Alpaca Primer: The PropTech Landscape in Latin America
Authors: Daniel Fetner, Ryan Freedman & Alex Petrescu
At Alpaca, we define ourselves as investors seeking to back disruptive and impactful businesses that intend to reshape markets through innovative technology-based solutions. While we have traditionally focused on the US, we have recently begun to dive into the PropTech landscape within Latin America (“LatAm”), a neighboring region serving as a vital piece of the global economy and whose importance is growing each day. Over the last several months, we have spent time conducting research and speaking with LatAm-based founders and investors to kickstart our journey into the region.
Setting the Stage: Real Estate in LatAm
When people think of Latin America, they often associate it with tourism and leisure. Unsurprisingly, hospitality has played a key role in LatAm’s real estate market over the years, developing into a more mature asset class with institutional capital backing many projects to capture strong global demand. Interestingly, the longstanding success of hospitality in LatAm has given rise to a perception that the subsector is a “solved prblem” resulting in less of a focus on PropTech solutions.
Meanwhile, residential real estate has experienced quite different dynamics. We believe the residential sector has been historically burdened with a lack of management prowess and financing options. In particular, rental properties’ lack of sufficient management has translated into lower rental rates and ill-maintained inventory. Despite the fact that over 80% of LatAm’s population lives in urban areas, real estate firms have yet to properly capitalize on this demand. It’s the opinion of our team that this leaves the region incredibly fragmented without a dominant player in the industry.
Industrial real estate has experienced tailwinds akin to other global markets due to the rise of e-commerce since the COVID-19 pandemic. Near-shoring operations to Mexico from China is also a relatively recent phenomenon for companies to reposition their supply chain for tax and geopolitical reasons. As investors seek to strategically allocate capital to the subsector, Mexico’s geographic location and incorporation in the US-Mexico-Canada Agreement (USMCA) is a comparative advantage compared to other Latin American countries.
Lastly, the office subsector has gone through similar trials and tribulations since COVID-19 as other geographies as remote and hybrid work no longer necessitate the same supply as pre-pandemic days. Premium office space has recovered from pandemic lows, driven by IT, startups, and manufacturing companies, due to demand for high-end, amenity-filled working and co-working locations. Nevertheless, this bounce back has not stopped the need for owners and prospective buyers to revalue office real estate across the region due to lasting shifts in demand for space.
The Venture Capital and PropTech Landscape in LatAm
LatAm’s venture capital market is less developed than the US, but there are a number of leading firms based in the region which allocate capital to PropTech. However, PropTech-only funds are extremely nascent and are helping build the investment strategy from the bottom up. Brazil-based Terracotta Ventures, one such PropTech-focused VC, is leading the way in LatAm by investing in startups that have yet to receive funding from larger VCs. Still, larger LatAm VC firms like Monashees (Brazil), Kaszek (Argentina), and BossaNova (Brazil) have backed numerous PropTech startups across LatAm including EmCasa (Brazil), Loft (Brazil, Mexico), QuintoAndar (Brazil, Mexico), Habi (Colombia, Mexico), and La Haus (Colombia, Mexico).
In regards to startups, it’s our opinion that three PropTechs have reached unicorn status based on our findings: Loft, Habi, and QuintoAndar. Another unicorn, Creditas (Brazil) provides FinTech services that can be used for mortgages and therefore can be considered a fourth PropTech unicorn to have emerged from the space in LatAm. The majority of regional PropTech companies provide a marketplace-oriented solution to connect buyers or renters with currently available supply, such as Loft, Habi, and QuintoAndar. This has made it hard for new entrants to become a leader in this space due to over-saturation.
Capital Flows & PropTech Subsectors
Geographically, PropTech capital has far and away been flowing toward Brazilian, Colombian, and Mexican startups. These countries also boast the most real estate tech startups (77 in Mexico, 66 in Brazil, and 51 in Colombia, according to the Latitude LatAm Tech Report, published December 2022), with Brazil alone accounting for 70% of total VC PropTech funding. Following these three countries, Argentina and Chile are fourth and fifth in the total number of PropTech startups, with approximately 30 and 20, respectively, operating as of the end of last year.
As previously noted, residential real estate has been the target of LatAm PropTech startups given the size of the market and the fragmentation of the sector. Particularly since the COVID-19 pandemic (March 2020), residential solutions have received the most funding due to the decline in office demand, increases in e-commerce leading to a fall in brick-and-mortar, the rise of remote work, and the previously low-interest rate environment.
As Latin American countries generally do not have Multiple Listing Services (MLS) equivalents, the focus on marketplace solutions can be explained by a need to fill this wide gap in the market. While not all countries within the region have been addressed by current players, the infrastructure that has been built in Latin American countries provides the basis for future expansion and potential consolidation with emerging startups in new geographies.
Given the oversaturation of residential marketplace solutions, other PropTech solutions will likely penetrate the market in short order. For example, startups that operate in the FinTech/real estate space who can provide attractive financing options in a region where financing is significantly less sophisticated than the US will likely become more prevalent. Creditas, CredPago, CrediHome, and Arrenda are some examples of companies operating in this space.
Property management is another area that has experienced tailwinds in the region due to a need to formalize management within multifamily apartment buildings that have been historically owned by individual investors. Companies like Yuca in Brazil are seeking to partner with real estate owners to provide such management services.
LatAm Specific Deal Attributes
Latin America presents various nuances within its macro environment, local market dynamics, and financing landscape that differs greatly from the US. As we venture south of the border to potentially capitalize on PropTech opportunities in this robust region, we will need to be attuned to certain specific deal attributes that, in our opinion, vary from our standard practices at home:
- Exchange rate fluctuations vary by country and can have a meaningful effect on business performance, particularly as funds often raise in USD.
- Financing is much less sophisticated than in the US and is traditionally only done through larger banks. These banks underwrite real estate transactions, whether for a construction loan or permanent loan on a fully leased building, in a similar manner. Lenders force consumers to adopt high-interest rates and often refuse to lend on high-risk projects.
- Consolidation in the region has been a consistent theme of due diligence calls with startups and investors. Because there is a lack of institutionalization of residential real estate in LatAm, companies that can pursue successful M&A strategies to expand geographically will better position their solutions to scale.
- Legal and regulatory policies vary across LatAm countries and can make new development difficult and put a premium on existing supply, particularly in major urban areas.
- Fragmentation is a major feature of the LatAm real estate market, with information availability scarce to consumers, layers of bureaucracy, and a mix of regional and international players.
- Consumption patterns in LatAm have remained stronger among high-income people, while the bottom 90% of the region’s population’s consumption share is in line with Sub-Saharan Africa and not other developing regions, according to findings from the McKinsey Global Institute.
Final Thoughts
We’re just starting our foray into Latin America. As we focus on educating ourselves on the region and its PropTech landscape, we are very early in our journey. Although we have significantly more diligence to do before implementing a LatAm-specific investment strategy, we see a large macro opportunity to deploy capital in an underinvested sector of the region’s economy. With the IMF projected GDP growth in Latin America and the Caribbean to exceed that of the US in both 2023 and 2024, we will continue our work to refine our thoughts and sharpen our pencils around the region’s PropTech landscape in order to best capitalize on this exciting space.
If you have any questions or would like to chat about LatAm’s PropTech landscape, please feel free to reach out.
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Disclaimer:
Alpaca VC Investment Management LLC (“Alpaca VC”) is a U.S. SEC registered investment adviser. Statements contained herein do not constitute an offer to sell or a solicitation of interest to purchase any securities or investment advisory services in any state or in any other jurisdiction in which such offer or solicitation is not authorized. Companies mentioned are for reference only and Alpaca VC has no business relationships with any company referenced in this article as of the date of this article.
