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Latin America’s economic growth story

View of Miraflores , Lima - Peru

Despite declining commodity prices, Peru’s dynamic market is still attractive for foreign investment, as Cityscape discovers.

April 2015

Peru remains one of Latin America’s fastest growing economies. According to the World Bank, the country has a favourable external environment and prudent macroeconomic policy, and has undergone deep structural reforms which combine to support high growth and low inflation.

According to the latest JLL report on the country, 2014 saw some headwinds in the form of declining commodity prices and a slowdown in China. With commodities contributing 70% of Peru’s exports, and with China buying around 30% of all exports, the ripple effect has been felt. With an annual growth rate of 2.6% in 2014, its lowest in several years, Peru still compares favourably to its Latin American neighbours.

Experts maintain that the country is still attractive for foreign investment due to the continued economic growth shown over the past 10 years, as well as the stable legal conditions.

“Foreign investment is expected to remain sizeable and will be able to finance much of the current account gap. Interest rates are likely to be kept at 3.5% to stave off more inflation induced by the depreciation of the Peruvian Sol,” says the JLL report.

OFFICE MARKET

Peru’s economic growth is attributed to Lima, which has grown exponentially over the past few years. JLL estimates approximately 1,200,000 sqm of prime office space in the capital city, half of which has been built after 2009.

Currently, the demand for prime office space (class A+ and A) is mainly composed of companies already established in the city, both domestic and foreign, says Sandro Vidal, Research Manager at Colliers Peru. “Economic growth in recent years had a positive impact on business; this has increased the number of employees, requiring more office spaces with better benefits. These were the main factors that have driven the ‘quantum leap’ in simple living offices to move to corporate buildings,” he says.

Peru continues to remain dynamic with new supply entering the market. However, while it is a dynamic market, new buildings are being absorbed at a slower rate than last year, says Scott Figler, Americas Consultant at JLL.

According to Colliers, the prime office segment will receive approximately 200,000 new square metres of stock this year, but the sales velocity rate has decreased compared to previous years. “Under this scenario, vacancy will continue to increase (8.4% to date) and rent prices are stabilising in some sub-markets and adjusting downward in others,” Vidal explains.

DRIVERS & CHALLENGES

While Lima’s office market is dominated by companies involved in the extractive industries, JLL identifies secondary goods companies such as pharmaceuticals, consumer products, and financial services as being the fastest growing demand segment.

Figler of JLL explains that developers and investors are concerned about falling commodity prices which may impact the office sector.

“This is because many of these companies will be scaling down or at the least not growing in Peru as previously planned. In addition, there is a huge financial service and consumer products segment of the market, but extractives are what dictate the macroeconomics of the country,” says Figler.

Experts also maintain that Peru’s commercial market is disproportionate because it is concentrated in the capital city of Lima. “Lima’s market is peculiar in the sheer growth it has seen, effectively doubling over the last few years and primed to nearly double again over the next three years,” says Figler.

According to the JLL expert, investors are now showing interest in the industrial sector due to concerns about oversupply in the office sector in the medium term.

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