Toesca SA recently announced the liquidation of its Real Estate Income Fundwhich has US$215 million in assets including shopping centers, warehouses, office buildings and residences in several cities in Chile.
The end of the fund, seven years after its launch, underscores the cost of years of high interest rates that have crippled the real estate industry and hurt the prospects of both residential and commercial projects.
Real estate funds are also struggling in the United States and Europe. But the pain in Chile, where the central bank is already aggressively cutting borrowing costs, shows how much interest rates need to be lowered to make the real estate industry attractive again.
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“The real estate sector is one of the sectors that we observe with some lag in the evolution of the economy. Therefore, yes, we focus on the real estate sector“said the president of the Central Bank of Chile Rosanna Costa on Tuesday.
Augusto Rodríguez, director of Toesca’s real estate area, said asset valuations had fallen about 11% since 2021, when interest rates began to rise in Chile. But he said these were paper losses. “Even so, we have seen real estate transactions for rental, and we hope that this will be reactivated as rates go down, which is what the market expects to happen.“, said.
Toesca had proposed extending the duration of the fund for another two years, but 5% of shareholders chose not to do so, forcing liquidation. The asset manager will now hold a meeting on May 30 to set the terms of the fund’s liquidation.
Rodríguez stated that no institutional investors, such as pension funds, life insurance companies or large family offices, voted in favor of the withdrawal.
The pain in Chile, where the central bank is already aggressively cutting borrowing costs, shows how much interest rates need to be lowered to make the real estate industry attractive again.
Chile’s central bank has cut rates from a high of 11.25% last year to 6.5%. But those borrowing costs still translate into expensive financing for buyers and developers, which has contributed to a slowdown in the market. Housing construction permits, for example, are near a historic low, according to the National Institute of Statistics.
Rodríguez added that the country’s commercial real estate market remains less liquid than before the pandemic due to high interest rates.
The fund will operate normally, but will not receive new capital or continue investing in acquisitions, Rodríguez said. An asset sale process will be initiated for a set period of time at the meeting.
As short-term rates fall as a result of the central bank’s easing cycle, that fall will make it easier to obtain financing for real estate, Costa said, adding that the market seems “more favorable” than in the past.
Toesca is currently investing in a separate fund of Net Lease assets in Chile and has purchased more than 20 such properties in the last 12 months.
“We still have a lot of capital left in that fund to continue investing, and our investors are delighted with the portfolio we have been building and the returns we are obtaining”Rodríguez stated.
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