The rise of Latin American REITs

by Ephraim Vecina24 Feb 2016
The United States and other leading economies are not the only viable real estate markets out there, as Latin America has been proving itself highly reliable and robust against significant global shocks.
This according to a senior official of an up-and-coming fund industry player, pointing out that the gains experienced in the region make South America the most promising destination for real estate investors.
In an interview with Forbes, Tierra Funds managing principal James Anderson said that market conditions in Latin America should make it a key consideration in investors’ lists, especially among those who are looking at real estate investment trusts (REITs).
“We expect the REIT market to grow significantly over the next five to 10 years as the local capital markets become the go-to place for real estate financing. We designed the multi-factor index around our 20+ years’ experience on the institutional private equity side of the business,” Anderson said in the interview.
Tierra Funds is offering the region’s first exchange trade fund based solely upon REITs and real estate operating companies (REOCs) in Latin America. Their flagship product, Tierra XP Latin America Real Estate ETF (LARE), launched with $2 million in capital last December, with REITs covering about 55 % of the portfolio.
“LARE is a passive product and seeks to track the Solactive Latin America Real Estate Index, which currently has 52 components. Brazil is weighted 58%, Mexico is 39% and Chile is a little less than 3%,” Anderson explained.
So far, the product has exhibited great performance, trading at 16.6 times earnings as of the end of January. Tierra Funds expects a promising forward price-to-earnings ratio of 14.8x, equivalent to a 10% discount and 28% earnings for 2016.
“So what we have is a basket of diversified real estate companies that, in aggregate, have cleaned up their balance sheets over the last three years and are growing earnings in a flat sales growth environment. There is tremendous built-in operating leverage when overall growth picks up,” Anderson said.
“An investor in LARE can have access to Brazil REITs with unleveraged yields of 10% to 15%, trading at a 40% discount to book value and a forward seven times P/E. That is dirt cheap for commercial real estate with stabilized lease cash flows,” Anderson added.


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