Private equity spending drives changes in Colombia's retail ownership

The real estate industry in Colombia and wider South America has undergone substantial change in recent years, driven by an influx of private capital investments from local and international fund managers, sovereign wealth funds and Canadian pension funds.

In light of the challenges of navigating Colombia’s property market, most of these investors have taken to partnering with local developers or purchasing equity stakes in existing funds, though a few have taken the risk of making green-field investments in the retail and hospitality segments.

Investments in Colombian real estate have decreased alongside property spending in the broader region, amid decelerating economic growth and greater political uncertainty. However, consumer and investor confidence in the domestic market is likely to pick up as Colombia’s top-line macroeconomic indicators continue their slow improvement.

Results from a 2019 survey conducted by the real estate platform GRI Hub indicate that the share of leading Colombian property firms investing in commercial expansion grew by 9% in 2018 to encompass three-quarters of all respondents. A similar share – 76.7% – expect good or excellent results in the market in 2019, while about two-thirds predict a favourable performance over the course of the year.

Basic Instinct

Observers have long considered Colombia’s construction and real estate industries a single economic sector, as developers have typically managed and sold finished properties themselves, rather than contract via an independent third party. This dynamic frequently translated into agreements in which one building was divided among several owners, who would then hire a management company to oversee day-to-day operations. This approach was often taken by large supermarket chains, which would purchase plots of land and warehouses themselves, rather than agree to lease the space, as is common practice in more mature property markets.

Similarly, office space was – and, to a certain extent, still is – frequently constructed by pooling pre-sale resources from several investors as a measure of risk mitigation. This trend has been exacerbated by the endemically high cost of credit throughout much of the continent, which weighs on the capacity of local construction firms to access financing. Barriers to borrowing have slowly begun to come down, albeit at different paces across the industry, depending upon the segment in question.

Private Capital

Of the 111 private equity (PE) funds that were active as of mid-2018, almost onethird was dedicated to real estate – the second-highest share in the country, behind infrastructure – according to data from the Colombian Association of Private Equity Funds. Moreover, direct and indirect property investments made up $3.4bn, equivalent to about three-quarters of all committed capital.

Robust participation from local firms has driven rapid growth in the retail segment, wherein close to 100 new malls have been inaugurated since 2010. According to Mall & Retail, the segment’s two largest players, Fondo Inmobiliario Colombia (FIC) and Viva Malls – a domestic real estate branch of Grupo Éxito, the largest retailer in South America – together own 13.5% of gross leasable area (GLA). Patrimonio Autónomo Estrategias Inmobiliarias increased its GLA to 262,000 sq metres and its market share to 4.8% in late 2018 when it acquired 80% of the shopping mall Único. Meanwhile, Pactia retained 4.3% of commercial floorspace, equivalent to 232,000 sq metres, and is the fourth largest nationwide.

Healthy, long-term growth patterns in domestic demography and the consumer preferences of the expanding middle class have likewise attracted interest from international investors. In late 2014 Blackstone, a US-based PE fund with extensive investments in real estate, established a partnership with the Colombian commercial builder Ospinas & Cia and Argentina’s Grupo Pegasus to develop a line of shopping malls, business complexes and mixeduse properties in some of Colombia’s largest cities. The value of the three-way agreement had not been publicly disclosed as of early June 2019.

Other foreign players are multiplying the dynamism of Colombian retail. PSP Investments, Canada’s largest pension fund, partnered for seven years with the local developer Amarilo to invest $220m in eight projects, before purchasing 30% of the Colombian firm’s shares in May 2016. Two years later, in August 2018, PSP invested $140m to purchase a 34% stake in FIC, while Bancolombia and the domestic insurer Sura retained shares of 51% and 14%, respectively.

Terranum, the country’s largest investor in real estate assets, has received similar support from several foreign funds, including Cadillac Fairview, a subsidiary of the Ontario Teachers’ Pension Plan and the US-based PE fund Equity International. Since its founding in 2012 Terranum has developed a balanced portfolio of valuable assets, including a mixed-use business facility in Bogotá, three logistics parks and several office complexes.

New Model

The advent of new financing vehicles has become progressively more competitive with the traditional co-proprietor model, as investors seek returns through asset rental and asset appreciation. At the beginning of 2018 only 20% of completed shopping malls were owned by a single proprietor; however, the majority of facilities then under construction were single-owner developments, due to the high costs associated with commercial space, according to an assessment from the real estate consultancy Colliers International. This shift coincides with an increase in developers anchoring new projects with a diversity of service providers, including sports clubs, restaurants and cinemas, to ensure footfall amid the rapid expansion of e-commerce.

“The co-proprietor model has often resulted in owners selling commercial space to the highest bidder, without a unified strategy to provide the best possible customer experience,” Pablo Pulido, president of Mallplaza Colombia, told OBG. “As consumer trends change and steep competition from e-commerce platforms continues to increase, malls that offer added value and associated entertainment will flourish, while others will continue to find it harder to attract pedestrian traffic.”

The advantages of this new dynamic have already become apparent: Colliers data indicates that shopping centres completed in Bogotá, Medellín and Barranquilla over the course of 2018 launched with occupancy rates upwards of 50%. This stands in contrast to demand for GLA in existing complexes, where occupancy rates continue to trend downwards.

In the office segment occupancy rates have stayed low in recent years, due to oversupply and lacklustre growth in the broader economy. In addition, international firms intent on renting large spaces have found a market ill-suited to their needs, as most office buildings are physically fragmented among several stakeholders. That mismatch is compounded by the fact that, under Colombian law, any reorganisation of existing developments may require regulatory changes or approval from greater than 70% of co-proprietors, which can slow or stop many such undertakings. Under the single-owner model, investors can mitigate the risks associated with negotiating with several independent parties.

The Atrio complex in downtown Bogotá, which will include the tallest building in Colombia when its second tower opens in 2025, is owned by a consortium led by Grupo A (formerly Grupo Chaidneme), with support from the engineering firm Arpro and the builder QBO Constructores. The tower complex will eventually offer 250,000 sq metres in GLA, with entire floors of 1800 sq metres available for lease.

“While the trend towards the single-ownership model is palpable in the commercial segment, it is not as evident in office space,” Roberto Caceres, CEO of Colliers International Colombia, told OBG. “International and local funds have always focused on rent, while developers still focus on sale, and a number of ongoing projects still adhere to this model.”

Looking Ahead

The emergence of new investment vehicles and global operators has lifted the Colombian real estate market by introducing needed capital, modern building methods and streamlined management structures. While traditional, multi-stakeholder project proprietorship is likely to persist, the single-ownership model continues to pay dividends and attract investor interest. The market has proven responsive to demand, as builders have looked to provide facilities for specific client needs, especially in the provision of built-to-suit industrial complexes. Supply flexibility will be key to attracting office and industrial tenants and increasing footfall in retail properties, and success is likely to drive greater capital interest in importing the same ownership model to the residential housing segment.