Zell's Equity Int'l eyes Brazil home builders

By Herbert Lash

NEW YORK, Aug 19 (Reuters) - Billionaire real estate mogul Sam Zell, who built a fortune investing in distressed property, sees opportunity in the beaten-down shares of Brazilian home builders and plans further investments in Brazil.

Zell's international private equity arm, Equity International, is betting that a consolidation of Brazil's overcrowded publicly traded real estate sector will unfold by mid-2009 or early 2010.

Realty was a major focus of Brazil's recent boom in public stock offerings, but too many companies entered the sector, Gary Garrabrant, Equity International's chief executive and co-founder, said in an interview. Many have since seen their shares plunge and investors are demanding better performance.

Equity International, through its stake in Brazilian home-builder Gafisa (GFA.N)(GFSA3.SA), hopes to pick up land when the shake-out squeezes management that cannot deliver.

"We're watching three or four of those through Gafisa. Because we believe over the next, call it 12 to 18 months, there will be a consolidation phase that begins," said Garrabrant, who also is chairman of the board at Gafisa.

"We've actually received calls, it's fascinating, from two or three founder CEOs, who are -- I don't want to say waving the white flag -- but are pulling the white flag out of their pocket," he said. "I don't know how long it will take for them; I don't know how big the flag is."

Equity International has stakes in four Brazilian companies, and Garrabrant said his goal is to have eight.

Many of the founders behind the new public realty companies, while highly entrepreneurial, were ill-prepared to deal with the level of disclosure investors demand, he said.

"As they get punished, they are now deprived of equity and debt capital. And that freezing out is now sweeping, call it the bottom third," he said.

Trisul (TRIS3.SA), EZ Tec (EZTC3.SA), Inpar (INPR3.SA) and Helbor (HBOR3.SA) are among the realty-related companies whose stocks have plunged between 40 percent and 80 percent since they went public in 2007, the height of the boom in initial public offerings.

Zell, known as the grave dancer because of an article he wrote 30 years ago about picking through the bones of distressed properties, is big on Brazil, so much so, Garrabrant said, that both had broken pledges to not promote the country.

Equity International sees an opportunity in specialty finance, either the introduction of securitization or other financial engineering, Garrabrant said.

There is a need for servicing of receivables and related work -- collection, documentation, investor reporting -- said Norton Bastos, an analyst at Moody's Investors Services in Sao Paulo.

Brazil is a beacon for realty investors because of pent-up demand among a population of 185 million and a housing shortage of 7 million to 8 million. About two-thirds of money that was raised during the IPO boom was foreign, mostly American.

One-quarter of the companies that went public and the $28.4 billion that was raised in 2007 came from real estate, excluding the year's two biggest IPOs -- the Bovespa stock exchange and the BMF commodities and futures exchange.

Investors believe Brazil will outstrip Mexico in size, demand and investor return. Mexico has been the poster child this decade for investing in emerging market home-building.

While Brazil's potential is impressive, there are hurdles. The securitization of residential mortgages, a key for funding home building, is almost nonexistent. Banks must invest 65 percent of money held in savings accounts in real estate, limiting their willingness to securitize, Moody's said.

Ignacio Goni, head of Latin America research at Riedel Research Group Inc., said it may take four or five years to see the winners and losers in Brazilian real estate.

"It's very hard to predict which are going to be the winners, which are going to be the losers, which will eventually have the capital to consolidate and which strategy will make the most sense," Goni said.

"I am sure that somebody is going to make a lot of money. I don't think anybody knows who, at this point," he said. (Editing by Leslie Adler)