Prudential Global Investment Management (PGIM) has a terrific platform – professional, transparent, proven track record & diversified. A couple years back, we performed a deep analysis of their Mexico platform for a leading sovereign wealth fund in connection with a follow-on fund. We came away very impressed overall.
We were intrigued to see this recent piece – Where Smart RE Investors Are Putting Capital in Latin America – sponsored by PGIM, that suggests they’re seeing increased interest from global LPs in the LatAm real estate asset class. It’s a good discussion and they make some interesting observations, including the challenges facing multi-family housing, residential development in Mexico, compelling risk-reward in Brazil and, drum roll, the rise of local institutional capital.
First, Pru is spot regarding Mexico housing. Many are aware that this segment crashed and burned with the heat of a flaming habanero pepper a few years back when the newly installed Pena Nieto government announced a sweeping restructuring of Mexico’s housing subsidy program, the changes of which rendered builders’ land reserves essentially worthless and over-indebtedness pushed most of public home builders into bankruptcy. What we saw over the next year was a series of high profile defaults, shareholders lost everything and the industry ground to a halt. Housing was really the only real estate segment that went through a distressed period since the 2008 peak – and it all happened in the public markets.
As Pru points out, Mexico’s housing industry totally recapitalized and, again, is positioned to take advantage of the favorable long term demographic opportunity. Notably, Sam Zell got back into Homex last year after having invested in & exited the builder nearly 10 years ago, and he’s doing it all through the public equity. And that is the conclusion that Pru leaves out – you can get exposure to the space through the half dozen or so public companies and in fact that’s what the shrewd managers, like Zell, are doing. But why you ask? Because private equity returns have converged with public equities.
This brings us to the next theme that Pru discussed – the rise of local capital. We’ve been writing about this for the last several years and, indeed, was a major impetus for our launching the Solactive Latin America Real Estate Index. The new era of real estate investing in Latin America is not on the private side but through listed equities, driven by local capital. Pru openly admits that local capital is willing to take lower returns but suggests that the shift hasn’t really happened yet. We beg to differ. The shift has been happening for the last five years and we see it everyday in the projected returns of direct investment deals in the region. Private returns aren’t going to generate any material benefit to the investor and, in reality, may even underperform as a result of high fees. Overlay the fact that locking up your capital has an opportunity cost associated with it, and the underwhelming proposition of going direct versus the public strategy becomes even more stark.
And this brings us back to the question of why is Pru cranking up the PR machine? Our suspicion is they’re likely sniffing out interest from LPs in a new fund but not the cookie cutter global fund where target LPs are US and Canadian pensions. Our guess? They’re looking at locally-listed funds with a regional (vs. country) focus. The piece is less about CalPERs than it is about local pension funds….