E-commerce in Latin America faces real estate bottleneck

By Charles Newbery

March 23, 2020 


E-commerce’s rapid growth in Latin America faces a stubborn bottleneck offline: same-day deliveries. Reaching a customer’s doorstep quickly has drawn investors toward warehouses and fulfillment centers located in dense city centers
Moving goods in and out of mega metropolises like Mexico City or São Paulo is sluggish at best.
Van and small truck drivers brave poor roads and epic traffic jams to make deliveries from large warehouses in the sprawling suburbs, often arriving late.

The poor infrastructure and delays are holding back e-commerce’s growth when it should be accelerating, says Sean Summers, chief marketing officer of MercadoLibre, Latin America’s biggest e-commerce marketplace.

Declining costs for internet services and data, plus a growing use of credit cards and digital payment systems have eroded hurdles for adopting online shopping. The sector now captures a 4% to 5% share of total retail sales in Latin America, says Summers. Still, that is far behind the 24% share in China, 18% in the UK, 16% in South Korea, and nearly 10% in the US, according to eMarketer, a research firm.

More customers and falling tolerance for delays in what is a round-the-clock business has forced companies like MercadoLibre to attack the logistics bottleneck. Over the past two years it has amassed 300,000 square meters of cross-docking warehouses, fulfillment centers and delivery hubs. “All of our innovation is focused on what else we can do to reduce delivery times and costs,” Summers says.

It’s not alone. Competitors like Brazil’s B2W, China’s Alibaba and US-based Amazon are on the hunt for warehouse capacity in major cities to store and dispatch products just hours after a customer clicks “buy.”

Many of these firms are “knocking on our doors,” says Brian Finerty, CIO of Equity International, a Chicago-based private equity firm that has invested in urban self-storage businesses in Brazil and Mexico which are proving ideal for helping fulfill orders.

Equity International has also taken a stake in Estapar, Brazil’s biggest parking lot operator, a base that courier companies like Loggi and Rappi can use to whip e-commerce orders by motorcycle from fulfillment centers to customers in São Paulo, Rio and other major cities of Brazil.

This last-mile infrastructure is returning an estimated mid- to high-teens for investors, says Gregorio Schneider, CIO of TC Latin America, a New York-based real estate private equity fund.

While e-commerce companies have shaved delivery times from 7-10 days to 2-3 over the past few years, the target is to reach same-day deliveries, says Cesar Nasser, CEO of Goodman Group in Brazil. “In order to do that, you need to have inventory inside the city,” he says.

That demand helped encourage Goodman, an Australia-based property developer, to launch a $700 million venture in 2018 to invest in logistics and industrial assets in São Paulo and Rio de Janeiro. Its partners are Canada Pension Plan Investment Board (CPPIB), Netherlands’ pension fund manager APG, Australia’s pension fund First State Super and Singapore’s sovereign wealth fund, GIC.

The timing was opportune as Brazil was recovering from a 2015-16 recession. The partnership, in an initial investment, snapped up land at a discount to develop a 40,000 square meter logistics center near the Arena Corinthians sports stadium, and a mere 20 km from downtown São Paulo.

The city of 12.3 million people has only 200,000 square meters of such inventory, according to Nasser, a fraction of the five million square meters in outlying areas and the state. This has led him to predict that more investors will get in on the business even as an economic recovery — and demand — push up land prices.

“Last-mile delivery is the next frontier for logistics,” he says.

Brazilian retailer, Magazine Luiza, is taking advantage of its real estate footprint, using its chain of more than 1,000 stores for e-commerce distribution and the option of buying online and picking up in-store.

Pure online retailers, however, are turning to third-party logistics specialists for last-mile inventory capacity, says Luis Felipe Lehuedé, general manager of Red Megacentro, a Chile-based operator of warehouses there and in Peru. The business, with steady demand and revenue, is also flexible: when the economy contracts, companies want more storage capacity and cost-effective logistics; when it expands, they want to move more products more efficiently, he says.

The strategy of finding deficits, like urban inventory capacity, is driving interest in other Latin American real estate areas by international funds.

The middle class is growing and millennials are entering the housing market, pushing up demand for multifamily and mixed-use assets in cities with heavy traffic like Bogotá, Mexico City and São Paulo but limited supplies.
Lack of capital is another challenge, in part because banks tend to be reluctant or overly cautious about financing real estate projects, says TC’s Schneider.

“You can have a piece of land to develop an amazing project, but the bank just won’t lend you the money,” he says. “That is where we can come in.”

Institutional investors are financing everything from all-inclusive resorts to data centers, cell towers, hospitals, schools, self-storage, senior living and student housing.

Yet finding opportunities takes time and is risky in a region as volatile as Latin America. Take Argentina, for example. It is in the throes of yet another economic crisis, making it cheap to enter the real estate market, but Schneider warns it is “impossible to time a crisis.”

His focus now is in the relatively stable markets in Colombia and Peru. By comparison, he is under-allocated in Mexican real estate, where high interest rates and a slowing economy are damping demand.

“I need to make sure that the day I come in I am really getting paid for the risk,” Schneider says.

Get it wrong, and it may take twice as long to lease a building or rent apartments, hurting returns, he adds.

In 2006, CPPIB invested in Chile, the beginning of its regional real estate investments. In 2014 it opened a Brazilian office, investing in logistics and retail which took a hit during the 2015-16 recession, as did offices. But that opened the opportunity to get in on new deals at a low price. Now it is working with Cyrela Brazil Realty to invest up to $230 million in middle-to-high-income multifamily residential projects as a recovering economy boosts demand.

“When some sectors are facing headwinds, others will have tailwinds,” says Marcela Drigo, CPPIB’s director of real estate investments in Latin America. “We can benefit from that diversification in the portfolio.”

Equity Internationals’ Finerty says he looks for business founders who want to take their companies public, for example, and works with them on creating a foundation of best practices in decision-making, governance, reporting and transparency.

“These things sound pretty simple, but you actually don’t see it very often in Latin America,” he says. “The companies tend to make decisions based on gut and intuition versus allowing data and analytics to help make better decisions.”

By combining “a great gut and intuition for real estate with an institutional backbone,” the goal is to develop assets that will attract buyers for a future exit. Finerty said it also feeds a “voracious appetite” for income-producing properties from local pension funds and real estate investment vehicles like Brazil’s FII and Mexico’s FIBRA, with billions of dollars under management.

Being on your toes is as important. “It is an active and dynamic market. It is not a market in which you can operate without being very cautious about the windows of opportunity,” Goodman’s Nasser says

The trends point toward expanding growth in urban e-commerce logistics in Latin America, as the region tracks the US for its decade-long quest for speeding up delivery times and expansion of fulfillment centers.

“We don’t need to reinvent the wheel,” Schneider says. “We just have to replicate proven concepts from developed markets.”

Source Latin Finance magazine:



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