RIO DE JANEIRO -- More Brazilian pension funds have been heading to the malls.
Collectively, funds' wallets have been opening wider as they witness consumer spending on the rise -- or at least it had been before interest rates shot up in October. That trend, encouraged by increased economic stability in recent years, has heightened the appeal of shopping mall investments. And returns on them have so far proved rewarding.
For the first nine months of 1997, Brazilian pension funds spent $180 million to acquire 60,000 square meters of gross leasable area of shopping centers throughout Brazil. That's up from 24,000 square meters during all of 1996, according to a study by the Sao Paulo office of property consultant Richard Ellis Corporate Real Estate Services.
Today, 25 of Brazil's 317 pension funds own 354,000 square meters in 42 shopping malls, an equity investment of nearly $1 billion, according to Richard Ellis.
Shopping centers now account for four percentage points of the average 10% that Brazilian funds invest in real estate. In comparison, office buildings account for 4.5 percentage points; warehouses, hotels and leisure properties together account for the remaining 1.5 percentage points, according to Richard Ellis.
A combination of higher shopping mall sales and lower interest rates have enhanced funds' interest in malls, said Fernando Faria, an investment director in Richard Ellis's Sao Paulo office. Sales at the better malls rose 80% since 1993. Most of the gains came after the mid-1994 introduction of the Plano Real economic stabilization program drastically cut inflation and ignited a consumer spending spree. And although that has since leveled off, sales still far exceed 1993's levels.
Moreover, higher consumption has boosted demand for retail space. That, in turn, has pushed up rents, noted Eduardo Machado, project manager of the Associacao Brasiliera das Entidades de Previdencia Privada, Sao Paulo, the national Brazilian pension fund association.
These factors are helping provide funds with a 12% return on investment from shopping centers -- far higher than the 6% required by law.
Before Brazilian interest rates were doubled in late October, funds had been transferring some assets out of fixed income and into real estate, particularly shopping mall investments. Before October, falling interest rates had decreased the attractiveness of fixed income, experts point out.
The boosted interest rates should trigger a heavy slowdown of consumer spending -- and thus shopping mall business. It is unclear how long those interest rates will remain in effect, analysts say. If the rates remain high through 1998, shopping mall business will suffer considerably, which could dampen the pension funds' enthusiasm for the sector. Interest rates were raised to avoid a devaluation of the currency.
However, shopping mall rents -- which are normally kept high as a cushion against slumps in sales -- should provide a buffer. They should help sustain malls' attractiveness as a medium- to long-term investment, experts said.
Brazil's largest pension fund, the $24 billion Caixa de Previdencia dos Funcionarios do Banco do Brasil, or Previ, in Rio de Janeiro, owns a stake in eight shopping centers throughout Brazil. While this is just a small part of the 5.5% of Previ's assets invested in real estate, the fund is nonetheless increasing its allocation to malls.
Joao Bosco Madeiro, Previ's investment director, said malls provide "good long-term investment returns."
Last year, to encourage more diversification, the government reduced funds' allowable limits on real estate investments. By the year 2002, funds would have to cap real estate holdings at 15%, down from 20% of assets in 1996.
According to Mr. Faria of Richard Ellis, Previ is still not close to its current ceiling for real estate investments. But since it has already invested more heavily in office buildings than malls, it now "prefers to put its money in shopping malls because the return is better," he said.