I OVERVIEW OF THE MARKET
During the second half of the 1990s several new types of project were introduced to the Argentine real estate market. City and suburban areas grew at a great pace and new areas in Buenos Aires were developed and consolidated districts strengthened as well. The construction of new roads and motorways encouraged the development of suburban areas where new infrastructure such as hospitals, schools, universities and hotels was also being established. The most successful product types during the 1990s were ‘garden towers’, which generally offered private security, gym, swimming pools and tennis courts, among other amenities, together with gated communities. Another popular concept of the same period was the introduction of ‘lofts’. Lofts projects were developed all over Buenos Aires, Puerto Madero being the most exclusive location for such projects.
Within the real estate market, there has been strong growth in the hypermarket and shopping centre sectors, with most of Argentina’s shopping centres having been constructed during the past 20 years. At the start of the 1990s, the city of Buenos Aires also suffered from a shortage of world-class hotels, a situation that has considerably improved, and there are now a number of projects for the construction of hotels both in the city of Buenos Aires and in the interior of the country.
However, even with the changes in the economy during the 1990s and the fact that culturally, and in the absence of other savings alternatives, Argentine investors have generally relied on the real estate market as the main alternative for investments, the local market is still underdeveloped in respect of regulated or listed investment vehicles. In addition, throughout the first half of 2002 and during the worst part of the Argentine economic crisis, prices of lots and parcels in suburban Buenos Aires dropped dramatically driven by uncertainty, creating opportunities for long-term investors. The financial, economic and social turmoil in 2000 and the slow recovery initiated years later limited the development of sophisticated tools to channel investments in real estate.
Between 2003 and 2008, the yearly growth of the construction sector was considerable due to several factors such as the consolidation of real estate investments to safeguard private savings, the recovery of lease prices and an increase in property prices – which have surpassed pre-devaluation prices – all of which served as profit indicators.
From 2008 to 2015, the construction sector’s growth decelerated as a result of, inter alia, the financial crisis that struck the international markets, resulting in the absence of credit for investors; increased foreign exchange restrictions; and continuing depreciation of the US dollar compared with the Argentine peso.
Likewise, the participation of private equity firms is also low in the real estate sector, with just a few cases of pure forms of private equity participating in the real estate business.
The recent elected government has been openly promising the modernisation of the economy and a shift to a more business-friendly model. Needless to say, clear rules will work as a catalyst for the development and importation of more developed and transparent vehicles, and investment options.
II RECENT MARKET ACTIVITY
i M&A transactions
As a consequence of the deteriorating business atmosphere, harsh foreign exchange restrictions limiting the availability of foreign currency, and few distressed opportunities, there have been no significant real estate M&A transactions within the past three years.
In fact, an overview of the real estate market information would show few residential sector transactions in recent years; investment has considerably decreased in recent years as a result of foreign exchange regulations, lack of financing options and high inflation rates. The commercial office sector has suffered for similar reasons, in addition to slow business activity in general. The rural sector has also experienced a decline in investment, following a series of government policies that have restricted meat exports and fixed wheat and soy prices, in addition to the enactment of a law that restricts ownership and possession of rural land by foreign persons.
Also, the hotel sector that originally benefited from the tourism boom in Argentina ended up suffering an increase in costs as a consequence of inflation and the decrease in competitiveness originally bolstered by foreign exchange rates; the largest hotel developments are in Buenos Aires, which is one of the most visited cities in South America. Finally, there are various opportunities for shopping centre developments in Argentina, in this case not just in Buenos Aires – where the market is quite swamped – but also in other cities of the country.
ii Private equity transactions
There have been no specific real estate private equity transactions within the past three or four years. In Argentina, private equity funds are rare in recent years owing to the unstable macroeconomic and legal conditions for investors.
There have been transactions involving the transfer of participations within private equity funds, but with no real impact on the target assets owned by the private equity firms.
III REAL ESTATE COMPANIES AND FIRMS
i Publicly traded REITs and REOCs – structure and role in the market
In Argentina there are no publicly traded REITs. There are, however, some publicly traded companies that act as developers and, on some occasions, operating companies (REOCs) of real estate assets. Although publicly traded, these companies are really privately owned by one or two major shareholders, with a very small portion of the shareholding participations being held by minor investors (float).
The main three public listed companies are:
- a TGLT SA: 50 per cent of the shares are owned by a private individual and 50 per cent by private investors.
- b Consultatio SA: 70 per cent of the shares are owned by a private individual, 25 per cent by the Argentine government as a consequence of the nationalisation of private pension funds, and only 5 per cent by private investors.
- c IRSA SA: 65 per cent of the shares are owned by a private individual; 5 per cent by the Argentine government as a consequence of the nationalisation of private pension funds, and 30 per cent by private investors.
Among the most significant development transactions, Consultatio is developing Catalinas Norte, which at 150 metres would be the tallest building in the City of Buenos Aires, to be used as office space.
Nordelta is a luxury housing development project by Consultatio in Tigre, Province of Buenos Aires. Nordelta is a city centre comprising 23 gated communities, a golf course, shopping centre, private schools, hotels, offices, among other services. Currently, there are more than 30,000 people living in Nordelta. It is estimated that over US$1 billion has been invested in the development, and the project is still being further developed and exploited. A similar project is currently being developed in Escobar, in the Province of Buenos Aires. The development, Puertos del Lago, will consist of 20 gated communities over 1,440 acres of land.
TGLT SA is currently involved in the development of several residential complexes, including Astor Palermo, Astor Nuñez, Forum Puerto Norte, Venice and Forum Alcorta.
One critical challenge faced in large cities in Argentina is compliance with the environmental and zoning regulations, most of which are poorly drafted and inconsistently applied. In addition, the superimposition of provincial and municipal regimes makes the legal framework more complex.
ii Real estate PE firms – footprint and structure
Even though there are not many private equity firms or funds structured and investing in real estate in Argentina, within the existing entities, the following provisions are standard:
- a Management fee (or advisory fee) rate: annual fee of 2 per cent of the total capital commitments of all limited partners during the commitment period, and thereafter, 1 per cent of the total funded commitments, declining on an annual basis.
- b Carried interest: usually structured as a waterfall that first remunerates limited partners’ capital contributions plus hurdle rate (i.e., 8 per cent per annum, compounded annually) and then allocates 20 per cent of the excess to the general partner of the private equity fund.
- c Distribution: this is done on a distribution of net proceeds basis, subject only to the customary claw-back.
- d Debt: Standard limitations usually cap indebtedness at a range between 15 per cent to 25 per cent of the aggregate capital commitments of all the limited partners. The maximum maturity of any indebtedness for borrowed money of the private equity fund usually does not exceed 24 months. In addition, it is customary for the aggregate borrowings and guarantees against the partnership to be less than or not exceed the aggregate amount of unfunded commitments. In terms of liens, it is common to find provisions stating that the general partner will not be authorised to grant liens on assets of the private equity fund exceeding between 25 per cent and 35 per cent of the aggregate total assets.
- e Forced sale provisions: certain members of the PE fund usually can request the sale of a specified real estate property at a specified sale price, providing thereby a first offer pre-emptive right to the other members of the fund. If such parties fail to exercise such right, then the general partner or managing partner may proceed to the sale of the specified real estate property at the requested sale price. Sometimes, the right to request a forced sale is exclusively limited to main initial investors, and is only enforceable after a specified lock-out period of the investment.
Conversely, and as opposed to private equity funds, privately traded trusts are a very widespread tool for pooling funds for developing of residential (mostly) or commercial projects. Investors will receive in exchange an apartment or unit after the project is finished. Many of this type of private trust are focused on constructing residential or office buildings. These trusts usually involve the following participants: (1) the owner or seller of the land, which in turn receives cash or units; (2) the developer, in charge of developing the project, hiring the construction company, and supervising the project; (3) the trustee, which has the obligation to receive the trust property and deliver the units as agreed in the trust agreement;2 and (4) investors, who make cash contributions in exchange for units.
Private trusts in Argentina have several advantages. Trust property constitutes a separate estate from that of the settlor and the trustee, and thus is ring-fenced against actions of the creditors of both settlor and trustee. This structure provides the possibility of organising projects as entirely separate business units that efficiently isolate the risks of each project, and therefore provide an incentive for investors who believe in the profitability and good planning of the specific venture. By way of contrast, when a real estate project is channelled through one or more corporate entities that, in turn, may develop more than one project at the time, the poor performance of one of the projects may negatively affect the others and creditors of one project may correctly claim from the profits of other projects being developed through the same corporate entity. Additionally, trusts not only provide risk isolation advantages, but also flexibility in relation to the tailor-made structuring of the contributions of each of the trustors (land, cash, rights, construction and development obligations, etc.) as well as of the benefits to be received by each of them (debt interests, profits, apartment or units, etc.) Such flexibility is not available for projects or developments being channelled through a corporate vehicle.
In reality, given the great flexibility and the risk isolation benefits provided by the trust structure, many recent real estate developments are channelled in this way. Argentina went through difficult years with poor macroeconomic conditions, where finance was extremely expensive and sometimes even not available. Trusts are so flexible that they allow different types of investors to co-exist within the same project according to the needs of such enterprise, with each of them being entitled to different benefits according to the risks and contributions made. Corporate structures can hardly provide this flexibility and are also subject to tighter administrative regulations and controls.
Even though trusts are very popular, there are just a few cases of trusts being publicly listed. One such listed trust had Consultatio acting as developer.
Nevertheless, with the new elected government and more professional staff in the securities exchange commission, an increase in the number of this kind of complex project is expected.
i Legal frameworks and deal structures
M&A activity in Argentina is mostly driven by macroeconomic conditions. These conditions have affected the investment climate more than anything else in recent years.
Given that all acquisitions are friendly, the structure of a public acquisition will essentially depend on the organisational structure of the target as well as on tax considerations. There have been, as a matter of example, acquisitions comprising the control of a closed company that controls a public company, coupled with acquisitions of direct holdings in such public entity (such structure driven by tax efficiencies derived from a lower capital gains tax applicable to foreign holders of local stocks).
The choice of a structure may also vary depending on the existence of different voting rights of the shares of the target (multiple-vote shares are allowed in this jurisdiction, although they are becoming rarer in public entities) or plans for a post-closing reorganisation, etc.
Specifically in relation to the applicable legal framework, acquisition of real estate M&A and real estate transactions in general are regulated by the recently enacted Civil and Commercial Code (the CCC), which includes the regulation of horizontal property and trusts.
Additionally, according to Law No. 26,737, the Rural Lands Law, foreign ownership of rural land may not exceed 15 per cent of the total amount of ‘rural lands’ in Argentine territory. This percentage is to be calculated also in relation to the territory of the province or municipality where the relevant lands are located. Ownership by the same foreign owner (i.e., foreign individuals, foreign entities or local entities controlled by a foreign person) may not exceed 1,000 hectares of the ‘core area’ or the ‘equivalent surface’ determined according to the location of the lands. The Interministerial Council of Rural Lands, the enforcement agency, defines the ‘equivalent surface’ taking into consideration: (1) the proportion of the ‘rural lands’ in relation to the municipality, department and province; and (2) the potential and quality of the rural lands for their use and exploitation. Likewise, under security zone regulations, foreign ownership in certain areas of national security, such as frontier zones, requires the prior consent of a federal agency, which is normally granted. A softening or lifting of these regulations is being studied at the present.
M&A transactions may be structured as transfer of shares or as transfer of assets. The transfer of assets in bulk is regulated by a specific statute, which establishes a specific procedure to follow in order to cut off the liability of the seller with regard to its creditors. Even when this procedure is not mandatory, if not fulfilled, both the seller and the buyer may be liable for the debts related to the transferred assets.
M&A activity is regulated by the CCC and supplementary legislation. Acquisitions are not subject to specific legislation; their regulation stems from the general rules applicable to corporations and partnerships, commercial contracts and securities. Share purchase agreements are subject to the applicable provisions of the CCC, while asset transfer agreements are regulated by Law No. 11,867, the Bulk Transfer Law, which sets forth a procedure mainly aimed at protecting the seller’s creditors.
M&A transactions generally fall within the scope of commercial law, with the exception of certain aspects (tax, labour, etc.) that are contemplated in other branches of law. M&A activity involving state-owned companies is further regulated by administrative law.
In general, off-exchange, private merger and acquisition transactions are not legally subject to prior substantive scrutiny by governmental, judicial or other bodies, except where they fall within the scope of antitrust law.
Takeover bids of companies that are authorised to publicly offer their shares are governed by the Securities Law and further specific regulations of the National Securities Commission (CNV). These regulations provide for requirements to be fulfilled in both voluntary and compulsory tender offers. The stock exchanges have not enacted express rules governing takeover bids. However, in the case of listed companies, any disclosure of information regarding any takeover bid that is submitted to the CNV must also be submitted and filed with the stock exchange where the relevant company is listed.
CNV Rules must be complied with by any person who intends to obtain control of a company that makes a public offering of its shares for the purpose of a takeover bid. The Securities Law and CNV Rules apply both to purchase offers and to share exchange offers.
Takeover bids of private companies are not expressly governed by the Law No. 19,550, the Companies Law (the CL) or any specific law. General rules of the CL apply to takeover bids, but such rules do not specifically contemplate tender offers. General rules established in the CCC regarding the execution of contracts may also be applicable (e.g., promise of contract or revocability of the offer).
ii Acquisition agreement terms
The process of acquiring immoveable property can be divided into three main stages: the pre-contractual stage, the contractual stage and the post-contractual or completion phase. The pre-contractual stage normally involves contact with brokers, initial negotiations, preliminary letters of intent and a summary investigation of title and encumbrances. During the contractual stage full and detailed negotiations are normally completed and the contract is entered into between the purchaser and the vendor. The post-contractual or completion phase generally involves the execution of the notarial deed of conveyance, registration of the deed at the Land Registry and any other completion matters (such as notifications to utility services, etc.).
Prior to entering into any form of binding contract, the parties to an acquisition of immoveable property, having agreed upon the main terms and conditions to govern such acquisition, particularly where more complex transactions are concerned, sign a memorandum of understanding or letter of intent setting out the principal terms of the deal agreed between them. The usual terms contained in such a document are those governing price, payment conditions, date of completion, etc., and are established to reflect the agreement between the parties at that stage of the transaction, pending further negotiations and agreement upon the detailed aspects of the operation involved.
iii Hostile transactions
The lack of a developed capital market and the very rare occurrence of hostile takeovers in Argentina has led to local companies not having had the need to include anti-takeover defences in their organisational documents. As mentioned above, the common capital structure of local companies works as the best defence against an undesired acquisition.
The foregoing notwithstanding, when found, defensive measures used in Argentina include: (1) provisions in the articles of incorporation restricting the transfer of shares; (2) increased quorum and supermajority requirements for shareholders’ meetings; and (3) staggered-term boards.
‘Poison pills’are rare in Argentina, where, in principle, no discriminatory rules may be set out against some shareholders in favour of others. However, some listed companies have included specific change-of-control provisions on their note issuances.
Many of the potential defences are decisions that require shareholder approval in any event, even if they are not implemented for defensive purposes (e.g., all measures that require by-law amendments). Besides, under Argentine law the board of directors is somewhat limited on the type of actions it can take to block a takeover bid, since the performance of the directors is limited to acting in the company’s interest.
iv Financing considerations
The trust was historically ruled by Law No. 24,441, but recently this structure has been included in the CCC. The characteristics of this innovative financial technique have not been substantially modified. This way of structuring the operation also allows the securitisation of the funds flowing from the project, thus opening up access to the capital markets for financing purposes.
The trust is safe both for institutional and regular investors because of the guarantee that it implies. The assets and funds are secured under a strong institution in order to avoid insolvency issues by isolating them in an independent estate, allowing easy execution. It also provides transparency in the use of the funds, and ensures the future of the resources.
Lending, including secured lending, was heavily affected by three forces that proved to be disruptive in the local financial market:
- a inflation;
- b foreign exchange restrictions limiting the ability of local residents and non-Argentine residents to acquire foreign currency (although since December 2015 some de facto rules and restrictions have been eased); and
- c lack of long-term financing.
Current interest rates in connection with financing in pesos (but also in US dollars) are priced at a rate that, at some points, is even lower than inflation. In other words, inflation has trumped interest rates in terms of percentage and, therefore, interest rates have sometimes even proven to be negative. In light of this issue, the most significant trends have been those aimed at structuring transactions that could mitigate the adverse effects of this situation. Examples of these features are:
- a dollar-linked transactions, or financings that are denominated in foreign currency but for which disbursements and repayments are made in local currency. This feature has been used in most recently issued securities (by private entities but also by publicly owned companies) and in some syndicate and bilateral loans. In addition, there are specific regulations issued by the Central Bank of the Republic of Argentina that could be construed as supporting this mechanism; and
- b transactions that include terms that allow the lender to request payment of principal and interest in a foreign currency, local currency at a specific exchange rate, or payment in kind.
Finally, since the re-enactment of foreign exchange restrictions in 2001, most financings received by local companies are trade-related financings, the proceeds of which are used by local companies to either finance production of commodities or other exportable goods, or to finance the acquisition of equipment or other goods. This type of transaction is afforded preferential treatment from a foreign-exchange perspective.
At present in Argentina the absence of the financial loans is remarkable. The political and economic conditions of the country in recent years have not been conducive to this special field. The offer of both personal and asset-backed guaranteed loans are lacking in the Argentine financial market. An improvement is expected in this area, because of the new government and the new economic measures announced in recently.
Regarding guarantees, Argentine law recognises two kinds: ‘personal’ guarantees and ‘asset-backed’ guarantees. Personal guarantees are granted by a person or a legal entity committing its property to assure the performance of one or more obligations of the debtor. Upon the debtor’s default, the creditor may eventually take legal action over the debtor’s property and the guarantor’s property. This guarantee, unlike asset-backed guarantees, does not create a lien or a privilege in favour of the creditor.
Asset-backed guarantees are granted over a specific property owned by the guarantor. In this kind of guarantee, either the debtor or a third party may be the guarantor. Unlike personal guarantees, asset-backed guarantees grant the creditor (1) the right to pursue the guarantor’s property, even if the guarantor sells or transfers the property; and (2) the right to execute the guarantee and receive the corresponding payment with preference over other creditors, even in the event of insolvency or bankruptcy of the debtor or the guarantor.
v Tax considerations
In an M&A transaction, when both, seller and buyer, are non-Argentine residents, the seller may choose between an effective tax rate of 13.5 per cent of the sale price or 15 per cent of the ‘real’ net income. The buyer is the party liable to pay the tax. However, there is no mechanism created for the buyer to pay the tax due. In practice therefore this type of transaction is not subject to capital gains tax. If the seller is a local entity, the potential gain or loss will be treated as part of its corporate income.
Also, if there is an ‘instrument’ signed by both parties regarding the purchase and sale of shares, quotas or any other equity participation issued by an Argentine company, that instrument would be subject to stamp tax in the Argentine jurisdiction in which the instrument is entered into or where it has effects (where the Argentine company is incorporated). Both parties are jointly and severally liable for the payment of this tax to the tax authority. If one of the parties pays it entirely, it might have the right to claim half of the amount from the other party. Usually, the tax is borne by the party who is resident in the country, if any. The tax rate in the City of Buenos Aires, for instance, is 1 per cent and it applies to the total economic value of the agreement. A non-Argentine resident has no regulated mechanism to pay this tax. Therefore the tax is not actually collected.
Regarding the formal requirements, the non-resident that wishes to acquire shares, quotas or any other equity participation of an Argentine company must obtain an identification number for tax purposes.
vi Cross-border complications and solutions
There will likely be an evolution in the next few years toward international standards. Lack of clear rules and an overly regulated and unstable economy have played a major role in diminishing, if not eliminating, M&A activity by listed entities in Argentina. The underlying reasons can be found in the external factors rather than the overlooking of specific transaction components.
The real estate sector, which has been a major player in prior comebacks of the Argentine economy, will most likely recover. Prices are still cheap relative to regional and international standards so international developers can be expected to return to the market.
Restrictions on the foreign exchange market are being lifted by the new administration.
V CORPORATE REAL ESTATE
There is a trend to separate real estate from operating activities specifically in the hotel field, where management contracts are usually signed between the owner of the asset and operating companies.
The Argentine government has recently launched a general tax amnesty. It is expected that in the next few months a significant number of assets owned by Argentine residents will be disclosed and taxed, and in some cases repatriated to Argentina. This regime, coupled with more restrictive regulations in foreign financial markets, is pitched by the government as the final opportunity for declaring assets before broad exchanges of information with other countries are put in place or become effective.
As an alternative to repatriating funds, investments in open or closed mutual funds listed with the Securities and Exchange Commission (SEC) grant a beneficial tax treatment. In turn, one possibility for these mutual funds is investing in infrastructure and real estate projects. These funds will be specifically regulated by the SEC.
This alternative could be attractive to those taxpayers who prefer to disclose their assets and consider investment in the real economy or infrastructure at the same time.
Beside this promising tool, as a consequence of our financial and political instability, the absence of institutional investors and the lack of appetite for stocks as a valid saving option, there are very few listed and sophisticated vehicles to channel investments in real estate and the presence of international private equity is still very low. Indeed, general macroeconomic conditions made the local capital markets largely unattractive for initial public offerings or M&A in general.
On December 2015 a new government took office with a focus on generating a more business-friendly climate. An important first step was settling a major international claim with hold-outs of defaulted Argentine sovereign debt that put an end to a 13-year default. Such default has been a big obstacle to boosting the access of the country and its companies to financing through the capital markets. Additionally, many of the restrictive measures affecting the access of residents and non-residents to the foreign exchange market were removed.
On these grounds, there are high expectations for Argentina’s economy to recover, particularly through foreign investments in infrastructure and real estate. Real estate has been important for Argentina’s economic recovery in the past, and is expected to also foster the recovery this time.