Tom Livelli, a Managing Director at Greystar’s office in Santiago de Chile, joins the show to speak about his background, residential real estate experience across the Americas, and strategy for investing in South America in the coming years. Of particular note, Tom discusses the formation of Greystar’s recently announced joint venture with the Canadian Pension Plan Investment Board and Cyrela to deploy $R 1 billion (~$USD $185mm) of equity into multifamily development projects in Sao Paulo, Brazil.
After receiving his undergraduate degree from Harvard University, Tom briefly worked in management consulting before moving to Chile for several years. Upon returning to the US in 2004 for his MBA at Stanford University, he started to incubate ideas in response to the poor housing options that he observed in South America. Little did he know at the time that his career path would eventually lead him back to Chile to spearhead Greystar’s growth plans in the region.
Maintaining offices in more than 50 cities, Greystar is a US-based international real estate developer and manager based with ~$32 billion of assets under management and 693,000 units across its portfolio.
Dealmaker Highlights
2:29 – Career Foundation – The Ascent of a Dealmaker
03:46 – Childhood influences on career
Tom describes key part of his childhood on the New Jersey Shore that affected his career trajectory.
05:45 – Harvard and entrepreneurship
Harvard and entrepreneurshipStudying environmental science and public policy at Harvard, Tom was able to explore real estate issues that had been percolating in his mind. Further, he gained an interest in entrepreneurship through exposure to his father’s biotech company and “business bootcamp” at the Parthenon Group.
08:10 – The initial path to Chile
The dot com boom/bust, as well as the tragic events of 9/11, gave Tom a a sober look at the risk in entrepreneurship and life. In response, he decided in 2002 to use his interest in sailing to help a team recreate the Kon-Tiki boat race starting in Chile.
12:18 – Meeting his wife
While the initial plans for fundraising and boat construction did not come together as planned, Tom met his now wife during the preparation phase and allowed the boat to set sail without him. Afterwards, he moved to her hometown of Conception, Chile for two years.
13:16 – Business school application
Applying to business school, Tom was able to press the reset button and dive deeper into real estate. Surprisingly, his application essays from ~15 years ago addressed the extremely poor rental experience in Latin America and the likely ability to raise rents for institutional product with enhanced service.
16:52 – Ideas to improve Latin American housing
Tom’s studies at Stanford Business School afforded him the chance to pair up with a Honduran classmate to incubate the idea of offering improved housing in Latin America. Upon graduation, both individuals worked for the same developer, leveraging financing from the Overseas Private Investment Corporation (OPIC) to create safe communities and give immigrants a place to live.
19:15 – Lease purchase contracts
As traditional financing was not available to these immigrants, the home contracts were structured as 25-year lease purchase agreements / synthetic mortgages. In response to many individuals leaving prior to the maturity date, Tom’s team built a property management division in order to manage the releasing efforts.
20:44 – Greystar’s international experience
Tom outlines Greystar’s historical international experience and how it led the firm to expand into Latin America and eventually engage with him.
23:52- Prudential leads Greystar to Mexico and beyond
After helping Prudential Financial improve operations at its Mexican real estate portfolio and divest of the assets, Greystar started to consider expansion into Chile so that it could leverage the existing team.
26:56 – Making the Market – A Research Perspective
27:21 – Demographic drivers
Demand for institutional housing is not necessarily driven by the economy, but rather demographics.
28:23 – Andean focus leads to Global Cities strategy
After initially moving to Santiago to focus on expansion within the Andean region (Peru, Chile, Colombia), Tom began to discuss opportunities to invest in Brazil in line with Greystar’s “Global Cities” strategy.
30:14 – New population segment for multifamily
A segment of the population has been created in both Santiago and Sao Paulo that did not previously exist. Individuals are living independently for longer periods of time, household sizes are on the decline, and the decision to get married and/or have children is postponed.
32:55 – Similarities between Brazilian and Chilean housing markets
Many similarities exist between housing markets in Brazil and Chile. Historically both countries enacted social housing policies that focused on lower middle income segments of the population, pushing them to projects on the outskirts of the cities. More recently, there has been interest in relocating to the city center where individuals can live in a community independently and maintain a shorter commute.
36:11 – Venezuelan immigrants in Chile
Chile has offered stability and safety to large numbers of educated Venezuelan immigrants and created need for additional rental product.
38: 50 – Professional services jobs on the rise
Diverse sectors of the economy are driving the Santiago and Sao Paulo economies. In particular, professional services related jobs (finance, accounting, etc.) in Santiago have been growing.
41:15 – Challenges in South American real estate markets
The primary challenges challenges in South American real estate markets are: 1) lack of data (rental values, comps, etc.) and opaqueness of construction costs and product availability; 2) No existence of multifamily zoning; 3) legal certainty of licenses / permits; 4) competition with home builders, especially in Brazil.
44:23 – Brazilian and Chilean financing sources
In terms of Brazil’s financing sources, banks are accustomed to originating construction loans predicated on a certain % presale component. However, there is not a deep market for longer term financing. In contrast, Chile has banks that lend on construction and insurance companies that provide long-term financing.
47:10 – Evolution of COVID-19 in Chile
While the daily COVID-19 infection rate was very low early in the pandemic, the situation suddenly worsened, especially within lower-income communities. The country’s infection rate per capita skyrocketed to among the highest in the world, forcing the closure of schools and borders and restricting citizens’ movement outside the home to twice weekly. These restrictions are slowly being lifted via a phased process.
51:05 – COVID-19 in Brazil
The COVID-19 measures in Brazil have been less severe. For example, restaurants and stores have remained open subject to early closure and temperature monitoring policies.
52:02 – Government support in Chile and Brazil
Tom discusses the government support programs initiated in response to COVID-19. The Chilean government has supported business loans to help protect jobs and has given emergency benefits to workers. The central bank also cut interest rates significantly to 0.5%. Whereas the debt to GDP ratio has increased to the low 30% range in Chile, Brazil’s figure now stands at ~90%. Further, the monthly benefit paid to families in Chile reaches as high as $US 650 compared to $US 130 in Brazil.
56:10 – Current lifestyle in Santiago
Daily life in Santiago today. Among the 37 Santiago municipalities, some are in a transitional phase within the 5-step plan. Although a permit is no longer required to leave one’s home, a curfew exists at 11pm.
57:20 – Reaction of real estate market to COVID-19
Real estate market reaction to COVID. In contrast to the beginning of the pandemic when Chilean banks seized up, banks are now taking loans to credit committees and approving them. However, 300+ development projects are still frozen, as the government did not deem construction an essential service. In Brazil, the market has maintained high levels of activity resulting from a mammoth decrease in interest rates from ~13-14% to 2%.
1:00:54 – Politicians and Attorneys: Red Tape and Bureaucracy
1:01:16 – Underwriting challenges for multifamily in Latin America
Underwriting challenges for Latin American multifamily deals. Condo management fees are charged to tenants similar to the case with office or retail. In this situation, complexities exist around employer liability and taxation.
1:04:13 – Property taxes in the region
Underwriting challenges for multifamily in Latin AmericaProperty taxes for development in Santiago and Sao Paulo are easy to predict, as they are based on residential values. There is no separate tax assessment for multifamily. In Chile, the assessed value is ~50% of the commercial value, but has recently risen. Also, the “sobretasa“ taxing higher value real estate was introduced. In Brazil, an urban building and land tax (IPTU) exists, making it more expensive to retain raw land than to develop vertical improvements.
1:07:07 – Permitting and entitlement process
Tom discusses the permitting and entitlement process for new construction in Chile and Brazil. In general, it is not the discretionary environment that is found in the US, but rather straightforward. In Brazil, the process is efficient and typically lasts ~6 months for entitlements. Chile’s system used to be more efficient, but now has more room for interpretation as evidenced by “vertical ghettos.” Consequently, the permitting process has been placed under a microscope and can last as long as 12 months. The director of public works, who approved building permits, has personal liability for decisions in order to limit liberal interpretations.
1:11:23 – Existence of title insurance / recording
In both Chile and Brazil, municipality-level real estate registries do a commendable job of tracking easements. However, no title insurance exists, so lenders need to study the title in depth.
1:13:30 – Finance and Formulas: The Economics Behind the Deal
1:13:55 – Background of JV formation
Background of JV formation. After working together in other capacities, CPPIB and Cyrela determined that the success of multifamily opportunities in Brazil would be dependent on managing the projects well. As a result, Greystar was the perfect party to bring into the venture after initially closing on four seed assets.
1:15:42 – Attractiveness of venture’s seed assets
The seed assets in Sao Paulo were attractive because of their scale and infill locations that are popular with millenials.
1:16:32 – Hold period strategy
While Greystar often executes on a merchant build strategy, the the firm will likely remain invested in these assets over a 5-8 year period. The goal is to eventually sell the portfolio to an investor looking for scale once the number of unknowns in the market are reduced.
1:18:07 – Total deal size
The JV contemplates a total of 10 deals or more in Brazil given the ability to upside the total investment to $R 1.5 billion.
1:18:55 – COVID-19’s impact on initial projects
COVID-19 has not negatively impacted the timeline of the four initial projects. The extra time allowed the venture partners to work through a redesign of the assets remotely.
1:20:07 – Projects all in Sao Paulo
100% of projects under this venture will be in Sao Paulo. Greystar also an interest in other Brazilian markets such as Rio de Janeiro.
1:20:48 – Projects all in Sao Paulo
Negotiation of JV terms. As Greystar has experience with global institutional investors, the formation of the venture was not overly difficult in terms of the structure, co-investments, terms, etc.
1:22:08 – Happy tenants are the key!
Beyond achieving such targets as pro forma rents and lease-up schedules, the measure of success will be having happy residents.
1:24:13 – Future Latin American plans
Greystar’s future plans in Latin America. Possible geographies for expansion include primary cities in Colombia, Peru, Chile, and Brazil. Ultimately, new investments will be driven by investor conversations.
1:26:15 – Thoughts on affordable, student, and senior housing
Affordable, student, and senior housing. Student housing could represent an interesting opportunity subject to availability of student loans, cross-border programs, and certain cultural behaviors. The active adult space is also intriguing, but the lower hanging fruit now exists with traditional multifamily.
1:29:27 – Tourist in Your Own Town: How to Spend Three Perfect Days
Santiago is not a very touristy city. Most people choose to head for the nearby mountains offering spectacular views of the city. With this said, there are certainly neighborhoods that are charming such asBarrio Italia and Barrio Bellas Artes.
In terms of recommendations for navigating the city, Uber is available, but technically illegal. As a result, be prepared to sit in the front seat and establish some sort of familiarity with the driver in the event authorities stop the vehicle, especially at the airport.
Lastly, the city’s metro system works great and is one of the most modern, safe systems Tom has observed.
Additional Links:
Greystar: http://www.greystar.com
Canadian Pension Plan Investment Board: https://www.cppinvestments.com
Cyrela – https://www.cyrela.com.br
Contact info:
tom.livelli@greystar.com
