International investors that have made big bets on Brazil real estate have no illusions that the Olympic Games that begin on Friday will do much to shorten the grueling marathon the country’s economy is running.
But some say there is one emerging bright side to Brazil’s prolonged recession, corruption scandals, ailing currency and political crisis: Distress levels for some property owners are reaching the point that they are selling at steep discounts.
The latest sign of this: Blackstone Group LP is in talks with listed real-estate company JHSF Participacoes to buy a 50% stake in five of the company’s malls in a deal that would value the portfolio at more than two billion reais ($620 million), according to people familiar with the matter. JHSF’s shares have been trading at below one real, compared with more than four reais in 2012 and it has been under pressure to reduce debt.
Last year, private-equity firm GTIS Partners took private Brazil Hospitality Group, one of Brazil’s largest hotel owners, in a $400 million tender offer, or about 35% of replacement cost. GTIS took advantage of the company’s low stock price and the pressure it was under from an activist shareholder, said Tom Shapiro, GTIS co-founder and president.
GTIS is now looking to do deals with capital-starved home builders who aren’t able to finish projects because sales have plummeted. “It takes time [for them] to realize their problems as we all know,” Mr. Shapiro said. “So it’s taken time for asset prices to reset.”
Other big international investors that have been active in Brazil include Brookfield Property Partners LP, Tel Aviv-based Gazit Global, Tishman Speyer Properties and Sam Zell’s Equity International. Executives at these companies say they expect demand for office buildings, condominiums, stores and other property to remain weak, making it tougher in the short term for foreign investors to produce the north-of-20% returns expected in the high-risk world of emerging-market real estate.
But the current search by many of these investors for deals underscores how doubling down plays an important role in emerging-markets strategies. Building operations in these countries positions them to take advantage of the bargains that materialize during down cycles, they say.
Tishman Speyer, a global investor and developer that has been in Brazil for two decades, made some of its most profitable deals in Brazil in 2002 after  Luiz Inácio Lula da Silva was elected president raising concerns about the country’s economy, according toRob Speyer, the firm’s chief executive. “You have to have the stomach for moments like this,” he said.
Gazit’s Brazil unit recently was able to turn a quick profit by buying a 5.16% stake in BR Malls Participacoes SA when the company’s stock bottomed out last year. Since then BR Malls’ shares have risen. Gazit announced last month it had reduced its stake to below 5% and used the proceeds to finance most of its 153 million reais purchase of Top Center Shopping, a mixed-used property in São Paulo.
“Retailers could benefit from foreign-exchange weakness as Brazilian consumers travel less and shift purchases to the local market,” said Mia Stark, chief executive of Gazit Brasil, in a written statement.
To be sure, some foreign investors aren’t happy with their Brazil experience. For example, Related Cos. ran into a massive legal delay with one of its two residential investments because of disagreements among different government branches over policies and permits.
“We had tried development and exploiting our knowledge into foreign markets…first we went to China and then Brazil,” said Stephen Ross, Related’s chairman at an investment conference in March. “I gotta say, those didn’t work out well.”
Meanwhile executives at investment firms that opted against expanding into Brazil say they don’t regret their decisions. They point out that the decline in the real, from over 60 cents versus the U.S. dollar, to about 30 cents, has been devastating for investors who bought property at the peak from dollar-denominated funds.
“There is more downside risk” in a country facing “a prolonged recession” and political instability which is “the new norm,” said Ralph Rosenberg, global head of KKR’s real-estate group in an email. “As a global dollar-denominated investor we see better risk adjusted value in other markets.”
Most investors who have been active in Brazil point out that they have taken steps to insulate themselves from downturns. For example, Tishman Speyer owns an office building in Rio de Janeiro that is mostly empty. But it developed the building with all equity so paying monthly debt service isn’t a problem.
“We have the luxury to be patient and to think long term,” Mr. Speyer said. “We wouldn’t invest any other way.”
Also, investors point say there are signs that the Brazilian economy has hit bottom. For example, the foreign currency has rebounded, with the real now worth about 30 cents up from 25 cents last year.
Mr. Zell, who has been looking at “interesting opportunities” in Brazil, said the political situation has improved since this spring when President Dilma Rousseff was suspended and ordered to face an impeachment trial.
“I think things are more stable today than they were, but I don’t think I’d want to take that stable to the bank,” he said.

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