Real Estate

Chile Braces for $552M Real Estate Liquidation Amid Market Struggles

Chile's real estate market faces $552 million property liquidation, risking further price declines amid high interest rates.

By Tal Alexander

7/11, 07:52 EDT

Key Takeaway

  • Chile's commercial real estate market faces a $552 million influx as Toesca SA and Banchile Inversiones funds near liquidation.
  • Forced sales could depress prices further, posing risks but also opportunities for cash-rich investors.
  • Elevated rates and high construction costs drive Chilean fund managers to diversify into international markets like the US, Peru, Mexico, and Spain.

Chile's Real Estate Market Faces Unprecedented Liquidation

Chile's real estate market is on the brink of a significant upheaval as two of the nation's largest real estate investment funds, managed by Toesca SA and Banchile Inversiones, approach liquidation. This rare event, driven by recent shareholder votes, could see commercial properties worth $552 million flood the market. The potential oversupply is raising concerns about further price declines in an already struggling market. According to Augusto Rodriguez, head of real estate at Toesca, the liquidation of their $215 million portfolio will make it harder to sell assets if the market becomes saturated. However, Rodriguez remains optimistic about the quality and interest in their assets.

The Mechanics of the Liquidation

The liquidation process involves significant portfolios from both Toesca and Banchile. Toesca's fund, valued at $215 million, is confirmed for liquidation, while Banchile's $337 million fund faces a potential liquidation in December unless new terms are proposed and accepted. The forced sales come at a time when Chile's real estate market is already grappling with high interest rates and a lack of commercial property transactions. The influx of properties could either confirm the dire state of demand or present a unique opportunity for cash-rich investors. Juan Enrique Gonzalez of Valor Raiz highlights the risk of slowed sales due to the high value of these assets and the limited market for such properties.

Broader Implications for the Real Estate Sector

The liquidation of these funds could serve as a litmus test for Chile's real estate market, which has seen few commercial property sales in recent years. The situation is exacerbated by global economic conditions, including elevated interest rates and high construction costs. Nicolas Gellona of Larrain Vial SpA notes that these factors create significant obstacles for fund managers. As a result, many are looking to international markets for more stable investment opportunities. For instance, Larrain Vial has increased its international real estate assets from 10% in 2021 to 40% this year, reflecting a strategic shift to mitigate local market risks.

A Comparative Look at Global Real Estate Trends

The challenges faced by Chile's real estate market are not unique. Globally, distressed property investors are eyeing opportunities in markets like the US, where commercial real estate values have plummeted. According to Preqin, private equity firms have earmarked 64% of their $400 billion in dry powder for North American real estate investments. This focus on the US could delay recovery in other regions, including Chile, as distressed assets in North America attract the majority of investment. Rebel Cole of Florida Atlantic University warns of a looming "tsunami" of troubled assets, suggesting that the current market stress is only the beginning.

My Perspective on Chile's Real Estate Outlook

The impending liquidation of Toesca and Banchile's funds underscores the fragility of Chile's real estate market. While the quality of assets may attract some interest, the sheer volume of properties hitting the market could drive prices down further, creating a vicious cycle. However, this also presents a rare opportunity for well-capitalized investors to acquire high-value assets at potentially discounted prices. The situation in Chile mirrors broader global trends, where distressed assets are becoming increasingly attractive to opportunistic investors. The key will be how quickly and effectively these assets can be absorbed by the market without causing prolonged instability.

Street Views

  • Augusto Rodriguez, Toesca (Cautiously Optimistic on Chilean real estate market):

    "It will indeed become more difficult to sell assets if there is an abundance of assets for sale... [but] we are convinced that there is and will be a lot of interest in them."

  • Juan Enrique Gonzalez, Valor Raiz (Bearish on Chilean commercial real estate market):

    "The speed at which properties can be sold could slow down if demand does not go hand in hand with higher supply. That is the biggest risk given that the majority of these assets are high-value and that is by itself a small market."

  • Juan Pablo Grez, Independencia (Neutral on current situation but optimistic about future liquidity):

    "It generated a lot of uncertainty and forced us to suspend the placement to explain the real situation to the market."
    "Our team is creative enough to do many things. We have many ideas in mind to propose as an alternative to the complete dissolution of the fund."

  • Nicolás Gellona, Larrain Vial SpA (Bullish on international diversification strategy):

    "[Elevated rates, long waits for permits, and high construction costs] can create obstacles... One way to hedge those factors is to go international. The proportion of real estate assets that Larrain Vial manages outside Chile jumped to 40% this year compared to 10% in 2021."