 REPORT

The global economy is currently facing a lot of uncertainty indicating that we are heading
towards a slowdown, and the real estate market is not an exception. Although the nominal
growth seems reasonable at the moment, real activity is already pretty weak. To prepare for
the possibility of a downturn, we need to look at companies and financial systems that are
struggling to deal with the total change in the financing landscape.

In Brazil, the interest rate is currently at 14 percent, which poses a challenge to real estate
investors looking for mid-teens returns for development. Buying a government bond may
seem like an easier way to achieve these returns. However, people continue to invest in
real estate because of the inflation-adjusted rents that they receive. But what is the risk
premium over the risk-free rate in such investments? These are crucial questions that need
to be answered when considering real estate investment in Latin America.

When interest rates are low, below 10 percent, real estate investment returns are easier to
produce. However, when they are above 10 percent, it becomes difficult to make a profit.
Liquidity in assets is an asset, but it also has a downside, and it is the responsibility of
investors to weigh both sides of the coin before making investment decisions.

If the world enters a more volatile interest rate environment with higher term premiums,
it can lead to increased funding costs, regardless of the country. Inflation predictability is
crucial, and the volatility of inflation can impact long-term yields more than central bank
policy rates. If inflation becomes unpredictable, central banks’ balance sheets will decrease,
leading to a changing global funding environment.

Despite country-level adjustments, LatAm real GDP growth outlook

holds steady

% change y/y

Source: J.P. Morgan. *As of December 31, 2022. **As of March 31, 2023.
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REAL ESTATE TRENDS

In recent years, US commercial real estate trends have shifted dramatically. While there
has been an oversupply of non-prime locations and commodity Offices, there has been
an acceleration of growth in sectors such as Logistics, Data Centres, and Multifamily and
Residential markets. Big companies have been leaning towards these sectors for some
time and are poised to benefit from them. Despite the current struggles, there are still areas
of strength that real estate firms can take advantage of, but the vacation rate for other
commercial properties remains high.

Latin America has a significant advantage in the deglobalization trend because of its
geographic location. Investment in supply chains in the region could benefit from loading
goods onto ships that can reach deep ports in the United States. This is a long-term project,
which could take up to a decade to complete, but it is already yielding results across sectors
in Mexico. CEO and CFO surveys show that supply chain resiliency is a consistent concern,
meaning that companies want to shorten their supply chains.

In today’s global economy, regionalization and resiliency in supply chains are becoming
crucial, especially with recent events like the pandemic that caused disruptions in global
supply chains. For data centres and logistics, it’s important to have them close to your
population centres to ensure faster and more efficient delivery. This regionalization strategy
is already being applied in countries like Mexico, Poland, and Hungary, as they continue to
be a greater part of the supply chains of Western Europe.

Nearshoring Opportunities

The upcoming US presidential elections have caused concern and instability, not just for the
US but also for its neighbouring countries. While the US construction industry is booming,
there are concerns about meeting the capacity to deliver the projects on time. This has
created an opportunity for countries in Latin America to become a hub for nearshoring.

Nearshoring is not just about moving labor to a new country - it’s about creating a supply
chain. The opportunity for countries in Latin America is to get pad-ready sites and to get
their government, business community, and utilities on board. It’s all about where is the
power, where is the electricity, where is the pad, and where is the port. By doing so, Latin
America can also become a major supply chain hub that can provide everything from car
manufacturers to chip plants.
 REPORT

Potential annual increase in goods exports due to nearshoring

US$ billion

Inter-American Development Bank (IDB) as of June 7, 2022.

Many auto companies have already started operations in Mexico, and now there is a
growing interest in expanding nearshoring to other countries in the region. Latin America
provides access to skilled workers and has a growing business community, making it an
ideal platform for US companies to expand their operations. However, countries must be
proactive in creating a supply chain that offers companies everything they need to operate
efficiently.

The Future of Data Centres

The growth of Data Centres is only set to increase in the coming years, with experts predicting
a 26% growth rate annually until 2027. While Logistics buildings are popular choices for Data
Centres, there is also a lot of development occurring in suburban and rural areas. With the
rise of cloud computing and the need for more robust Data Centres, it’s clear this asset
class is going to play a vital role in the real estate industry in the coming years. As such,
investors should consider data centres as a key topic to focus on when it comes to real
estate investment.
 REPORT

Data Centres present an exciting and profitable investment opportunity, with a bright future
ahead. The alluring potential of the sector translates to growing interest, with investors
seeking alpha in Brazil and Colombia. Right now, investing in Data Centres promises a
return of 15-16% dollars net. Colombia appears to offer investors the best conditions to take
advantage of the trend. While Mexico is also an option, given that the country is undergoing
a technological revolution, it may not be the best place to invest in hyper-scale projects.

The reasons behind this trend are straightforward: they are essential for companies to store,
analyze, and process data, and the growth of AI is making them more critical than ever
before. With the rise of usable AI, Data Centers are going to be the main real estate impact
from now on.

In recent years, Logistics buildings have become incredibly popular as hosts for these Data
Centre projects. With Logistics in every city across North America, they are well-placed to
take advantage of proximity to population centres. Additionally, they are usually single-story
and flat, making them the perfect hosts.

The Evolution of Offices

With the rise of hybrid work arrangements, Offices are no longer just desks and meeting
rooms. As companies embrace the idea of having a balance between remote and in-person
work, they are changing their workplace layouts to be more open and to provide common
areas such as restaurants, game rooms, and creativity spaces. This shift to Co-living and
common amenities has caused an increase in demand for Office space, with companies
needing more square footage per employee.
 REPORT

Building managers and owners are investing in lifestyle amenities to attract tenants. One
example is childcare facilities in Office buildings, which allow employees to have their
children nearby during the workday. Similarly, pet centres are becoming more popular, with
employees able to bring their pets to work and let them play for the day. These amenities
provide not only convenience for employees but also a sense of community and camaraderie
in the office.

Offices JLL

Stock evolution (in millions). 2021 - 2024

Stock (sq. m) Production (sq. m)

However, the US currently faces a problem with too much Office space and not enough
demand for it. While these lifestyle amenities may attract tenants, it is not the complete
solution to the problem.

As the market continues to evolve, it will be important to consider how to repurpose

underutilized office space to meet the changing demands of today’s workforce.

FINANCING & INVESTMENTS

The Latin American real estate market has great potential for growth and returns on
investments, but it’s important to recognize the challenges and the different investment
types. Political instability, currency issues, and high inflation rates have been a catalyst
for international investors leaving the market, but there is hope for a return with a stable
political environment and lower interest rates.
 REPORT

When investing in the Latin American real estate market, it’s crucial to have a local partner
who understands the market and its trends. With this knowledge, investors can make
strategic investments that will see high returns on investments.

While countries like Brazil, Chile, and Mexico offer opportunities, investors need to be
comfortable with the currency, and some countries are not yet ready for institutionalizing
investments. It’s essential to assess each country individually to determine whether they are
ready for investment and have a clear exit strategy. While foreign investors may see Latin
America as a distressed market, this is a misconception that needs to be addressed.

The Rise of Private Credit

Private credit is becoming a major force in financing, poised for explosive growth across
all corporations in the coming years. Traditional banks, especially regional ones, are seeing
a retrenchment in lending, opening up a void for private credit to step in. This shift is not
specific to real estate or any one industry, but rather a structural trend that will revolutionize
the way that corporations are financed.

Policymakers are recognizing the benefits of private credit, which offer a safer alternative to
regional banks that often lend long-term to risky ventures. Businesses are also recognizing
the advantages of private credit, which offers a better match for seven-to-ten-year loans.

Additionally, private credit is not necessarily more expensive. Rates will depend on individual
circumstances, but there will be funding available for decent assets. It will be harder for
distressed sellers, but good assets with positive net operating income growth, rental growth,
occupancy, and low vacancy will still find financing.

The private credit industry will step in to any financing opportunities, and the financial
sector will evolve enormously as a result. Overall, this shift in financing represents a natural
progression of the financial sector and will be of great benefit to all.

Real Estate en Latinoamérica - Tiempos de recuperación en diferentes giros

Pensando en su país, ¿Qué giro del sector real estate ¿Qué giro del sector real estate considera
considera que se ha recuperado más rapido? que ha tardado más en recuperarse?

México LatAm México LatAm

Industrial Vivienda
38% 50% Oficinas Oficinas
& Logística Vertical
Vivienda Vivienda Hoteleria Hoteleria
Vertical Horizontal & Turismo & Turismo

Hoteleria Industrial Retail & Vivienda

& Turismo & Logística Comercio Horizontal
Vivienda Retail & Vivienda Retail &
Horizontal Comercio Vertical Comercio
Retail & Hoteleria
Comercio & Turismo The Talks | Panorama Inmobiliario MX y LatAm 2022
 REPORT

If investors want projects with a long-term view, perpetual products are an excellent choice,
meaning that investors do not have to worry about their money being returned in a short
period. With assets like Logistics, Data Centers, and a significant investment in Multifamily
residential units, investors can expect a stable return on investment over the long-term.

While the world is still working out the costs of fragility that come with fractional reserve
banking, private credit seems to be a better match between liabilities and assets and the
time horizon.

The correlation of bond yields in Latin America with those of the West is a factor that could
contribute to capital flowing into the region. Long-term assets have high funding costs,
especially bonds that mature in over five to seven years.

Additionally, if yields remain high in the region while they fall in the West, capital could start
to flow into Latin America. However, this is a speculative possibility, as it also depends on
stability in both political and policy environments.

Investments in Brazil: Opportunities and Caution

Brazil has its ups and downs as an investment destination. The non-deliverable currency of
Brazil makes it a challenging place for investors to hedge their investments. Unfortunately,
this should not come as a surprise because returns on investments in dollars have been
underwhelming. However, on the bright side, investors can expect better returns if they
opt to invest in BRL. The next 15 years remain uncertain, and the suggestion is to exercise
caution when investing in Brazil.

According to the speakers, there is limited demand from global investors for Brazil. This is
mainly due to the return on investment being affected by currency exchange rates. The
speakers noted that local investors would be more interested in certain asset classes that
offer decent returns, particularly in specialized opportunities and credit. It is important to
show good experiences to the investors to attract them to invest.

2023 YTD Capital Volume by Property Type

304.85M (17.8%)
930.84M (54.5%)
Cushman & Wakefield Q1 2023

Office

Industrial

Retail
473.13M (27.7%)
 REPORT

Investments in Mexico: Opportunities and Growth

On the other hand, investments in Mexico offer potential opportunities. With the ongoing
conflict between the US and China and other political global events, Mexico is in a unique
position for growth. The following 15 years are anticipated to be much better than the
previous 15, even with the North American Free Trade Agreement (NAFTA) no longer in
effect.

In 2015, the currency appreciated by 15-20%, something that has not been seen in 50 years.
One of the unique opportunities that investors are facing is the current trend towards
sustainable investments. ESG initiatives and having an internal ESG team are imperative for
investors to keep up to date with investor demands, and for unique investments to thrive.

Industrial investment options seem to be the most viable right now due to the robust
growth of the sector. However, resorts and real estate financing are also potential avenues
worth exploring. According to recent data, resort investors are enjoying a healthy return on
investment, with some reporting north of 20%.

Mexico’s Industrial Landscape

819.9M 19.7M 1.6% 17

square feet of square feet under vacancy rate leases with Chinese
industrial inventory construction companies in Mexico
(121 buildings) in 2022
Source: Savills

The Future of Investment in Latin America

The speakers were asked if they wished they had invested more or less in the region over
the past 15 years and how they think the next 15 years would compare with the past 15 years.
They agreed that their countries would always be seen as opportunistic, which attracts
certain investors during down cycles of mature economies such as the US and Europe.
However, they would love to have more stable investors instead of those who come in and
out.

They commented that it has taken a lot of time for most of the Latin American countries to
get to the point where they have potential like Chile, which is well-structured. They expect
that most countries in the region will still struggle with attracting local and foreign investors,
with ups and downs, in the next 15 years.
 REPORT

They commented that it has taken a lot of time for most of the Latin American countries to
get to the point where they have potential like Chile, which is well-structured. They expect
that most countries in the region will still struggle with attracting local and foreign investors,
with ups and downs, in the next 15 years.

Selling large assets worth over $100 million in Latin America can be a daunting task due to
liquidity issues. Finding people who can stroke a $150 or $200 million check is becoming
increasingly difficult.

TECHNOLOGY & INNOVATION: A NEW CYCLE

It is no news that the pandemic and lockdown had a significant impact on various sectors,
including the PropTech industry.

Investors often overlook the long-term benefits of innovation, as they are focused on short-
term gains. It is crucial for real estate companies to not make the same mistake when it
comes to incorporating technology and innovation. PropTech is an industry that has seen
great benefits from innovation and investment, and companies should not hesitate to take
advantage of the opportunities available. By investing in innovation, companies can stay
ahead of the curve and better adapt to the ever-changing market.

One of the key factors that will drive the new cycle in PropTech
investments is the increasing demand for technology in the real estate
industry. While the industry has traditionally been slow to adopt new
technologies, the pandemic has forced many companies to reconsider
their strategies and look for ways to adapt to changing market
Demand for
conditions. As a result, we are seeing a growing number of real estate
Technology
companies investing in new technologies that can help them operate
more efficiently and effectively.

Another important factor driving the new cycle in PropTech investments

is the increasing innovation we are seeing in the space. Over the past few
years, we have seen a wave of new startups and technologies emerge
in the real estate industry, each with the potential to disrupt traditional
business models and create new opportunities for investors. From
Innovation in virtual reality and blockchain to data analytics and machine learning,
PropTech
there are countless innovative technologies that are reshaping the way
companies think about real estate.
 REPORT

Finally, the third factor driving the new cycle in PropTech investments is
the long-term growth potential of the industry. Despite the short-term
disruptions caused by the pandemic, the real estate industry remains
one of the largest and most important asset classes in the world. In
fact, many experts expect the industry to continue growing over the
Long-Term coming decades as populations continue to grow and urbanization
Growth
increases. As such, there is no shortage of opportunities for investors in
Potential
PropTech, and is expected to see continued growth and innovation in
the years to come.

Government Support and Regulations

Another factor driving the new cycle of PropTech investments is the increase in government
support and regulations. Governments are now interested in supporting and promoting
technology in the real estate industry. This support will create a conducive environment
for PropTech companies to develop and thrive. Additionally, regulations will increase
transparency and accountability, which will attract more investors to the industry.

The Use of AI in the Industry

One of the most significant disruptors in the industry is Artificial Intelligence (AI). AI is a
powerful tool that is already being used by many companies to streamline their operations
and increase efficiency. However, the adoption of AI has been slow, and many businesses
are struggling to keep up with the pace of change.

For those that are willing to embrace this new technology, the rewards can be significant. AI
can be used for a wide range of tasks, from data analysis to estimating costs. However, there
are also concerns about the potential risks of AI, and how it could be used to replace human
workers. As such, it’s essential that companies take a cautious and considered approach to
the adoption of AI, to ensure that it is used ethically and responsibly.

AI is forecast to boost Latin America’s GDP by 5.4% by 2030

Source: pwc (2018)

Contribution of AI to GDP by regions, 2030

 REPORT

The potential of AI as a research tool is almost limitless. With AI like Chat GPT, companies
can access vast amounts of research data from multiple sources quickly and easily. This can
save businesses months of research time and simplify the building of a business plan.

One example of using AI to improve business growth is by finding the right price for products
that have no equivalent in the market. This is where Chat GPT can come in handy, helping
businesses discover the right price point.

THE ACCELERATION OF ESG IN BUSINESS

Environmental sustainability is becoming increasingly important in investing. Many

companies now have a policy that they will only invest in developments that are carbon zero.
Not only does this help the environment, but it also ties into the overall social responsibility
of the investment. As investors, it is also important to consider the potential for distress
cycles, particularly with regards to leverage in the market.

ESG practices are a requirement to meet the demands of investors and consumers. This is
especially true for large, multinational corporations such as Microsoft, Amazon, and Google,
who are demanding ESG practices from their business partners. However, implementing
ESG practices in the real world is not always straightforward.

While some businesses have strong governance and environmental practices, social issues
can be more challenging. Despite this, companies must address ESG requirements as part
of their agenda to stay competitive and maintain their reputation.

Governance is an integral part of ESG practices and must be in place to create a framework
for environmental and social efforts. Without proper governance, businesses may not be
able to implement the necessary changes to create sustainable practices.
 REPORT

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