By: Peter D. Morris SCLS, SCSM, SCMD

© 2011 All Rights Reserved

 Legendary, billionaire real estate investor Sam Zell said he is entering the real estate markets in Colombia and India.

India has been on the economic radar screen as part of the BRIC countries for several years. BRIC is an acronym for the emerging economies of Brazil, Russia, India and China. However, as many real estate investors have found deals were hard to consummate and investor attention saturated those markets resulting in overall price escalation.

But what about Colombia? Forget about its drug related past. This is the new Colombia. While there are still rebel problems in the jungles and drug issues in poor suburbs, just as there are drug problems in any major city, Colombia is expanding.

The World Bank listed Colombia as one of the easiest countries in Latin America to do business. The culture of the country seems to be to move forward and move up with a relatively young population and a dynamic workforce. It is an economy coming of age and rich in oil reserves.

Recent free trade agreements with a number of countries, including Canada, and soon to be signed agreements with countries, such as the USA, are pumping the economy.

Colombia is part of the next wave of emerging markets called CIVETS, that hold prospect of returns greater than can be found in developed nations. And Colombia holds a preferred position even in this group. CIVETS stands for Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. The recent turmoil in Egypt has all but excluded it as an emerging market for investors. Colombia is the closest geographically to North American investors, is politically more stable than some of the other CIVETS countries and is better understood.

There is something else about Colombia that is attractive to commercial real estate investors. In fact, there are three things:

1.      The ability to reap short term returns based on the county’s prevalent real estate business model,

2.      A change in the native real estate practices is on the horizon, and

New investment vehicles.

The Current Practice

As I wrote about in another article, Colombia went through a credit crisis over a decade ago. At the time it was difficult to obtain financing for any large scale project. The market adapted and ‘constructors’ came to the fore with a real estate model of ‘sell, build.’ As a result, almost all new developments - even today – are pre-sold condo projects, irrespective of land use. Investors can buy individual offices or entire floors, individual retail shop space in regional malls or blocks of space, etc.

Financing these types of development projects can produce a nice return in a short term as the project is pre-sold prior to the dirt being turned.

There are specific issues with investing in individual new units however; such as a phenomenon known as dead on arrival projects. If you would like more information about this costly issue and the things you can do about it, please contact me.

A Change on the Horizon

We predict the issues associated with the sell, build model coupled with international interest in the country will propel a new real estate model for the country. We expect to see a return of the ‘developer’ who owns the entire project and leases individual space, rather than the constructor who is out of the project once it is sold and built.

There are several reasons in our view why this will come to pass, including: foreign financing accustomed to lending for long term holding projects, foreign pension fund investment that seeks consistent long term returns rather than project by project returns and multi location tenants (particularly in retail) that wish rapid market entry to capitalize on the opportunity to become a leader. It is easier for them to deal with a few developer/owners rather than hundreds of private investor owners.

This change will come about as single investors take down entire projects; or consolidate, and then expand, majority ownership stakes in distressed projects. We also expect to see single owner new project developers enter the market.

New Investment Vehicles

Ten new real estate investment trusts were created in Colombia in 2010 alone, although a few have since disappeared because they couldn’t complete the types of deals their charters stated. The Colombian form of REIT is a relatively new investment vehicle. Because of their recent introduction to the market, some may be high risk so a complete due diligence is required before investing. That said, coupled with the prospect of single entity long term leased space ownership we see these funds as powerful new players in the years to come.

Irrespective of the type of investing above, it is important to know the market and have strong existing relationships. That is where we come in. We have worked in Colombia. We have strong relationships with key influencers in the commercial real estate industry, who in turn have their finger on the pulse, trends and market movements. We would be pleased to assist you in exploring an investment in the Colombian real estate market so contact us at pmorris@beyond-the-building.com