Unshackled from domestic restrictions, Chilean pension funds hope to find new homes in the U.S. real estate investment market. One such international investment fund, Santiago-based Fronteras Fondo de Inversion Internacional, has selected Draper & Kramer Realty Advisors Inc., Chicago, as its exclusive U.S. realty adviser.
The move follows recent legislative changes allowing Chilean pension funds to invest in offshore real estate.
"We expect to initially raise about $50 million, but it's quite likely that it will grow beyond that amount," explained Juan Ariztia, president of Fronteras. "Initially, we will be looking at four real estate markets, three of which will be in Latin America," he said. In addition to the United States, the three investment markets are Brazil, Argentina and Venezuela.
In the future, he said, his fund likely will hire a number of South American-based realty advisers. In addition, Mr. Ariztia said consideration is being given to establishing "an international real estate fund, based outside of Chile." He expects a decision to be made "within the next year."
As for Fronteras' U.S. investments, Mr. Ariztia said that his fund chose Draper & Kramer as a result of its "knowledge and history in the American real estate market."
He also cited a variety of reasons for seeking U.S. real estate investments. "I would say that the U.S. offers the most professional real estate market available," he explained. "In order to truly make the most of a successful, diversified international real estate investment fund, I believe you have to have some of your portfolio invested in America."
Lew Kresch, senior vice-president at Draper & Kramer, explained that "Chilean pension funds are currently estimated at approximately $30 billion. By law, workers are allowed to invest up to a maximum of 10% of their pension fund in external real estate."
Mr. Kresch added that funds such as Fronteras are "analogous to our 401(k) plans, in that they provide workers with a number of investment alternatives."
According to Mr. Ariztia, Chilean defined contribution pension funds have grown in popularity in recent years; however, prior to this spring's legislative changes, funds had been limited to "investments in shares and bonds."
"The ability to invest in real estate opportunities on an international level provides for a more secure, diversified retirement portfolio for Chilean workers," he said.
The Fronteras fund was established in June, and operates as a closed-end international investment fund. Established investment guidelines for the fund require Draper & Kramer to pursue investments with typically a low- to moderate-risk profile. Property sizes will range from $2 million to $20 million.
"We expect to be concentrated on real property investments," Mr. Kresch explained. "Although we will examine opportunities in the real estate investment trust area, one of our main criteria will be to find property locations with strong economic fundamentals. We'll also be looking at joint-venture projects, as well as existing properties with development potential." Property types will include office, industrial, warehouse/distribution and retail. Both single and multi-tenant properties also are being considered.
According to Mr. Kresch, the process of negotiating the partnership with the Chilean fund took "a little more than six months to get it on paper." Although he conceded the 12-hour flight to Chile made this relationship intrinsically more challenging than a domestic partnership, Mr. Kresch cited the personal background of Mr. Ariztia as a major asset.
"As one of the key players in coordinating the changes that occurred, Mr. Ariztia was instrumental in helping to pioneer Chile's privatization of its social security system in the 1980s," he said. "He has gone on to utilize that knowledge in the capacity of consultant to many other Latin American funds and governments."
Mr. Ariztia said each of the Latin American markets in which Fronteras will invest provides unique opportunities.
"Brazil, for example, has a very dynamic real estate market," he explained. "Some economic problems may still exist, but in the long run you can't think about investing in South American real estate without considering Sao Paulo.
"Argentina, on the other hand, is similar to Chile and is geographically close by. Their current economic climate makes this a good time to consider real estate investment opportunities there.
"Venezuela is going through an interesting process of privatization of its assets," said Mr. Ariztia. "I believe that given these changes, this is a particularly good moment to examine the real estate investment opportunities in that market."