Unpacking corporate ownership in property markets: A typology of investors and the making of an investment value chain in Brazil

Abstract

Over the past few decades, a growing number of studies have analyzed the social, spatial, and economic consequences of the sharp rise in corporate ownership of property assets. These studies have shown that financial(ized) rationalities, preferences, and techniques increasingly shape the investment behavior of corporate landlords, with notable effects in cities and regions. Less attention has been given, however, to the heterogeneity of actors that are bundled together under the umbrella of corporate landlords, as well as to the investment strategies these different actors pursue. In this paper, we aim to fill this gap by analyzing the investment behavior of three corporate and financial investors in Brazil's commercial property markets: pension funds; listed property firms; and real estate investment trusts. Drawing on institutional and evolutionary approaches to economic geography, we build a typology of investor types in Brazil's commercial property markets which shows that the investment preferences of these actors are largely shaped by three key variables: their organizational rules and routines; their ownership structure; and differential access to financing. In addition, we show that these investment preferences translate into distinguishable patterns of property investment and influence broader property market dynamics by giving shape to an investment value chain.

Keywords

Corporate landlords financialization commercial property markets market behavior investment value chain

Introduction

Over the past decade, real estate has increasingly commanded the attention of scholars as a driving force of change in cities across the world (Lizieri, 2009; Shatkin, 2016; Weber, 2015). In particular, the recent trend toward the financialization of real estate has eased the way for a wider range of investors seeking a return from this asset class. The specific characteristics of real estate as an asset class—its non-correlation with other asset classes such as stocks and bonds, as well as its long-term nature—makes it particularly attractive to institutional investors in a scenario of low-interest rates and scarce opportunities for diversification (Aalbers, 2020; Bonizzi & Kalterbrunner, 2019; Hebb & Sharma, 2014; Monk, 2009; Wijburg & Aalbers, 2017).

In this context, research in urban studies has made considerable progress in analyzing the growing flows of financial capital into the real estate market. These studies have generally regarded large institutional investors—sometimes dubbed “corporate landlords”—as a type of investor driven by financial(lized) metrics and rationalities and have shown how these investors’ expectations and decisions are increasingly shaping the way cities are produced and managed (Beswick et al., 2016; Halbert et al., 2014; Janoschka et al., 2020; Van Loon & Aalbers, 2017; Weber, 2015). However, we contend that, while sharing some investment assumptions, such investors often vary in terms of their actual investment practices. This raises the question of whether acknowledging the varieties of existing investor types and investment practices among financial actors may yield new insights into the functioning and evolution of property markets and, more broadly, into the production of cities. Following Özogul & Tasan-kok's (2020) cautioning against treating different types of property investors as “one and the same,” in this article we seek to address this question by scrutinizing and comparing the investment practices of three financial and corporate owners in Brazil's commercial property market: listed real estate investment trusts (REITs), pension funds (PFs), and listed property companies (PCs). By developing an analytical typology to categorize these actors’ behavior in commercial property markets, we identify the diversity of business strategies pursued by these three investor types and explain these strategies as largely shaped by historically contingent institutional and organizational constraints. Furthermore, we argue that, by acknowledging diversity, we bring into view trends in property markets that remain overlooked when we treat investors uniformly as “corporate landlords” or simply “financial capital.” In particular, we identify and discuss the structuring of an investment value chain in commercial property, whereby different actors perform different functions in the creation and maintenance of buildings as income-yielding assets.

This article is divided into four parts. In the “From the secondary circuit to varieties of financial capital: taking stock of diverse investment practices” section, we discuss the literature that analyzes the emergence of institutional landlords in the real estate market and lay out our conceptual framework. In the “Actors studied and methodological procedures” section, we briefly introduce each of the three players analyzed and outline our research methodology. In the “Key variables driving investment decisions” section, we introduce an analytical typology that helps us describe and make sense of the investment behavior of these players. Finally, in the “A typology of investor types in commercial property markets” section, as well as in the conclusion, we explore the consequences of these diverging investment behaviors and discuss some of the key theoretical implications of our findings.

From the secondary circuit to varieties of financial capital: Taking stock of diverse investment practices

Since David Harvey's (1982) seminal re-conceptualization of land ownership under capitalism, urban political economy has been interested in understanding the conditions under which capital switches to the “secondary circuit” of land and property investment as opportunities for accumulation dwindle in manufacturing and related sectors (Haila, 2020). Scholars in this tradition have long called attention to how property has become enmeshed in circuits of financial capital as mortgage lending and institutional ownership of buildings took off in the last few decades of the 20th century, thus enabling land to be increasingly treated as a “pure financial asset” or a “quasi-financial asset” (Beauregard, 1994; Coakley, 1994; Gotham, 2006; Harvey, 1982). However, while this literature has drawn attention to the broader context of “capital switching,” it did not specify in more detail how financial investors engaged in the property market, the particular strategies they pursued, and the different ways through which this financial rationality has affected property markets and cities more broadly.

In the early 21st century, and particularly in the wake of the 2008 financial crisis, property rapidly emerged as an investment alternative in the portfolio of institutional investors and financial intermediaries, as the latter sought higher returns amid declining interest rates. In this context, an expanding literature has made considerable progress in understanding the economic and socio-spatial impacts of the investments made by institutional investors in property by resorting to and elaborating on the concept of financialization. In particular, by combining the insights of political economy with an institutional perspective on markets applied to empirical case studies, this scholarship has generated valuable insights into how these investors are reshaping commercial property markets and how their investment priorities shape the cities and regions in which they invest.¹ Two strands of literature on the issue stand out. The first concerns the studies that have delved into the financial, economic, and regional outcomes of the portfolio and asset management decisions made by institutional and financial investors. The second focuses on how the investment priorities and decisions taken by these actors have shaped the urban built environment in various contexts.

Regarding the first strand, several scholars claim that financial market investors exhibit a strong selectivity in favor of global cities in building up their property portfolios. Lizieri (2009), Charney (2001), and Theurillat et al. (2010) (in the UK, Canada, and Switzerland context, respectively) provide us with an example of how financial actors and institutional investors act with a strong spatial selectivity—favoring larger cities—when selecting the properties that will make up their portfolio. As Henneberry and Mouzakis (2014) claim, this spatial selectivity is caused by “familiarity bias” and herd behavior that drives investors to overestimate the risks of investing in other regions, as opposed to investing locally. To the authors, this explains the persistent gap in yields, as well as in the availability of funding, between prime areas and other regions. The few studies that have investigated the issue in developing countries have found similar trends. Halbert and Rouanet’s (2014) findings concerning India's property markets show that financial investors’ search for transparency and liquidity largely explains the metropolitan bias in real estate investments. Comparable trends are found, respectively, in Mexico (David & Halbert, 2013) and Brazil (Sanfelici & Halbert, 2019).

A second group of studies has spelled out the consequences, for the urban built environment, of the prominent role played by financial investors in commercial property markets. Theurillat and Crevoisier's (2014) study in Switzerland, Guironnet et al.’s (2016) study in France and David & Halbert’s (2013) study in Mexico City show that, while several actors with diverging agendas have shaped the outcomes of urban development projects and commercial properties in all contexts, financial actors impose risk and return rationalities that now must be considered when projects are built. The first two studies describe how the projects’ features in both contexts had to be altered several times to meet the expectations of financial investors for property assets that generate a steady rental income. David & Halbert’s (2013) study of Mexico City, on the other hand, shows how foreign investors’ search for transparency has led them to invest in outlying municipalities, where established business networks did not create barriers for new-coming investors using financialized accounting and calculative techniques.

In sum, while the literature on the “secondary circuit” has put the spotlight on the broader political-economic conditions that have enabled financial capital to switch to real estate as accumulation elsewhere weakens, the recent scholarship on the financialization of real estate has delved more deeply into how the rationality and expectations of financial market actors largely shape their investment priorities and thus the types of buildings, projects, and geographies they are willing to invest in. Yet because neither has given proper attention to the heterogeneity of investor types that exist under the umbrella of “financial capital,” they run the risk of “black boxing,” “finance itself—its institutions, its functions […], its revenue-and-profit generation models […], and its socio-spatial configurations” (Christophers, 2015, p. 191). By drawing on the insights on the contextuality of practices provided by institutional approaches we may recognize that, while all investors share in the broad-based, financialized market conventions that circulate through professional and business networks, a set of institutional constraints faced by different types of organizations often leads to different orientations in terms of risk-taking (for instance, greenfield development vs. passive rent extraction), investment time horizons (longer-term holding of assets vs. short-term capital gains), location preferences (metropolitan cores vs. metropolitan fringes and smaller-sized cities), and models of rent extraction (rental income plus development profits vs. exclusively rental income). Understanding such differences and their origins, we claim, adds value to the literature on financialization both at the economic level, as it enables a better grasp of the aggregate functioning of property markets by shedding light on the different functions performed and strategies employed by market actors and how they ultimately collaborate in the structuring of an investment value chain (Arjeliès et al., 2017)¹; and at the political level, given that, by recognizing the economic interests, as well as the financial and institutional resources on which investor strategies rely, it allows us to have a better sense of the (differential) political power exercised by such investors and how they may change the cities and regions in which they invest.

An analytical framework for scrutinizing investor types and investment practices in commercial property markets

Our analytical framework relies on evolutionary and institutional approaches as key lenses through which to scrutinize and contextualize market behavior by placing firm-level economic practices as both molded by larger-order institutional structures and as a set of forces constantly (re)shaping such structures (Jones & Murphy, 2011).

From evolutionary economics and evolutionary economic geography (EEG), we take the idea that organizational routines strongly influence the observed behavior of firms in market contexts (Boschma & Frenken, 2006; Boschma & Martin, 2007; Nelson & Winter, 1982). Such routines are rooted in the long-run history of the organization, thus reflecting the broader market context from which it emerged and the external challenges it had to respond to and adapt to over time. Once these routines get firmly entrenched, however, they tend to evolve only slowly, and are thus prone to all sorts of path dependencies dictated in large part by the “cultural and administrative heritage of accepted practices built up over the course of the firm's history” (Dicken & Malmberg, 2001; see also Bebchuk & Roe, 1999; Fuchs & Scharmanski, 2009; Schreyögg & Sydow, 2011). As firms’ histories are varied and as their practices are constantly evolving, we can expect a diversity of organizational architectures to co-exist at any point in time and in any given industry, even though market forces work incessantly to select competitive market behaviors that are better adapted to a given context.

While the focus on the individual organization and its endogenous evolution constitutes a crucial lens for analyzing firm behavior, institutional approaches add an additional layer of complexity by conceiving organizations (firms) as embedded in broader, multi-scalar institutional arrangements that shape business practices (Martin, 2000; Zukauskaite et al., 2017) by providing a set of incentives to and constraints on action. Where institutions are concerned, scholars in economic geography have often placed emphasis on the territorially bounded institutions that set the “rules of the game” (Gertler, 2010) underpinning market transactions across all industries. However, a case can be made that an equally (or perhaps more) important dimension of institutional influence over investment behavior comes from industry-specific arrangements (Boschma & Frenken, 2009), as our case study largely confirms. In addition, institutional forms are not carved in stone, but are instead permeable to the political agency of business groups and associations at different scales, thus suggesting the need for an understanding of how organizations and institutions co-evolve (Bathelt & Gluckler, 2014; Gong & Hassink, 2019).

Relying on such a framework, we provide an analytical treatment of the actors’ firm-level organizational routines and the broader institutional arrangements that frame their market behavior. Following that, we connect the heterogeneous market behavior exhibited by financial actors and their distinct investment patterns to broader property market dynamics.

Actors studied and methodological procedures

Before describing the methodological procedures, it is worth briefly clarifying who these domestic investors are and what is the market context under which they operate.

Since the early 2000s, the property market has become one of the most important alternative investment outlets for financial investors in Brazil. This decade became a turning point in this market as several factors converged to make property investment attractive to large institutional investors: first, macroeconomic stability achieved in the 1990s meant that smaller investors, who had long used property as a hedge against inflation, could redirect their savings to more liquid financial assets, thus leaving room for more professional investors; second, as interest rates declined in the mid 2000s, large institutional investors have sought to diversify their investments away from government bonds into higher-yield assets, property being one of the preferred alternatives; third, as the economy grew in the wake of the emerging market commodity boom, new demand for space from firms spurred new construction in segments as varied as retail, storage and logistics facilities, offices, and hotels, thus creating a pool of income-yielding assets for potential investors; and, lastly, firms added to this asset pool of assets by externalizing their property wealth with a view to focusing on their core business (Alencar, 2014). Altogether, this resulted in a growing share of commercial property being developed, owned, and managed by professional investors, such as family offices, PFs, REITs, and PCs.

PFs are widely discussed in the international literature as important actors of post-1980 capitalism (Clark, 2000). Despite this vast literature, the performance of PFs in the Latin American context is still scarcely studied, especially regarding their investments in property. In Brazil, PFs have grown considerably in the wake of an array of pension reforms enacted throughout the 1980s and 1990s, which made possible the consolidation of a private retirement system. Since the 1990s, PFs have become important investors in the office market, purchasing large corporate buildings in major cities (Fix, 2007; Magnani et al., 2021). Currently, PFs have approximately BRL 1 trillion in assets under management, BRL 32 billion of which are invested in the real estate market, with only the five largest funds holding about BRL 23 billion (Associação Brasileira das Entidades Fechadas de Previdência Complementar, 2020). Although they invest in other classes of assets, the property has become, in the context of falling interest rates and the COVID-19 crisis, an enticing investment opportunity for PF managers (Pereira, 2019; Schincariol, 2020).

REITs, called Fundos de Investimento Imobiliário, are collective investment vehicles, managed by financial institutions, whose purpose is to pool dispersed capital to invest in property assets and distribute the results to their shareholders. Although these vehicles were authorized in Brazil by a law passed in the early 1990s, REITs only experienced a significant growth over the last 10 years: from 2009 to 2019, the number of registered funds has increased more than sixfold (from 89 to 552) and their market capitalization has grown from BRL 5 billion to almost BRL 178 billion (Uqbar, 2021). Finally, PCs are listed as limited liability corporations whose goal is to invest in the property market, distributing their results to shareholders. PCs have existed since the 1980s but have grown substantially since the early 2000s in Brazil. Some of them emerged as spinoffs of family controlled property development firms that had been operating for a longer time. Currently, a group formed by 12 companies amasses almost BRL 83 billion in property assets (BMF Bovespa, 2020).

The overall amount invested in the property market by the three players analyzed was close to BRL 300 billion between 2020 and 2021. While this value is not restricted to commercial property, it is mostly concentrated in this segment.

Analyzing how institutional and corporate investors conduct investments in real estate to distinguish their practices and potential outcomes for property markets required a methodological approach that could provide ways to not only understand their specific rationalities and operational routines, but also compare them using common categories of analysis. Recognizing this difficulty, as well as the lack of access to information and reports from some of these actors (especially PFs), we conducted a qualitative inquiry comprised of four steps.

First, we analyzed the business press material, regulatory documents concerning the three actors studied, and industry reports and publications. In the business press, we selected and examined the subjects covered over the last four years (2018–2021). In addition, we subscribed to websites that bring together specialized professionals who publish content and analysis for their subscribers, such as Clube FII, and watched several webinars offered by these organizations and actors. We focused our analysis on four key factors: (1) innovation, that is, how these agents differentiated themselves from competitors by exploring niche markets and adopting distinct governance practices; (2) strategies of portfolio building and management, that is, what these institutional investors are prioritizing in the moment of acquisition, sale, and development of properties; (3) property location, focusing on their current areas of activity, and property types invested, as well as their territorial expansion or retreat; and (4) relations between the three agents and other market players, such as consultants and international enterprises.

Second, we located and classified all property assets owned by PFs (BRL 31.6 million), REITs (BRL 220 billion), and PCs (BRL 48.2 million) in the real estate market in 2020 (for PFs³) and 2021 (for PCs and REITs) to have a more accurate understanding of where and in which types of property they allocate their capital.⁴ To do so, we have manually collected information from annual reports of the 10 largest PFs—who together concentrate over 90% of the total invested by this investor type in the real estate market—concerning direct and indirect investment in property (the latter, which consists of investment in REITs, makes up only 23% of the total invested in the property class). The assets were georeferenced using the name of the property and/or location (data provided in the reports). Data on REITs was accessed from Clube FII, a private database that compiles data from different primary databases, such as monthly and annual reports of individual REITs compiled by the Comissão de Valores Mobiliários, a government body. The aggregation of the data and the complementation with information not available in Clube FII's database was conducted by the research team manually and by consulting each one of the annual and monthly reports from each REIT. Data on PCs, in turn, was also collected from the annual reports of these companies that are available on their websites.

Third, we conducted semi-structured interviews (38 in total) between 2017 and 2021 with the managerial staff of the firms studied, as well as with assorted professionals in financial services. We selected a broad sample of professionals that are directly involved with portfolio management and decision-making within the three organizations studied. Among these interviews, 8 were conducted with real estate portfolio managers in government-sponsored and private PFs (group A in the interviews cited); 20 targeted REIT managers from the largest asset management firms in Brazil, such as Votorantim, Kinea, Capitânea, Vinci Partners, RB Capital, and others (group B); 2 were carried out with PCs (group C); 2 with senior managers of international property consultants (group D); 4 with senior representatives and bureaucrats from associations and regulatory bodies (group E) and 2 with real estate developers (group F). For all the interviewees we posed questions specific to their operational routines, decision-making process, governance aspects, and property management practices. We also posed questions related to the differences, similarities, and established relationships among the three groups of actors. Finally, we carried out participant observation at events and congresses related to the commercial real estate market, especially when representatives of the three actors investigated here were present. The attendance at these networked time spaces (Ibert et al., 2015) was not only crucial to determining the relationships established between these actors and observing the process of knowledge creation, but also to obtaining access to the professionals interviewed through snowballing.

Finally, after analyzing and triangulating all the material collected in interviews, press, and participant observation, we inductively built up the variables of analysis for constructing a typology of investment practices.

Key variables driving investment decisions

Our research has identified several variables driving key differences in terms of investment strategy among these three investor types. After analyzing, filtering, and categorizing these disparate explanatory variables, we were able to narrow them down to three key dimensions that have exhibited an outsize influence on the strategies these investors adopt, how they conduct these strategies, and the property types and locations they invest: (1) the organizational rules and routines that are dominant among each investor type; (2) the ownership structure of these organizations and the rules governing revenue distribution; and (3) the opportunities for financing new investments by issuing debt or equity. We will describe and analyze each of them, before moving on to a more integrated analysis of their overall meaning.

Organizational rules and routines

Drawing on evolutionary economics (Nelson & Winter, 1982), economic geography has long been interested in how organizational structures and organizational routines are constantly evolving as a response to competitive pressures, while at the same time reshaping the playing field of the competition itself (Boschma & Frenken, 2018). Our empirical material suggests that organizational characteristics are key variables to explain the market behavior of the actors studied.

It is worth noting, in this regard, the substantial differences in terms of governance models that strongly affect the discretion enjoyed by managers in making investment decisions, as well as the time frame of such decisions. In this respect, PFs are the least flexible organizations of the three: strict governance rules aimed at aligning sector managers to the organization's overall investment goals mean that investment decisions by managers in property departments are subject to the approval of the board of trustees. This procedure considerably lengthens the time needed to reach an investment decision and thus limits managers’ room for engaging in more opportunistic investment behavior (Interviews B4, C1, D1, B12, and B13). This is often underscored by the REITs’ managers and property consultants interviewed. As one REIT manager stated:

PF as institutional investors have more [complex] routines. You have the committees, [then] the board must approve. So, with PFs, there are more steps to follow before an investment. Often times we begin to arrange [an investment] mandate and it takes a year and a half [to] […] go through the investment committee, the board, then you have to negotiate the terms [of the contract], it goes back and forth. (Interview B2)

These characteristics of PFs are reinforced by ingrained, path-dependent organizational routines (Schreyögg & Sydow, 2011) that are designed to prioritize long-term, low-to-moderate risk investments. Indeed, within state-sponsored PFs, the largest investors in property in the group, the professional body is often composed of employees whose careers were pursued in the sponsor firm, instead of in financial markets. This often means that their views lean toward more conservative investment options (Interviews A1, A2, and A3) that preserve the fund's ability to meet future liabilities (Sanfelici & Magnani, 2022).

REITs, in turn, present a more variable picture, because managerial discretion is influenced to a considerable degree by investment mandates. For instance, some REITs clearly specify in the statutes the list of assets that will be managed. These funds, classified as passive in Brazil's legislation, limit manager functions to day-to-day management of the assets owned. Yet most REITs are now classified as active, granting managers more discretion to buy and sell property to beat a set benchmark—though approval by shareholders is often needed for broader changes in investment strategy. This means that, compared with PFs, REITs have more organizational flexibility to seize investment opportunities when they appear—their limitations stemming instead from other characteristics related to shareholder structure and financing (see the “Ownership structure and revenue distribution requirements” and “Financing opportunities” sections). To this must be added the fact that many of the REITs set up lately are spinoffs of investment banks or investment management firms and thus share with their parent companies organizational routines that are geared toward short-term opportunities (Interviews B1, B9, and B14). As one REIT manager notes when asked how they take investment decisions:

[…] opportunities emerge from diverse sources. […] Once these opportunities arise, we have a few committees to take a quick decision: “this makes sense, this does not”. […] Once we decide it makes sense, we move on to due diligence — collect information, rental contracts, […] visits to the property. And then we submit a proposal. (Interview B9)

In general terms, managers in PCs likewise enjoy considerable discretion to reach investment decisions in a short span of time. Despite this flexibility, however, a distinction regarding the other players analyzed must be made in terms of organizational structure. First, some of these listed firms are still family controlled, with the founders still holding a considerable sway over investment decisions. Thus, a strong element of path dependence in corporate strategy may be present in those firms that have long specialized in specific asset types. But more often the case, these firms have become more susceptible to shareholder discipline after going public (Interview C2). This means that, although managers have considerable discretion under an agreed investment mandate, activist shareholders may redirect the firm toward other investment strategies. This is exemplified by one manager at a large PC:

We changed a lot the firm's […] investment thesis when we changed our board of directors. […] When we got into an uncomfortable position in terms of leverage […], we had to raise capital with shareholders. […] At that point, they [shareholders] decided on two things. First, a change in the firm's management. So, the CEO and all directors were replaced, and this new management came with a new strategy, obviously because our previous strategy was not working. There was too much leverage, little equity and [a strategy] 100% focused on development. The difference we brought in our management was to bring third-party capital […] and an investment [strategy] much more focused on acquisitions [of developed property]. (Interview C2)

Moreover, PCs are more likely—due to organizational and institutional features—to establish partnerships with other important niche market players. As our investigation shows, this happens in moments when the firm seeks to engage in a specific operation in a market niche on which they do not have the expertise to execute and operate. Differently from REITs, which most of the time remain in well-established market segments and avoid taking on too much risk, PCs often team up with specialized partners that enhance their risk-taking investments.

Altogether, organizational structures strongly shape what managers can do in terms of investment strategy and their ability to make investment decisions quickly. But this must be seen, though, alongside the other two variables.

Ownership structure and revenue distribution requirements

A second variable observed that distinctly shapes investment behavior, particularly in terms of risk attitudes and investment time preference, concerns the ownership structure of these three organizations, how this structure conditions revenue distribution practices, and how it ultimately constrains investment options and investment timing (Bachher et al., 2016; Deeg & Hardie, 2016; Kang & Sorensen, 1999; McCarthy et al., 2016).

In this respect, PFs are peculiar organizations, in that revenue distribution (in the form of retirement income) takes place only at the end of a long period of time and beneficiaries are typically passive in relation to management, as well as not likely to reclaim their funds before retirement. This leaves ample room for trustees and managers to decide autonomously on investment strategy. Our data show, however, that property managers in large PFs usually stick to models of Asset–Liability Matching that prescribe investment decisions in line with the maturity of liabilities due (Interviews A1, A2, and A4). This means that PFs are more likely to engage in riskier ventures in property markets—by making brownfield investments, even in locations considered less standard to invest in—when pension plans are less mature, but shift to a more passive, lower-risk investment strategy—by investing in rent-generating core property—as benefit plans come closer to their maturity (Sanfelici & Magnani, 2022).

This ownership structure is in stark contrast with listed, for-profit organizations such as REITs and PCs. The fact that shares in these organizations are traded on the stock exchange and owned by shareholders⁵ give the latter leverage to influence the decisions of managers responsible for defining the investment strategy. Overall, our research shows that managers in both REITs and property firms are much more concerned about shareholder perception and shareholder reactions (be it in the form of “voice” on management boards or “exit” by selling shares). However, differences in terms of regulatory framework and end-investor type set apart REITs and PCs across several dimensions, shaping distinct investment strategies.

In this respect, it is worth mentioning that listed REITs are required by law to distribute 95% of revenues accrued to shareholders, with a minimum periodicity of 6 months (Brazil, Federal Law No. 9.779, 1999). This strongly constrains the ability of managers to hoard cash to carry out more ambitious investments, either in new acquisitions or in improvements/expansions of the assets owned. As opposed to that, as firms subject to corporate rules, PCs have more autonomy to distribute dividends to shareholders when and in the proportion they see fit. This gives managers more flexibility to use cash reserves to seize investment opportunities.

In addition to (and in part thanks to) these differing requirements in terms of revenue distribution, REITs and PCs have attracted a fundamentally different type of end-investor. REITs were set up initially as tax-exempt investment products for middle-class households seeking to diversify their portfolios (often away from real property). Because these investors prize reliable, steady investment income, most REITs pay out dividends monthly (thus more often than required by law) and prefer investment strategies that generate immediate cash flows. As one interviewee in a PC explains:

A question that many people pose is: “why would I buy a [share in a property firm] instead of buying [shares] in REITs?” The answer I like to give is that those are investment tools [that are designed for] different types of investors. This has to do with risk-taking. […] REIT is a product designed for retail [investors], especially given the tax exemption it enjoys. […] In the case of firms that have a more active management of portfolios [property firms], we use a different metric [than the] monthly dividend yield. We work with a metric of absolute return on investment. So, I will work much more with an IRR [Internal Rate of Return] than with a cap rate [such as] dividend yield. When I make an investment, I see what the growth potential of this asset is, how I will liquidate it in the future, at what price I will sell it in the future. (Interview C2).

Overall, then, key differences among these three investor types in terms of investment practices and investment options are driven by their ownership structure, the profile of end-investors, and the rules governing revenue distribution. This leads to variable attitudes toward risk-taking—with PFs at the lower-risk end of the spectrum and PCs at the higher end—as well as different time horizons of investments—with REITs focusing on immediate revenue-generation through acquisitions while PFs and PCs are likelier to engage in longer-term strategies (though in different ways, as we will see).

Financing opportunities

The last variable that our research has identified refers to how they raise additional capital (either equity or debt) to purchase new assets, refurbish or renovate the assets owned, or else engage in new development projects. Variable access to capital sources and the liability structure of firms strongly shapes whether and how these actors seize investment opportunities and the type of risk they are able and willing to run (Minsky, 1975).

In this respect, PFs are again unique in that they cannot easily raise equity nor issue debt to invest, first of all, because pension plans rarely receive a large inflow of new money at any point in time. When confronted then with new investment opportunities in property, managers in PFs’ property departments must bargain with the board of trustees to shift capital allocated in other securities (shares, bonds, asset-backed securities, etc.) to their own department. This requires justifying the targeted asset in terms of risk-return in comparison with other investment options in financial markets, and in line with the fund's overall target rate of return and stage of plan maturity. Given the prolonged analysis that precedes a shift in capital allocation within the portfolio of such organizations, PFs often lack the organizational flexibility to take advantage of one-off opportunities to buy up distressed property assets or to swiftly join an investment partnership.

Overall, publicly listed organizations such as REITs and PCs have thus more opportunities than PFs to raise fresh capital for investment. But rules preventing REITs from issuing debt, combined with the dividend distribution requirements mentioned above, means that the latter can only count on new share issues and sales of owned property to raise new capital for investment (Interview B1). This puts REITs at a disadvantage in relation to PCs, which are allowed to issue private bonds in capital markets. More precisely, raising capital by REITs is strongly contingent on the expectations of capital markets. One manager at an asset management firm sums up this difference in terms of the cyclical dynamics of capital markets in relation to property markets:

[…] REITs are at a disadvantage by being prevented from using leverage. And when I see the current scenario, […] I feel like crying. Because there is an opportunity to buy brick [property] at an interesting price, because of all the uncertainty… it is in these foggy moments that good opportunities arise, right? Except that nobody wants to give you money. [And also] because the law requires [REITs] to distribute huge payouts and then you have little cash in balance. The shares are [priced] below [the REITs] assets and issuing [shares with a price] below [what] your assets [are worth] is terrible. So [REIT managers] don’t do anything and just keep looking at that huge amount of property in the market at a reasonable price. […] But they can’t do anything, right? […] So not having leverage is bad for REITs. (Interview A8)

Even though such constraints on debt are unanimously seen as limiting the flexibility of REITs, they are not always regarded as negative by managers in the REIT industry. In fact, managers view them as suitable for a product that is designed for retail end-investors, who are usually wary of too much risk (Interview B12).

In sum, different financing opportunities through a combination of equity and debt means these three investor types face variable limitations and opportunities in terms of risk-taking and in terms of the time frame of their investments. While PFs and REITs currently lack the flexibility of PCs to engage in opportunistic acquisitions during downturns in property markets, they are more protected against the risks posed by excessive leverage.

A typology of investor types in commercial property markets

Our key contention is that these organizational and institutional features—related to management routines, ownership structures, and financing opportunities—translate into distinct business strategies and patterns of investment, summarized in Table 1. In it, we identify six different strategies of property investment that are strongly correlated to increasing levels of risk in investors perception: (1) passive, long-term rental extraction, which refers to the ownership of property for longer periods of time with investment limited to upkeep; (2) passive, short-term rental extraction, which is similar to 1, except that holding times are often shorter to take advantage of property cycles to obtain capital gains through acquisitions and sales; (3) active management for rental extraction, which comprises strategies of substantial expansion and renovation of property assets in order to extract more rent, as well as an attention to property cycles for timely acquisitions and sales; (4) greenfield development for rent, that is, development of new property in order to incorporate it into a portfolio of income-yielding assets; (5) greenfield development for sale, which concerns strategies of development of new property assets for sale to other investors or owner-occupiers; and (6) strategies of short-term capital gains through opportunistic acquisition (often leveraged) of distressed assets. Each of these strategies (second column) is tied to certain institutional and organizational constraints (first column) and, in turn, circumscribes the options available to actors in terms of typical investment products (third column) and investment geographies (fourth column). Furthermore, each strategy positions the players studied in an investment value chain that treats buildings as income-yielding assets.

Table 1.

A typology of investors in Brazil's commercial property market.

	Organizational and institutional constraints	Typical property investment strategy	Investment products	Investment geographies	Notable projects
Pension funds	- Complex and bureaucratic governance limits manager discretion and lengthens decision-making. - Path dependence in organizational structures, as well as managers’ fiduciary duty restrict excessive risk-taking. - Liability structure (pension plans) favors longer-term investments. - Limited opportunities for raising new capital and lengthy decision-making constrain opportunistic investment.	1 (common), 3 (less common)	- Core assets, mainly retail (shopping malls) and office towers. - Expansion and renovation of owned assets (usually malls) using less mature pension plans and when enjoying a majority position in the property owned.	- First-tier metropolitan cores (São Paulo and Rio de Janeiro)	Pátio Paulista (São Paulo)
Listed REITs	- Ownership structure composed of retail, small investors favors immediate revenue-generating strategies. - Strict requirements of dividend payout, along with constraints on leverage, limit funding for substantial new investment.	1 (less common), 2, 3 (common), and 4 (less common, usually big players)	- Core rental assets, including retail (malls), office, logistics, hotels, and college campuses. - Greenfield projects by major REIT players in partnership with an expert firm that holds majority control of the property.	- First- and second-tier metropolitan cores - Metropolitan fringes (logistics)	Edifício Chucri Zaidan (São Paulo)
Listed Property Companies	- Corporate organizational structure gives the CEO/manager more discretion to explore and adjust (at opportunistic times) investment strategies. - Ownership structure composed of institutional investors favors riskier and longer-term revenue-generating strategies. - Permission for leverage allows for more flexibility in investing throughout the real estate cycle.	3, 4, 5 (common), and 6 (less common)	- Large-scale mixed-use projects (usually anchored by the mall) for rental or sale. - Retrofit of obsolete office buildings; niche products (lockers, delivery platforms, etc.).	- First and second-tier metropolitan cores - Medium-sized cities (Malls)	Barra Shopping Sul and surroundings (Porto Alegre)

Source: Made by authors.

Starting with PFs, by analyzing the portfolios of the 10 largest funds we have noted that these actors remain conservative in terms of investment strategies, resulting in long-term holding of property (1) (Interviews A1 and B10), even if they have become more open to advice provided by international consultants that often recommend portfolio turnover (Shimbo et al., 2021). Although they do engage in more active asset management (3), investing in the expansion or renovation of property such as office blocks and shopping malls, this tends to occur when pension plans are less mature (Interviews A1 and A2; PREVI Notícias, 2019a, 2019b) and when they own majority stakes in multi-owner, large-scale projects (Interviews A2, A3, and E1). More often, though, PFs hold a property for the long run, usually more than 10 years, only making minor investments in maintenance without substantially altering the profile of the property. Additionally, investments in property by PFs have targeted mainly the core areas of the two largest metropolitan agglomerations in Brazil (São Paulo and Rio de Janeiro) and have been limited to two key segments: offices and malls. As we saw, this behavior largely stems from constraints on risk-taking and incentives to long-term investment within these organizations, such as their liability structures, their governance rules, the strong path-dependence in investment choices, and the limited opportunities for raising additional capital.

An example of such a strategy (1 and 3) is provided by the investments undertaken by Funcef, a PF sponsored by the state-owned bank Caixa Econômica Federal. The mall Patio Paulista, located in a prime area of the city of São Paulo, is owned by the PF since the 1990s. Recently, it has worked actively to make renovations and expansions in the mall. Between 2017 and 2019, Funcef used part of its new pension plan's reserves to undertake a BRL 500 million expansion of the mall. Together with this investment, the PF inaugurated a waste recycling program that collects and treats organic and recyclable waste. This has ensured that all the garbage produced is recycled and compacted, to help reduce the amount of trash destined for landfills (Funcef, 2015). This example illustrates a common behavior among PF which includes a longer-term vision of property value creation. As we observed, the largest PFs have been keen to obtain green certificates for the buildings they own in order to improve their valuation for the time they plan to sell the property, that is, when the pension plan reaches maturity.

REITs again are more heterogeneous, first because the first generation of REITs, set up before 2010, was made up of single-asset vehicles whose shares were sold to small investors seeking regular returns. In these cases, REITs were rather passive owners (1) that held property for the long run. After 2010, though, most funds were set up with an active-management mandate whereby managers have discretion to buy and sell property, and portfolios are composed of several assets (sometimes of different property segments). As these funds have been established by asset management houses, their management often incorporates financial(ized) rationalities not only expressed by the use of metrics such as discounted cash flow to guide investment decisions, but also by their tendency to regard property as an asset to be bought and sold throughout property cycles so as to extract more value in the short-run (3) (Interviews B5 and B12). A small portion of REITs also undertakes investments in the property owned to seek the “highest and best use” (Interviews D1, B1, B5, and A8). However, this usually occurs when their share prices are higher (Interview B12) and when their end-investors—such as PFs and family offices—require this type of investment strategy when joining an exclusive fund (Interviews D1, B5, B9, and B10). In addition, a few well-established and large REITs engage in the development of new property to incorporate it into their own portfolios (iv), but this strategy is less common overall (Interviews B9 and B12).

Riskier strategies of development or opportunistic acquisitions, represented in Table 1 by 5 and 6, are generally not explored by REITs because the latter still appeal mostly to small, retail middle-class investors who seek regular returns as a way of complementing income from other sources. This means that waiting for an investment in a new project to bear fruit (3 to 5 years) is not interesting for this type of shareholder, while only recently institutional investors such as PFs have become interested in acquiring shares in REITs. The lack of opportunities for raising additional capital adds further constraints to such a strategy by preventing REITs from buying assets or making investments when prices are low. As opposed to PFs, though, REITs are more diversified in terms of (a) segments, with portfolios including offices, shopping malls, logistics, hotels, hospitals, and university campuses; and (b) in terms of investment geographies, with more investments targeting second-tier metropolitan areas such as Belo Horizonte, Porto Alegre, Curitiba, as well as on the fringes of first-tier metropolitan areas in segments such as logistics. This diversification reflects, for the most part, a logic of specialization and scale economies, as new REITs targeting specific market niches have been set up to attract different types of investors. Despite some diversification in terms of sector and location, though, REITs mostly continue to follow strategies 2 and 3, acting preferentially as rent-extractors and investing in buildings that (i) have been recently completed; (ii) have undergone renovation; and/or (iii) are in areas of the city that managers see as potentially attractive to blue-chip tenants.

A typical investment of a Brazilian REIT can be illustrated by the recent acquisition made by Credit Suisse Hedging-Griffo (CSHG), an investment management firm that holds one of the biggest property portfolios in Brazil. From 2019 to 2021, CSHG bought a class-A building named Edificio Chucri Zaidan, located in a core area of São Paulo that recently was the target of a large public–private urban intervention. When the investment took place, the building had just been renovated, including the installation of an antenna tower, a theater, and a newly refurbished floor. In the investment thesis that was publicly shared, the REIT points out that the acquisition of the building was made taking into consideration the transformation of the surrounding area, which now has new lines of metro and buses, and the possible arrival of tenants from the banking and services sector. This example illustrates how REITs in Brazil act preferentially as rent-extractors, investing in new (or recently renovated) buildings and where good tenants are expected.

Finally, PCs are more likely to deploy a broader range of strategies, with much more exposition to risk. This includes development and management of assets such as mixed-used projects anchored by a shopping mall, but also more idiosyncratic strategies such as: retrofitting obsolete buildings (considered risky in Brazil due to the lack of an appropriate regulatory framework); creating property assets with less usual features and uses (e.g., the network of suburban strip malls Best Center, owned by São Carlos); and exploring innovative services and facilities in the properties they own (e.g., developing exclusive delivery platforms for retailers and installing pick-up lockers). It is worth noting that major PCs such as Iguatemi, BR Malls, and Multiplan are also mall operators, thus amassing expertise in both property investment and the management of retail spaces. Specifically, in these projects anchored by malls, PCs also have more dispersed geographies of investment, spreading to second-tier metropolitan areas (such as Porto Alegre, Belo Horizonte, Recife, etc.) and mid-sized cities. As discussed, the tendency to engage in riskier strategies stems from the fact that PCs are corporate organizations owned by professional investors (Interviews B4, C2, and B14) who provide wider latitude for managers to pursue a business plan. Access to capital through bond issuance also provides these firms with more opportunity to finance renovations and expansions, as well as asset acquisitions, throughout the property cycle.

Multiplan's actions in the southern city of Porto Alegre (metro area of 4.5 m inhabitants) provide an interesting example of the typical approach (3, 4, and 5) taken by PCs. In its investment in the waterfront of Guaiba Lake, Multiplan has embraced a long-term strategy of greenfield development combining retail, office, and housing. Its first action was the inauguration in 2008 of a 300,000 m² shopping mall targeting middle- and upper-income households, with established brand names as tenants. This investment was followed by the construction, on the same site, of two high-rise office towers—inaugurated in 2011 and 2015, respectively—and a 23-story residential condominium. While the two office towers have been incorporated into Multiplan's portfolio of rental properties, the residential building was sold to end users. A second phase of Multiplan's transformation of this area began in the 2010s. A stone's throw from the site where now sits the mall and the three buildings, Multiplan had also purchased, in 2009, a 163,000 m² land plot from a horse racing track. Throughout the 2010s, Multiplan worked through the complex bureaucratic procedures of approval for a large-scale residential development comprising 18 high-end buildings facing lake Guaíba, together with several private amenities, such as fitness center, artificial lake, (outdoor and indoor) pools, spa, etc. After obtaining the final approval in 2019, Multiplan started developing the first condominium, comprising 4 residential buildings and expected to be delivered in 2024. The rest of the development will be concluded in phases over the next 10 years (Laurence, 2021). This example illustrates Multiplan's willingness to engage in a range of longer-term, riskier greenfield development strategies rarely deployed by other large players in the commercial property market.

All in all, even though the usual caveats should be made regarding the limitations of any typology as an analytical tool, the interpretation of our empirical material through the lenses of institutional and EEG has allowed us to contextualize the market behavior of the different types of investors in Brazil's commercial property market by connecting particular risk-adjusted investment patterns to historically contingent organizational and institutional constraints. More than that, though, our findings yield insights into the aggregate functioning of the commercial property market in Brazil by suggesting connections between firm-level dynamics, institutional context, and broader market outcomes. For instance, our typology provides evidence of a functional division of labor within the property market that may be interpreted as an emerging investment value chain whereby actors with varying risk profiles and different business strategies collaborate to create and maintain buildings as income-yielding assets (see Figure 1). As we observed, REITs engage more commonly in acquisitions of new (or recently renovated) buildings for rent extraction. For this reason, we can expect REITs to work as important absorbers of property stock shed by the other two large investors—either through new output (greenfield) or through portfolio turnover. Relatedly, we can anticipate demand shocks in commercial property driven, in large part, by surpluses or shortages of demand coming from the REITs. This fluctuation between times of high and low demand will likely be strongly tied to the ups and downs of financial market expectations, as REITs rely predominantly on new equity raised in the stock exchange. Finally, when comparing the business strategies of the actors studied, it is fair to believe that REITs will significantly shape the strategy developed by PCs and, to a lesser extent, also PFs—the first as developers of greenfield property, the second as sellers of property as pension plans mature. These findings were largely confirmed by recent property transactions (buying and selling) involving the actors studied (Brandão, 2020; Brandão & Ryngelblum, 2020; Ryngelblum & Gutierrez, 2019; Valor Econômico, 2019) and by some interviewees when asked about their investment priorities and their relative position within an investment value chain (Interviews B14, B18, and B20).

Figure 1.

Market strategies and the making of an investment value chain. Source: Made by authors.

An additional aspect to be highlighted has to do with the development of new property (greenfield investment). As opposed to what is common across major cities of the Global North, where foreign investment provides a larger share of the money that goes into commercial property markets, our study has focused on a Global South economy where the key investors remain, for the most part, domestic. By shedding light on the restrictions faced by domestic investors in terms of ownership and financing structures, as well as by highlighting organizational path dependences, our study has shown that only PCs, among the largest institutional investors, are willing to develop new projects. There are thus market segments, such as logistics, and investment geographies that are likely to attract foreign capital because they are currently under-explored by domestic actors (Interviews B6, F1, and F2). In this sense, it is perhaps no coincidence that well-known foreign private equity firms, such as Hines, Tishman Speyer, and Brookfield, as well as developers such as Prologis and GLP, and international PFs, especially the Canadian Pension Plan (CPP Investments), have recently made inroads into market niches not explored by the actors studied here (Reuters, 2022; Siila, 2021, 2022; Quintão, 2019a, 2019b, 2021). Also not coincidentally, these international players, being less subject to Brazil's macroeconomic environment, show up strongly in this market when a slowdown of domestic investment is observed.

Implications and conclusion

Over the past few years, a burgeoning literature in urban political economy has turned attention to how financial market actors are increasingly venturing into property markets, with key consequences for urban development. Yet while this scholarship has made considerable progress, it has often overlooked the variations in the market behavior of financial actors by placing them all under the label of “corporate landlords” or “financial capital.” By focusing on three financial investor types, we have shown in this article that such differences in market behavior are not inconsequential idiosyncrasies, but instead touch on critical aspects such as the propensity to take on risk, the time horizon of the investments undertaken, the revenue extraction models, and the preferences in location. Although our typology reflects the context of a single country, with its unique history and institutions, this research nevertheless provides a broader theoretical contribution to the literature on financialization as it shows both the economic and political relevance of better contextualizing market behavior.

At the economic level, our findings underscore the emerging functional division of labor performed by property market investors along an investment value chain that works to create and maintain buildings as income-yielding assets. Understanding this division of labor and its institutional context is relevant both at the firm level and at the aggregate level. With regard to the prior, it provides a better understanding of the expected market behavior of specific investors toward both other market actors—whether and how they may collaborate in joint partnerships; what kinds of projects they are more likely to engage in; what transactions they may be involved in—and toward governments—for instance, how willing they are to take on risk in urban renovation projects proposed by policy-makers. With regard to the latter (aggregate level), our findings may provide a better grasp of the overall dynamics of property markets by distinguishing between different market strategies (greenfield development, passive rental extraction, etc.) and how they may affect the overall supply and demand for commercial property at any given circumstances.

Yet our research also provides clues to understanding these investors as political actors who have distinct interests in policy issues as well as different institutional capacities to exercise political power at various scales. For instance, as actors with a strong interest in long-term development, PCs are usually eager to get involved in municipal zoning laws, land use regulations, and urban renewal projects, as the case of Multiplan in Porto Alegre, has largely confirmed. Contrastingly, the asset management firms that shelter REITs are less concerned with local legislation, as new development is not usually their business focus, and much more with a whole range of regulatory issues that may affect the attractiveness and effectiveness of REITs as investment vehicles, while PFs are also concerned about issues related to the investment constraints and investment requirements affecting their organizations. By tracing the institutional incentives behind market behavior, our analysis thus affords insights that may help researchers understand property investors as political actors with different policy agendas.

Finally, our study opens up possible future research agendas. By understanding market actors as bounded by institutional and regulatory constraints, our research provides elements to explore several understudied dimensions of market competition in property, including innovation, and envisage possible outcomes in terms of urban development. How do these actors along the value chain interact (both collaboratively and competitively) on a day-to-day basis to create and maintain buildings as income-yielding assets? How are smaller, local property actors engaging with this group of large, well-funded investors? Is this growing market power of a small group of large investors limiting the options both of other private developers and of local governments seeking to fund redevelopment projects? Those are a few research questions not directly addressed by this paper which can certainly benefit from our investigation into the diversity of investment practices in commercial property.

Footnotes

Acknowledgments

We would like to thank students Guilherme Muniz Filho, Calvin Borges, Tiago Carbone, Otto Princigalli, and Raphael Reis, of the Universidade Federal Fluminense, for their work in collecting and organizing information concerning the actors studied. We also thank Phil Ashton and Ludovic Halbert for their careful reading and valuable suggestions for improving the manuscript. Finally, we are grateful to the three anonymous reviewers and the editor for their constructive advice on previous versions of the article.

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work was supported by the Fundação Carlos Chagas Filho de Amparo à Pesquisa do Estado do Rio de Janeiro, Conselho Nacional de Desenvolvimento Científico e Tecnológico, and Urban Studies Foundation (grant numberE-26/201.275/2022 - Jovem Cientista do Nosso Estado, Bolsa Produtividade de Pesquisa 2, International Fellowship).

Notes

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