Profiting from Logistical / Industrial Property in Brazil
The development of logistical property across Brazil continues to grow, offering superior returns when compared to other segments of the construction industry. Know the main in-demand areas, valuation, vacancy rates, the average cost of development and the viability parameters of the business.
The logistical hubs of Brazil are leaving behind their adolescence and maturing with the economy. Weathering the 2008 economic crisis, they have continued to become more profitable and eco-efficient – particularly in the southeast and, more recently, the northeast. In the state of São Paulo, the available stock rose by 21.6 percent in 2009, a rate that should be beaten in 2010 and 2011. According to the indicators of Herzog Homes, a company that operates in the marketing and administration of industrial warehouses, the total area being used is 600,000m² in the country’s economic capital. In the same period, the average occupancy rate of logistical warehouses was around 90%, which – by professional standards – represents a strong demand. There are a number of reasons that can be attributed to the expansion of the industry which are already well known – including the income effect and rising credit which, in turn, has increased consumer demand and product distribution. To meet the exigencies of a heated domestic market, companies from various sectors are seeking secure and well managed logistics centres where they can operate closer to their consumers: “this is a very underserved market, particularly with a lack of logistical hubs in Brazil – there is scope for a variety of new ventures to meet all the productive sectors,” says Marino Mario da Silva, Commercial Director of Retha Homes.
Compared to the 1990s, where the main tenants of the condominiums were from logistics and manufacturing industries, today it is impossible to define profiles with such huge variations existing. In the Cotia Logistical Centre in São Paulo, for example, tenants range from a luxury furniture business, an ATM cash point company and a document storage specialist. According to Retha, who administer the building, all contracts are negotiated with a minimum of three years at rental value of between $ 19 and $ 22 per square metre. “A logistical centre can be more profitable than a AAA business office at the Avenida Paulista or Faria Lima [São Paulo city]. It also has the advantage of not as easily depreciating over the years,” says Mr da Silva.
Investments
The deployment of a logistics condominium requires a range of average investments of about $ 50 million over 24 months from the acquisition of the land until the lease of the building. Then comes the good part: the rent. The rate of return in the market place averages at 13 percent per year, which features an additional return in the medium to long term. The most popular projects are those near highways. In fact, as the users / tenants of warehouses and logistics have a common need access to the large poles of consumption, the strategic location that facilitates the distribution of products is among the main advantages of a condominium. The maps below show the regions of Brazil that house a noticeable proportion of logistical property.
Still, it is not easy pontificate the most popular sites. According do Mr da Silva: “in the interior of São Paulo, the main regions are Ribeirao Preto, Campinas, Sumaré, Americana, Piracicaba; in greater Curitiba, the main area is Pinhais; in Santa Catarina the regions are Joinville, Mariners Harbor and Taja; in Rio Grande do Sul, the main areas are Santa Maria and Canoas; in Minas Gerais, areas of strong interest are Belo Horizonte, Uberaba, Uberlândia and Betim; in the north east, Recife is a logistical hub due to its proximity to the Port of Suape.” In São Paulo, it is debated that the expansion of the Beltway and the restriction of truck traffic within the city caused an overvaluation of the price of land for logistical projects. A survey of construction businesses [by the Construção Mercado magazine] pointed increases of four, seven and even ten times of the market price over the past two years – particular in the regions surrounding the Anhanguera, Castelo Branco, Raposo Tavares and Dutra highways.
“On a general level, land values have increased throughout Brazil,” says Sérgio Fischer, director of MRV Log: a subsidiary of the MRV mining construction company which was established in 2008 with the ambition to become the leader in the logistical park market. Between January and August 2010, the company invested R$ 130 million in land acquisition and a new development has been partially delivered in Contagem within the metropolitan region of Belo Horizonte with a further fifteen planned initially in the state of Minas Gerais and then on to São Paulo. Even with the overestimation witnessed of land values, projects continue to be sold for their asking prices. Price ceilings are determined by feasibility studies, which also analyse the costs of construction and other market assumptions, such as potential void and rental value variations. The viability assessment of the land must also take into account the topography of the land (the higher the slope or grade, the higher the cost of excavation); restrictions on the access road to the project site (high-speed roads may demand the construction of a side roads to facilitate entry and exit); a range of zoning issues, and of course, all historical documentation of the land.
The main investors in logistics parks are Brazilian groups; pension / property funds (stockholders receive a share of rental profits) and the developers themselves (such as CPC (the commercial arm of Cyrela), WTorre, Bracor, Método, Rational, Hines, amongst others) – all are attracted by increasingly interesting returns of the industry. With property values and good prospects for the logistical condominium market in the next four or five years, some landowners have also opted to go into business. In these circumstances, there is the exchange of land for a portion of the project. “This case can be interesting, because it reduces the amount disbursed in the purchase of the land,” says Simone Santos, director of corporate services from Herzog Homes.
Regarded as a strategic investment, the logistics condominium is also a chance to diversify one’s portfolio of real estate assets (even though the market for residential and commercial property is not saturated). This was the case of the Racional Engenharia company, who have who have focused their attention on the banks of the Raposo Tavares highway in Greater São Paulo. The company already owned a plot of 180,000m² – according to executive manager of construction, Erika Matsumoto: ”we already had a growing turnover and strategised to expand our asset base to ensure performance; it was natural progression to choose something related to logistics.” The company have invested R$ 250 million in the Centeranel project, a logistical condominium that will have 107,000m² of floor space – with the first stage being in October (2010) and the first lease contracts also being signed. According to Matsumoto, the financial resources were obtained through financial leverage and equity funds: ”we have not intentioned to bring in a partner as our goal with the condo is to build a long term ancillary income.”
Business Models
From 2009 onwards, there was a 70 percent increase in the number of investors interested in logistics parks in São Paulo, according to Herzog. The company also noted the predominance of model Build to Suit (BTS) – where the condo is custom built for the future tenant. ”This model presents minimal risk as a contract is signed that guarantee a buyer or tenant for ten or 15 years. The investor with a more conservative look tends use this model,” says Santos. Nevertheless, the ‘speculative’ model of buying logistical buildings and marketing for tenants post or near to completion continues to attract supporters – however, investors have been taking into account potential risks prior to making offers examples of which could include bad designs, structural issues, low vacancy rates and changes in the direction of the economy. “Whilst supply does not present any issues in the current market, its future associated risks requires study and market sensitivity,” says William Rossi, a founding partner of GR Properties, a company based in São Paulo that, since the end of 2007, works in raising funds from investors for use in income-generating real estate.
Regardless of the model chosen, the construction is relatively simple and low risk (with the use of precast elements and erection of only one or, at most, two floors). The challenge, however, is on developing an efficient design. The BTS should strictly meet the contractual requirements and, in the case of the speculative model, it is essential that the product is flexible as well as able to meet the needs of a variety potential tenants. It is highly recommended, for example, to guarantee space to create or expand a possible mezzanine, parking manoeuvres, conditions for a primary energy cabin and other items that depend on the profile of potential users. The importance of sustainability is also considered of particular importance in the list of requirements for tenants including the installation of sewage treatment stations, solar energy, water reuse for toilets / washing facilities and irrigation practices. But that may not be sufficient, according to Sérgio Fischer: ”big tenants, which includes most of the multinationals, will not enter into condominiums without a Green Building which attests to the environmental suitability of the premises.” In turn, companies undergoing a growth process in the industrial condominium market, such as MRV Log, are considering obtaining the certificate which are estimated to be at a cost of 5 percent of the venture. The result of such adjustments is a saving of approximately 20% of expenditure on water and energy, besides adding value to the enterprise, according to Guilherme Rossi of GR Properties, who secured the certification.
Project Reference Basics
The dimensions and features below show references to a basic design of a competitive logistics condominium in Brazil, plus some items that add value to the project (based on the models used by some of the main development companies):
- Location: easy access to major highways of the country;
- Land Area: from 30,000m²;
- Area of Warehouses: from 1,000m², but there enterprises that are interested in smaller modules from 700m²;
- Number of Modules: variable depending on the total number of tenants and their needs;
- Administrative Area: between 10 percent and 15 percent of the unit;
- Height: between 8 and 12 metres – although there is talk for increased height demand going up to 20 metres;
- Floor Strength: high – from 5 tonnes per m²;
- Common Requirements: security systems; services (maintenance, cleaning and gardening); yard trucks; heavy goods vehicle parking; restaurant; snack bar and / or cafeteria; locker room; standard health & safety facilities;
- Favourable Requirements: renewable energy sources (see the Brazil Green Building site here); shop and petrol station boxes as well as related services including ATMs and lottery shops (according to local needs);
- Security Requirements: surrounded reinforced walls, alarm systems, industry standard reinforced doors, security monitoring room(s);
- Favourable Security Requirements: caged lock system for trucks and modern anti-theft installations;
- Deployment Time: on average approximately 18 to 24 months, from the purchase of the land to delivery;
- Construction Cost: from R$ 1,000 to R$ 1,300/m²;
- Cost of Condo: R $ 1.5 to $ 3.5 /m² per month which includes security, maintenance, equipment and payroll but does not include the IPTU (Imposto sobre a Propriedade Predial e Territorial Urbana, property and urban land tax);
- Frequent Users: logistics, light manufacturing and other enterprises from Brazil’s growing goods and services industry.
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