Zell's Firm Raising $500 Million to Invest in Brazil Property

By Alexander Cuadros

May 20 (Bloomberg)

Billionaire investor Sam Zell's Equity International is seeking to raise about $500 million to step up investment in Brazilian real estate, betting interest rate increases will fail to stem demand as the economy grows at the fastest pace in two decades.

The firm will invest as much as two-thirds of the money in Brazilian companies tied to the residential and commercial property industries and the rest in countries outside the U.S., Chief Executive Officer Gary Garrabrant said. The new funds will bring the Chicago-based company's total invested capital to about $2 billion.

"Our enthusiasm for Brazil could not be higher," Garrabrant, who co-founded Equity International with Zell in 1999, said in a May 18 interview in Sao Paulo. "You've got this local demand that's unparalleled."

Rising incomes among Brazil's burgeoning middle class will ensure that a cycle of rate increases won't suppress housing demand, Garrabrant, 53, said. The economy will grow 6.3 percent this year, according to a central bank survey published this week. Brazilians' average monthly income has risen close to 40 percent in the past five years to about 1,400 reais, according to the census bureau.

Zell is expanding in Brazil after Equity International sold part of its stake in Gafisa SA, the country's second-largest homebuilder by revenue, last week. The BM&FBovespa Real Estate index has tumbled 23 percent this year as policy makers lifted the benchmark interest rate in April for the first time since 2008.

Gafisa Stake

Selling Gafisa shares doesn't signal that Equity International is bearish on Brazilian real estate, Garrabrant said. The firm sold the equivalent of about 18 million Gafisa common shares and now holds 30.1 million, or 7.2 percent of the total, according to a May 13 statement from Gafisa.
Equity International bought a 32 percent stake in the builder for $50 million in 2005 and Garrabrant remains the Sao Paulo-based company's chairman.

"This is, for 10 years, what we do: we invest in businesses," he said. "And then at appropriate points in time we'll monetize our position. It doesn't mean we have any less enthusiasm for Gafisa."

Brazilian builders are now inexpensive compared with "overvalued" U.S. real-estate companies, Garrabrant said. The BM&FBovespa Real Estate gauge trades at nine times earnings, according to data compiled by Bloomberg.

Higher Rates

"There are no constraints to growth for the homebuilding sector," he said. "Fundamentals are way ahead of share prices. It's natural that interest rates will rise in the short term."

The Selic rate was increased to 9.5 percent on April 28 and policy makers may push it to 10.25 percent next month, according to the median estimate in a central bank survey.

Garrabrant said Brazil's real estate industry will benefit from economic and political changes. President Luiz Inacio Lula da Silva has helped lift 19 million people out of poverty and more than doubled the monthly minimum wage to 510 reais since taking office in 2003. The government's "My House My Life" program is funding the construction of 2 million homes for low- income families by 2014.

The nation's middle class last year increased to 53 percent of the population of 200 million from 42 percent in 2002, Finance Minister Guido Mantega said last month.

At least 1.5 million new households are formed in Brazil each year while builders produce about half that number of housing units, Garrabrant said.

Economic Expansion

Equity International may invest in Colombia for the first time with its new $500 million fund, the firm's fifth, Garrabrant said. President Alvaro Uribe has boosted investor confidence, he said, by cutting the murder and kidnapping rates since taking office in 2002.

Colombia has "great demand" for affordable and middle- income housing, he said.
The firm is also looking at opportunities in China and "frontier markets" including Vietnam, Indonesia and Morocco. Equity International sold its investments in Ukraine and Venezuela because of political risk, Garrabrant said. In 2008, it sold its holding in Desarrolladora Homex SAB, now Mexico's largest homebuilder.

Mortgage Market

Garrabrant, who began his career in the real estate division at First Chicago Bank, and Zell created their company to invest in real estate businesses outside the U.S. Zell three years ago sold his Equity Office Properties Trust for $39 billion just as commercial property prices were peaking. He also orchestrated a buyout of media company Tribune Co.

Beyond Gafisa, Equity International also holds a stake in BR Malls Participacoes SA, Brazil's biggest owner of shopping malls, and bought an 8.5 percent stake last year in Brazilian Finance & Real Estate Participacoes SA to develop the country's mortgage market.

"There are less than 400,000 mortgages in Brazil -- I think there are 400,000 mortgages on the Upper East Side of Manhattan," Garrabrant said. "Will the Brazilians catch up? No question."