LAVCA caught up with Alexander Chalmers, Managing Director of private equity real estate firm Avenida Capital, to learn more about Colombia as an important real estate market and the appetite from institutional investors for exposure to the asset class ex-Brazil.
LAVCA: Please provide some background on Avenida Capital
Chalmers: Avenida Capital is a private equity real estate investment firm with offices in Bogota and New York City. We currently manage two real estate funds focused on the development of retail, residential and mixed-use projects in the main and secondary cities of Colombia. Additionally, we pursue opportunistic direct investments across Latin America. We were founded in 2006 and have committed capital both as a principal and on behalf of institutional investors to residential, retail and mixed-use projects in Colombia, Brazil, Chile and Panama.
LAVCA: Tell us about your background. What Latin America-specific experience did you have leading up to your role at Avenida?
Chalmers: I worked on an investment banking desk for a number of years doing advisory work for both GPs and LPs. We did real asset transactions in Latin America as well as in other emerging markets and I saw the demand for this asset type in these economies. Latin America in particular interested me because I had been going there since I was young and spoke the language. Plus I loved the people and different cultures in the region. Professionally, it was clear that large amounts of institutional capital hadn’t really arrived yet in most of the markets due to the lack of institutional managers in the space and a general lack of awareness of the region itself. So I saw the potential and started asking some of my LP contacts about what type of product they would want to see and why. It was clear that pensions and other institutional investors liked real estate development in emerging markets given the fundamental supply/demand imbalance and shorter duration of capital requirements.
About that time, I got back in touch with two friends (now my partners) who had been building their real estate track record in the region. We knew the opportunity was there and joined forces, invested our own capital in additional track record projects to decide which strategy would be best and launched our institutional fund platform based on those lessons learned.
LAVCA: Why is Colombia an important real estate market for Avenida and what other markets are attractive currently? Are there any markets in Latin America that have factors which would be prohibitive for real estate investing? Has this changed over the last 5 years?
Chalmers: Previous to launching our fund platform, we completed track record projects in Brazil, Chile, Colombia and Panama and worked extensively in Peru so we had a good idea of the markets. Colombia stood out for us based on the size of the country and the fact there are multiple large main and secondary cities versus some countries that just have one or two major cities. It has a young population of consumers and is severely under retailed. We also felt it was easier to get things done business-wise, than some of the other countries. As an example, in Colombia, the process to approve building permits is done within each individual city or municipality. It usually takes 3 months. In Brazil, no matter what part of the country you want to build, all the permits must be submitted through a central office in Sao Paulo. This bottleneck creates a permit approval process that can take 15 months or longer, and then you begin construction.
Additionally we liked Colombia because it has a center-right government that had put significant legal and financial controls in place in the early 2000s. These provided significant investor protections and created a unified structure for real estate development that is used very successfully today. Combined with the improved security situation and our existing local relationships, it was the right place to start for us.
We also like Peru as a market, as well as Chile, but are focused exclusively on Colombia for now. Each of these countries are smaller than Colombia but we believe the overall Andean region has a lot of attractive qualities and is underserved institutionally because they can’t receive the large amounts of capital that investors want to put out. We see this changing over the next 5-10 years with different strategies.
LAVCA: What was the profile of the investors who participated in the 2014 fund closing of Avenida Colombia Real Estate Fund I? What was the appetite like for exposure to Latin America real estate at the time?
Chalmers: Our fund I is comprised of public and corporate pensions, foundations and asset managers from the US, Europe, Asia and Latin America. From the beginning we created Avenida to be an institutional platform with strong governance, risk management and fiduciary reporting out of New York, but with local investment professionals in Bogota. At the beginning of fundraising for fund I, very few investors had been to Colombia or knew about the country so there was a lot of incorrect perceptions versus the reality of the country and market opportunity. In the end, we had 11 groups visit us to meet our team, see our projects and validate the market and 10 invested with us. For our fund II fundraising, we’ve seen a lot more investor knowledge of Colombia and the region in general, which is great.
LAVCA: How does the current environment in Latin America today impact the real estate sector and your overall strategy? How do you effectively source opportunities?
Chalmers: On the macro side, the drop in oil prices and devaluation of the Colombian peso (and other local currencies) have created uncertainty for some international investors while others see it as a strong opportunity to invest at a discount. The local elections in Colombia held last month elected centrist mayors to all the major cities in the country, showing the people’s judgment that the previous leftist administrations weren’t competent and they instead preferred to look to growth. Completing the FARC peace agreement is the next step for the government but unemployment is very low, infrastructure concessions across the country are being built to improve transportation, the construction sector is increasing its growth and the residential demand for housing continues to far outweigh the supply.
Our sourcing of real estate projects in Colombia has never been stronger since we are seen as a Colombian fund manager. Developers feel comfort that we are partners with them, we live in the country, we see them every week and we are here long term rather than parachute capital coming in from other countries every other month to scout for projects. We receive the majority of our projects through our established developer relationships who understand our return hurdles but we are also now seeing a lot of land owners contact us directly based on our reputation in the market.
LAVCA: What’s your average investment size? Please describe in detail some of the projects Avenida has backed.
Chalmers: We generally invest between $10-25M USD in each real estate project. We are always the control equity and require any development partner who brings us a project to put in their own capital in order to align interests.
We’ve now done over 20 projects between our two funds and have successfully completed large format shopping centers, multi-tower residential buildings and urban mixed-use projects in Bogota, Medellin and secondary cities within Colombia. One important lesson we learned from our track record investments is that real estate development requires strong operational expertise not just at the development partner but within the fund management team itself. To that end, we assembled a very senior investment team in Colombia who have worked at or run large developers in Colombia.
This pays off immensely to our investors because returns depend on getting a project built on time and on budget. To us this means you need to work together with the developer, not just receive updates along the way. We put our own people on each project from day 1 and they stay onsite until it finishes. This gives us a competitive advantage in that if something happens on a project, we know at the same time as the developer and together we can make the adjustments required.
LAVCA: How does governance specifically play a role in your investments?
Chalmers: At the project level, we hire 2 people who remain with the project onsite through completion, one to look at receipts and spending and the other to monitor technical construction. This ensures our project level data is accurate. These individually roll up to a monthly risk management report showing all the portfolio projects and how the costs and sales are performing compared to original underwriting. Each quarter, we update our investors as to these results and once a year we hire a third party to value each project independently. We do official audits every year in Colombia and the United States and our portfolio and fund accounting team are all former big 4 accountants. We have independent auditors review our company controls and procedures each year.
LAVCA: What is the Fundación Avenida de Vidas?
Chalmers: To whom much is given, much is expected. Two years ago, we contributed resources to a non-profit children’s center in Cali that needed help with acquiring land from the local municipality and developing their project. From this experience and others since, we saw an opportunity where we could leverage our experience in real estate development and relationships with the local municipalities to create replicable and sustainable projects that aid children and give back to local communities.
The model is to partner with other local non-profits who have the expertise and track record in programming and operations and we manage the land acquisition, structuring, project management and design of the facilities. The three areas of focus are early childhood development, technology education and conflict victims of the FARC.
We formally created the Foundation this year to provide a dedicated vehicle to receive outside funds and hired a person specifically to manage all its activities. It is a registered 501(c)3 non-profit in the United States with a similar vehicle in Colombia. We intend it to be a standalone entity eventually and we welcome any partnership opportunities or other conversations. www.fundacionavenida.org
We are leading the companies’ strategies for expansion, with a goal to reach over 100 stores by 2018; large scale operation, processes efficiency, and cost management strategies; and constant product innovation. Since our investment, Beleza Natural has added 17 stores for a total of 28 locations, and in 2014, the company’s revenue and EBITDA grew above 40%, in spite of the negative macro scenario and the end of the consumer demand boom in Brazil. We believe Beleza Natural will be an ideal target for a strategic target or an IPO, as it provides exposure to a sub-sector in Brazil with high growth and high potential.
LAVCA: What is the timeline and strategy for exiting your investments? Who are potential buyers?
Chalmers: Depending on the project type, construction usually takes 18 months – 3 years. The apartment units are purchased by individual buyers so once we deliver the units, we exit our investment. This is the same in retail actually, which is unique to Colombia, in that retailers traditionally buy their store locations so once we deliver the completed shopping center, we exit our investment. As an investor, this lowers our risk substantially.
If we build a for-lease retail project, there are 6 stabilized yield funds in Colombia looking for single owner leased-up assets, as well as 12 insurance firms and 4 pension funds. Not to mention all the outside funds, REITs, etc. so there is plenty of demand but very few of these single-owner assets available. They are always calling us to find out what is in our pipeline and if they can be first in line once we complete them.
LAVCA: What challenges and opportunities do you predict for the real estate market in the next 5-10 years in Latin America?
Chalmers: Latin America is a large region with each country having their own particular challenges and opportunities. The structural issues in Brazil have painted the overall region with a brush that isn’t indicative of other individual country opportunities. It has negative growth while Colombia and Peru are above 3%. But it’s the area that first-time investors tend to seek out, which leads to a herd mentality, something that never works out well. This is a challenge when trying to show investors that are new to the region that Latin America is not just Brazil.
We prefer to focus in other areas with less competition, more stable governments and stronger macroeconomic policies. I think the long term opportunity in real estate is in for-rent residential housing. The younger generations in the larger countries will have more mobility in the next decade and traditional rental housing such as we are used to in the Unites States will be in big demand.
The challenges to this strategy are that the tenant laws in most of the LatAm countries are such that it is very difficult to remove someone from their apartment. As such, very little for-rent housing has been built. But these laws are changing, and we will see the rise of this sector first in Mexico, then in Colombia, Peru and Chile.
This for-rent housing will appeal to the institutional investors because they’ve made a lot of money around the world in these strategies and are likely to support it in Latin America. I’m very excited for our company to be a part of this opportunity.
LAVCA: Why did you join LAVCA?
Chalmers: LAVCA is the leader for the region and well respected for the way it brings together all the actors. I’ve made so many connections through its conferences and programs and it serves an important role in the ecosystem among service providers, fund managers and investors. We need it to continue to expand its horizons to include real estate, infrastructure and other areas that are important to investors.