The issuance of Uruguay’s first real estate investment trust (Reit) is being quickly followed by more advanced deals. Strong relationships with pension funds and the securities regulator should be top priorities for managers looking to tap the market.
A rush of high net-worth individuals entering the country and a shortage of eligible investments for pension funds makes Uruguay ripe for public Reits. And despite no Reit legislation, the first IPO was launched last month by asset manager Indendendencia and another, managed by Compass, is in its preliminary stages (yet to be filed for registration).
Counsel on both deals offer two warnings: work prospective investors’ requests into the structure before filing with the regulator; and then be willing to wait.
Tailor-made
The suitability of Reits for pension funds, Uruguay’s dominant institutional investors, has driven the development of the new instrument.
Guyer & Regules partner Nicolás Piaggio who is working on the Compass deal said there were not many products that are eligible for investment. “Therefore the pension funds are eager to discuss and cooperate with whoever brings new products to the market – they want them to be eligible investments,” he said.
Indepencia’s Reit allowed pension funds to participate for the first time in the real estate market. The long-term nature of the investment makes it attractive, but it also involves exposure to the asset at the centre of the financial crisis.
Ferrere partner Diego Rodríguez, lead counsel on the deal, said this meant the first-time real estate investors requested additional protections. “It was complex to negotiate with them and come up with a final structure with which they were comfortable,” he said.
Compared to the US and other more established Reit markets, pension funds will be more cautious. “Here, when pension funds invest in something they take a lot more precautions, controls and formalities that are not all that common in other countries,” Rodríguez added.
But in Uruguay, they also get a greater opportunity to do this.
“As part of launching the product the developer discusses openly with the prospective investors – mainly pension funds – and then the product is tailor-made to the requests and needs of prospective investors,” Piaggio said.
Mangers must be prepared to engage with the funds throughout the structuring process, and give serious consideration to their requests. Managers, however, will also receive two key benefits from this: great certainty about investor appetite when it launches, and an appeased Superintendencia de Servicios Financieros.
“The regulator sees this as a good opportunity for the promoters to make the product better,” Piaggio said.
Mixed feelings
According to Independencia’s Claudio Zichy, who led the deal internally, the manager being known by the Superintendencia, and known for having a good track record with the country’s investors, will be crucial for the approval of future Reits.
He agreed that future deals will be easier now that there is a precedent to work from, but only slightly. “It takes some time for [approval] to happen and you need to know the right people to make it happen. If you go there and try to do it on your own, it would be more difficult,” he said.
It could take a couple of years between the start of structuring to the launch, Zichy said. Work on the Inderpendencia deal started in 2007 and it listed on May 15 2012. As to be expected, the deal stopped during crisis, but it still took around three years of regular work before it launched.
Piaggio has mixed feelings about how receptive the regulator has been in considering the new instruments. The authority can be welcoming at the initial stages, but then approval can be delayed.
“It’s probably because they are swamped with work, but either way, it takes too long to overcome the obstacles for these products to be released into the market,” he said.
An alternative to Argentina
What makes Inderpendencia’s Reit most impressive is it was structured under the country’s 2003 trust law. Uruguay has no specific Reit law, meaning no tax efficient legislation.
In other countries, tax benefits embedded in legislation is a major reason for using the vehicle. But in Uruguay, connecting pension funds with the real estate market is the main driver.
Zichy said tax treatment under the Inderpendencia Reit was optimisied by incorporating debt and equity features. The asset management firm’s experience in Argentina, which also has no tax efficient legislation, helped here.
“We have done something similar in Argentina, we used what we learned there and applied it in Uruguay as they use very similar structures,” he added.
Argentina’s Reit market is more developed than its eastern neighbour. The similar regimes, and Uruguay’s economic growth, could create an alternative for investors who are staying away from Argentina’s real estate market because of the country’s political situation.
Accelerating structures
Even before the second Reit comes to market, it seems the instrument’s development is accelerating.
Independencia’s Reit, which raised $60 million on its IPO, is limited to investing in existing properties, creating sale-and-lease-back opportunities for property owners wanting to free up their balance sheet.
“As this was the first deal they didn’t want to get involved in construction,” Rodríguez said.
The Compass Reit, which is still at a preliminary stage after work commenced late last year, is expected to raise up to $90 million. This vehicle will be able to invest in the development of real estate.
This makes is more complex to structure as it involves buying and developing land, however it also appears to be where Reit opportunities will be in Uruguay.
The economy is growing quickly and the real estate industry has performed well, but in the high-end residential and tourism sectors more than commercial buildings.