Liquid real estate investment fund in Latin America : analysis of worldwide best practices and portfolio proposal

Abstract

This work was inspired by three factors: as real estate increasingly becomes a global investment option, investors around the world turn their attention to real estate emerging markets, such as the Latin American one, looking for i) attractive returns, ii) diversification and iii) the option of liquidity. The latter characteristic, which has been -at varying degrees- more and more required by investors, is crucial in determining the investment strategy regarding target allocation for each real estate asset class. It is crucial because, although every asset class behaves differently, real estate is an illiquid investment by nature; it involves a large amount of capital, whose return comes in the form of both yield and appreciation, resulting in lengthy due diligence periods and costly transactions. Is important to note that attractive returns in emerging real estate markets do not always come easy; the lack of transparency and information in these markets is, many times, the toughest barrier to break. This document proposes a methodology, based on economic models and mathematical procedures, to jump across the information barrier. With this in mind, this thesis explores Real Estate Open-ended Funds and REITs, the principal real estate investment vehicles that provide liquidity to investors, in order to outline the specific characteristics that the underlying assets of a liquid real estate fund in Latin America should have. Once the characteristics are defined, the document analyzes the historic performance of different asset classes and sub-classes to narrow the investment spectrum. The analysis was done on US data, as no historic real estate information is currently available for Latin America. Through a set of equations that resulted from a regression analysis based on the Four Quadrant Model (4Q)1, the performance of three selected retail asset sub-types in the US was projected to six Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico and Peru). The final product of this work is the proposal of an investment portfolio, based on the projected performance of three retail asset sub-types across six Latin American countries. The investment portfolio was calculated based on the modern portfolio theory (MPT)2.