In a recent visit to Sao Paulo, real estate investor Sam Zell gave an interview to newspaper Estado de Sao Paulo (“Estadao”). Though he did not disclose the reason for his visit, he said he “remains optimistic about the country though more cautious”
The following are key excerpts from the interview:
Estadao: How Brazil has been seen by foreign investors now that the economy is slowing?
Zell: The question is whether this slowdown is over or not. There are different opinions about it, but in general, foreign investors see Brazil and other emerging markets with caution. Today, emerging economies face many obstacles, a lot of resistance.
Estadao: Is the real estate market still attractive?
Zell: The main question is whether Brazil itself is attractive. In my opinion, the answer is yes. The country has so much potential. In real estate, we’ve been always interested, we’re just more cautious now.
Estadao: What kind of companies you think have the highest growth potential?
Zell: The best segments are a direct correlation to the economy. The population continues to grow, as well as the upward movement of the middle class. This clearly indicates the actual demand for real estate in both housing and retail. The hotel industry is also very promising.
Estadao: Are there signs of a bubble in the Brazilian real estate?
Zell: I am not an expert in this area, but I think that if there is a bubble, it will more likely deflate slowly. The housing sector still offers good value in Brazil, despite high prices.
Estadao: What went wrong with the homebuilders?
Zell: In some cases, the delay of projects is the result of incompetence. In others, the cost problem is a result of the inflationary construction environment, which has seen higher costs than other sectors. I can not possibly believe that what is happening in Brazil is different from other parts of the world.
Estadao: In Brazil, many developers have lost more than half its value in two years. Is this a good time to invest in them?
Zell: The fact that they have lost more than half the market value is very expressive. Nevertheless, it is worth remembering that in the last six years, the revenues of these companies grew by two or three times. As they’ve doubled in size, it makes it hard to say that the situation is a disaster. I believe that they were overvalued before but I’m not sure if they are currently undervalued.
Estadao: What were your main reasons for selling out Gafisa?
Zell: It was a normal investment decision. We went in 2005 and left in 2011. Every fund has to liquidate some of its investments from time to time as it is our responsibility to return capital to shareholders.
Estadao: What does Gafisa need to be profitable again?
Zell: I think Gafisa needs a controlling shareholder. When Gafisa was controlled by Equity International and GP Investments, we monitored the company very carefully. When we left, Gafisa became a company without an owner.
Estadao: Do you have any interest in businesses related to the World Cup and the Olympics in Brazil?
Zell: No. The Olympics lasts less than two weeks. Who will build a hotel for two weeks? Someone will, but I won’t. The World Cup and the Olympics are wonderful things for Brazil, but it will your country a fortune. You will be very proud, but you will spend a long time paying for it. Just look at Montreal (Canada). It took them 35 years to pay for the games.