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, gyms, swimming pools and tennis courts, among other amenities typical of gated communities. Another popular concept of the same period was the introduction of 'lofts'. Lofts 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; 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.
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 and 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.
The substantial yearly growth of the construction sector between 2003 and 2008 was 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 in relation to the Argentine peso.
Since the administration change at the end of 2015, the current government has made it a top priority to attract foreign direct investment; to this end Argentina has relaxed and almost completely removed previously existing foreign exchange restrictions and passed a new tax amnesty, resulting in the declaration of more than US$116 billion.
The current government has executed several significant economic and policy reforms that have resulted in the temporary revitalisation of the capital markets and an increase of interest from the private sector in the issuance of debt and equities in the domestic and international capital markets. Several programmes of mortgage loans for housing construction have grown in importance, mainly as a result of the ProCreAr programme, the launching of new loans with UVI or UVA (housing units) and new mortgage loans from banks like Ciudad or Nación that reactivated the real estate market temporarily during 2017 and 2018. In spite of these efforts, due to lack of financing options, high inflation rates and devaluation, there has been a significant reduction in construction and real estate activity. In fact, an overview of the real estate market information would show few residential sector transactions in recent years.
It is worth noting that even with the changes in the economy and the fact that culturally, and in the absence of other investment alternatives, Argentine investors have 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. 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.
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 over the past few years.
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, as well as the enactment of a law that restricts ownership and possession of rural land by foreigners. Furthermore, the hotel sector, which originally benefited from the tourism boom in Argentina, has ended up suffering because of an increase in costs as a consequence of inflation and a decrease in the competitiveness that was originally bolstered by foreign exchange rates.
Recent real estate trends show that the construction of big areas for hypermarkets, houses and working spaces has slowed down, and focus has shifted to the worldwide trend of small premises with little square footage and amenities with low or premium (for high-income individuals) expenses.
ii Private equity transactions
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.
In 2018, Equity International, Goldman Sachs and Centaurus Capital, in partnership with Grupo Pegasus, announced the formation and US$300 million investment of ARG Realty Group, a commercial real estate company based in Buenos Aires, Argentina. The transaction included the acquisition of Pegasus Real Estate Fund's one thousand square foot class A office and retail real estate portfolio. ARG Realty Group now represents one of the largest real estate platforms in Argentina and is being led by its development company Rukan, which previously developed some of Argentina's most iconic real estate projects.
III REAL ESTATE COMPANIES AND FIRMS
i Publicly traded REITs and REOCs – structure and role in the market
In Argentina there are few 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 four public listed companies are:
- TGLT SA: 50 per cent of the shares are owned by a private individual and 50 per cent by private investors;
- Consultatio SA: 70 per cent of the shares are owned by a individuals or private funds, 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;
- 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; and
- RAGHSA SA: completely owned by private investors. In 2017, the company issued several notes totalling US$150 million.
Among the most significant development transactions, Consultatio developed Catalinas Norte, which, at 150 metres is the tallest building in the City of Buenos Aires and is 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.
TGLT SA is currently involved in the development of several residential complexes, namely Astor Palermo, Astor Nuñez, Forum Puerto Norte, Venice Tigre and Forum Alcorta, among others.
IRSA SA is developing the following residencies, retail spaces and offices: Expansión Alto Palermo, Lindero Dot – Ciudad de Buenos Aires and the Catalinas Building, among others.
RAGHSA SA is currently developing offices in a project named Centro Empresarial Libertador.
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:
- 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.
- 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.
- Distribution: this is done on a distribution of net proceeds basis, subject only to the customary clawback.
- 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.
- Forced sale provisions: certain members of the PE fund can usually request the sale of a specific real estate property at a specific sale price, providing thereby a first-offer pre-emptive right to the other members of the fund. If the parties fail to exercise this right then the general partner or managing partner may proceed to the sale of the specific 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 very widely used tools for pooling funds for development of mostly residential but also commercial projects. In exchange, investors receive an apartment or unit once the project is finished. There are many of these private trusts focused on constructing residential or office buildings; the 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. In contrast, when a real estate project is channelled through one or more corporate entities that, in turn, may develop more than one project at a time, the poor performance of one of the projects may negatively affect the others and creditors of one project may legitimately claim from the profits of other projects being developed through the same corporate entity. Additionally, trusts provide not only 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.). This 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 have been channelled in this way. And although trusts are very popular, there are only a few cases of them being publicly listed. One listed trust had Consultatio acting as developer. Another publicly listed trust has Pilay acting as a developer and is intended to finance the construction of buildings in the metropolitan areas of the cities of Cordoba and Rosario.
During 2016 and 2017, a tax amnesty programme was put in place in Argentina by governmental authorities. One of the programme options allowing participants to avoid paying a penalty fee to the tax authorities was to invest their money in real estate development funds. The investment in these kinds of funds is not to be withdrawn for a period of five years, the minimum amount to invest was US$250,000 and the funds had to include at least three real estate projects. As a result, several funds were created, such as Allaria Residencial CasasARG, Consultatio Inmobiliario, Quinquela + Predial Inmobiliario and Inmobiliario AlRío.
In February 2019, the National Securities Commission (CNV) approved the largest closed mutual fund (FCI) ever placed in the Argentine capital markets, which will be used for the development of real estate projects with a residential purpose under the advice and development of Miyagi S.A. The FCI raised approximately 4 billion pesos (approximately US$88 million) and will be managed by Allaria Fondos.
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, for example, acquisitions comprising the control of a closed company that controls a public company, coupled with acquisitions of direct holdings in the public entity (this structure being 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 (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 currently being studied.
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 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.) 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 when 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 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 Law No. 19,550, the Companies Law (the CL) or any specific law. General rules of the CL apply to takeover bids, but these 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 the 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 rarity of hostile takeovers in Argentina has led local companies to feel no 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, discriminatory rules favouring some shareholders over others are prohibited. However, some listed companies have included specific change-of-control provisions in 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 as regards the types of actions it can take to block a takeover bid, since directors are constrained to act in the company's interests.
Thus, because of the nature of the capital market and the conditions set by Law No. 19,550, no successful hostile transactions have occurred.
iv Financing considerations
The trust model was historically governed by Law No. 24,441, and nowadays is included in the CCC (modified by Law No. 24,770). 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 to avoid insolvency issues by isolating them in an independent estate and 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 two forces that proved to be disruptive in the local financial market: inflation and lack of long-term financing.
Even though there has been a continuous increase of interest rates in the past few months, 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. An example of these features are transactions that include terms that allow lender to request payment of principal and interest in a foreign currency, local currency at a specific exchange rate, or payment in kind.
In the recent past, foreign exchange restrictions used to be an important factor that restricted heavily the ability of receiving financing in Argentina. However, since the current administration took over, these restrictions have been progressively abrogated to the extent that there are no pending foreign exchange restrictions standing.
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.
Despite the measures adopted by the current government to improve the Argentine financial market, which initially resulted in an increase in the issuance of debt and securities and in cross-border loans (e.g., there have been many bond issuances by the national and provincial governments), at present the absence of financial loans is remarkable. Offers of both personal and asset-backed guaranteed loans are limited and there is considerable uncertainty on whether the situation will improve in the short term.
v Tax considerations
Law No. 27,430 published in the Official Gazette on 29 December 2017 (the Tax Reform) introduces important amendments to the Argentine tax system. Before the Tax Reform, subsection w) of Section 20 of the Income Tax Law provided that the results from operations of sale, transfer or disposition of participations, bonds and other securities obtained by individuals and undivided estates located in Argentina were exempt from income tax whenever they were listed on stock exchanges or securities markets and had public offer authorisation.
The Tax Reform modifies the aforementioned subsection and establishes that only the results from the sale, transfer or disposal of shares, securities representing shares and certificates of deposit of shares that are carried out through stock exchanges or stock markets authorised by the Argentine Securities and Exchange Commission are exempt. A tax is applicable to net income from Argentine sources belonging to individuals and undivided estates arising from profits related to interest or return on the placement of deposits made in financial institutions, public securities, negotiable obligations, share of mutual funds, debt securities of financial trusts, bonds and other securities, and would be reached at the tax rate of 5 per cent if it is issued in Argentine currency without an adjustment clause or 15 per cent in the case of Argentine currency with an adjustment clause or if it has been issued in foreign currency. The foregoing exemption is also applicable to foreign beneficiaries to the extent that said beneficiaries do not reside in and the funds do not come from non-cooperative jurisdictions. For foreign beneficiaries the exemption is also applicable to public securities issued by the national, provincial, municipal or the City of Buenos Aires governments, negotiable obligations and representative shares or deposit certificates shares and other securities, provided that such securities have been issued by entities domiciled or located in Argentina. Notwithstanding the above, the exemption would not be applicable for letters of the Central Bank (LEBACs).
For the transfer of shares, representative securities, deposit certificates shares and any type of corporate participations that are not placed by public offering, the tax rate is 15 per cent. The sale of real estate or transfers of property rights is included in the tax rate.
In an M&A transaction, when both seller and buyer are not Argentine residents, the seller may choose between an effective tax rate of 13.5 per cent of the sale price and 15 per cent of the 'real' net income. Previously, the buyer was responsible for paying the tax when the seller was a non-resident. Currently, in transactions between non-residents, the non-resident seller is responsible for paying the tax through their legal representative in the country. If the seller does not have a legal representative domiciled in the country, the seller can pay the tax via international wire transfer. If the seller is a non-resident and either the purchaser is a resident or the transaction is completed through a stock exchange market or authorised agent, the purchaser or the stock exchange market and authorised agent are responsible for withholding the tax.
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. The tax is usually 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.
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. One of the most important measures in this regard is the lifting of restrictions on the foreign exchange market by the Macri 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.
As a consequence of Argentina's 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.
The measures adopted by the government, focused on generating a more business-friendly climate are still not enough to attract foreign investment to finance economic growth or bring down inflation.
A general election will be held in October to elect the president of Argentina and President Mauricio Macri will probably run for a second term. However, there is still uncertainty about the possible outcome of the election and the subsequent development of the Argentine economy.