Iguatemi is an indigenous name which, in the tupi guarani language, means “sinuous river”. Yet, for most Brazilians, Iguatemi is synonymous with a high-profile shopping mall in Sao Paulo and other large cities. When the company decided to launch its initial public offering on the Sao Paulo stock market on February 7, investors rushed for a straight deal in this temple of consumption. As a result, the real estate operator raised 550 million reals (around $260 million) as more than 18 million shares were sold for 30 reals each, which came at the top of the company’s initial estimates.
Foreign institutional investors accounted for 70% of the deal. Brazilian customers are commonly known to be high spenders. The rapid boom in consumer credit has fed a strong level of demand, which is set to benefit shopping centres. But the Iguatemi story is far from an isolated case: the number of IPOs on the Sao Paulo stock exchange has reached an unprecedented level in the past 18 months (with 26 last year and nine in 2005), as the local capital markets have finally become a reliable source of finance for Brazilian companies. (In 2004 the figure was seven.) A record 125 billion reals (around $58 billion) was raised in securities (equity, bonds and debentures) last year, which marked a 75% increase over 2005. Some 27 billion reals ($12.5 billion) that were raised in primary and secondary offerings of shares amounted to a 150% increase compared to the previous year.
The local stock exchange Bovespa was strengthened, thanks to buoyant international capital markets. Its market capitalization amounted to 74% of GDP in 2006, against 33% of GDP in 2002. “Companies used to depend on [long-term financing from the state-owned National Development Bank] the BNDES or foreign credit. Now, they can invest at a cheaper cost,” says Raymundo Magliano, Bovespa’s chairman, who talks about a “silent revolution” in the market. Foreign investors temporarily pulled out in the middle of the year, but they returned soon after, amidst a bullish atmosphere. They accounted for 35.5% of trading, up from 32.8% in 2005, as they held more than $100 billion in assets at the end of 2006, according to the local securities exchange commission (CVM) and the central bank. Bovespa’s main index closed at 44,473 points in 2006, which marks a 32.9% increase in nominal terms and a 45.5% increase in dollar terms. There is still a queue of half a dozen IPO applicants waiting for approval from regulatory authorities.
The gradual decline in the benchmark Selic interest rate and a positive macroeconomic environment have led investors to shift their strategy away from fixed income assets, which has boosted the equity market, although Bovespa was not spared by the latest market jitters. Real estate fever The real estate sector has largely benefited from this latest burst of enthusiasm. “The market is definitely hot at the moment,” says Paul Weeks, head of capital markets at Cushman & Wakefield. As many as 15 companies have launched their IPOs within a year, including some high-profile construction firms in the residential market that are also eyeing the promising office market. The firms have already raised almost 10 billion reals ($4.8 billion).
But the best may yet be to come, as heavyweights like the German mortgage company Eurohypo and the US Capital Trust are due to launch their operations in Sao Paulo and Rio in the second half of the year to lend money to the commercial real estate sector. “They will be the leverage in the market,” says Weeks. Annual returns in the office market could reach 12%, according to Weeks’ estimates. But profits may be much higher when rental rates pick up. Many investors like Sam Zell (ex Equity Office) have started buying in Brazil after doing some profitable deals in Mexico. “When people like [Zell] go into the market, others follow like sheep,” says the Cushman & Wakefield executive. Carlyle, a large private equity company, has appointed a local executive, Eduardo Machado, to build and manage its real estate portfolio with up to $500 million in investment. Private equity investors, who may inject as much as $1.5 billion in the Brazilian economy, have also been encouraged by the sector’s sound regulation by CVM, the equivalent of the Securities & Exchange Commission.
New corporate governance rules in the so-called Novo Mercado (new market) and the 2005 bankruptcy law ensure that minority shareholders’ rights are better protected. Foreign investors have also been exempted from a 15% capital gains tax. Away from real estate, logistics is another promising sector that has been scrutinized by financial investors. The largest container terminal, Santos Brasil, launched its IPO last year, while Gavea, the fund managed by the former central bank president Arminio Fraga, took a 25% stake in another private operator in the port of Rio de Janeiro. Indeed, investors’ horizons are not limited to fashionable shopping malls.