Latin America saw the largest decline worldwide in commercial real estate investment in the first six months of 2020, down 37% on the prior year.
Asset owners and operators in the region are facing a reduction in operating income as an increasing number of their tenants struggle to pay. Prior to the pandemic, human density was a revenue driver and malls, healthcare facilities and student housing were booming. Today, the opportunities have shifted to industrial facilities, data centres and storage facilities.
A commercial real estate private equity investor reported, “The mall managers are renegotiating with tenants to try and reduce delinquencies and vacancies. While retailers focus on e-commerce, malls are modifying layouts to maximise physical space and converting other areas into warehouses and mini logistics hubs.”
“While retailers focus on e-commerce, malls are modifying layouts to maximise physical space and converting other areas into warehouses and mini logistics hubs.”
Commercial real estate, private equity investor
The CEO of a Peruvian mall gave us the view from the coal face, “We haven’t seen a change in usage yet as tenants are mostly on long-term contracts. The reactivation made us introduce security protocols, capacity reductions and access controls but we are trying to work closely with our clients to get through this.”
The investment case for commercial real estate has clearly weakened, the private equity investor explains, “For existing funds, there is a strong reduction in expected returns, for new funds, by accepting a higher risk, the investors will demand a higher rate of return. The uncertainty is scaring most investors, except specialist distressed investors.”
Longer term, our sources believe that there will be a transformation of use in retail space, but not an end to it. The mall CEO predicts, “Malls will continue to be used both for sales and for showrooms as customers like to see products. Also, the mall in Latin America is an important place for family entertainment where people like to spend large parts of their weekend, that will return.”
“The mall in Latin America is an important place for family entertainment where people like to spend large parts of their weekend, that will return.”
CEO of a mall in Peru
The short- to medium-term is more uncertain according to the private equity investor, “Over the coming years, depending how COVID-19 develops, we may see maintained or reduced capacity or even the complete conversion of retail space.”