Prologis' Controversial Acquisition: Reviving São Bernardo do Campo's Stalled Land Raises Questions and Challenges

After a three-year period of inactivity, the land that previously hosted the Ford factory in São Bernardo do Campo has been successfully acquired for R$850 million by the American company Prologis. This purchase marks a significant development in the trajectory of the once-stalled property, shedding light on its revival under the ownership of Prologis.

Armando Fregoso, SVP and Country Manager of Prologis in Brazil

By: SiiLA News

01/17/2024

After three years of stagnation, São Bernardo do Campo's esteemed 'trophy asset' has found a buyer in the American company Prologis. The acquisition, amounting to R$850 million for the land that once housed the Ford factory, was announced in a relevant disclosure by SJ AU Logística (owned by Credit Suisse, FRAM, and Vortx) and BTG Pactual, who owned 75% and 25% of the asset, respectively.

Often deemed a challenging undertaking, this expansive land, spanning over 1 million square meters, initially held the promise of becoming a vast industrial complex with 451,000 square meters of Gross Leasable Area (GLA). However, the project remained stagnant for years, hindered by approval processes and financial viability, according to an internal source, that was interviewed by the REsource team.

Despite multiple attempts to resell, the property was offered for swap to various real estate companies. Yet, several factors prompted a retreat, including environmental liabilities discovered on the land, R$20 million in annual maintenance costs, and, despite municipal approval, a lack of endorsement from CETESB (Environmental Company of the State of São Paulo). Given the project's size and complexity, this absence of approval could impede progress until all relevant agencies reach a consensus.

When asked about the acquisition, Prologis opted not to comment, stating, “Prologis informs that, at this time, it will not comment on the subject in question. We reiterate that official information on the topic will be disclosed when possible”

Troubled Past

In 2019, the automotive giant ceased operations at its factory, resulting in the mass dismissal of 1,350 employees. By January 2021, Ford officially ended all its operations in the country.

In 2020, a BID (bidding) took place, and the vacant space caught the interest of Construtora São José. The company quickly acquired the property with a commitment to pay R$550 million within a short timeframe. However, the payment never materialized, prompting Credit Suisse to step in as a co-owner alongside BTG Pactual. At that juncture, the envisioned investment reached R$1.2 billion, with the project spearheaded by PiB Incorporadora.

Initially touted as one of the largest developments in the Grande ABC market, the project aimed to encompass the refurbishment of existing warehouses and the addition of an entirely new area. Although the first phase was initially slated for completion in 2021, three years later, it remains mired in the study and approval phase, as indicated by the latest management report.

The original plan outlined 11 warehouses in an expansive area of 451,890.90 square meters. However, due to exorbitant costs, the plans underwent modifications. According to an insider source, faced with limited alternatives, the owners found selling through a swap to be the most viable option.

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Behind the Scenes, Problems, and Doubts

The interviewed source, an expert in the real estate field, divulged exclusive insights into the transaction. Four major companies, including Prologis, were part of the potential buyers exploring the development.

However, obstacles such as the lack of approval from CETESB, environmental liabilities, and the project's substantial costs prompted them to withdraw. The expert noted that the R$850 million valuation for the land alone is exceptionally high for this kind of development. “To achieve a return at a yield of 10%,11%, the average asking price should ideally be R$40 per square meter”.

Market Analytics data indicates that the Grande ABC region, housing the asset, boasts an average asking price of R$30 per square meter. Consequently, the asking price per square meter needs to be 33% higher than other comparable assets for the project to be economically feasible.

Moreover, the construction cost is anticipated to be significant. Following Prologis' construction standards, a project overhaul is likely, potentially reducing the Gross Leasable Area (GLA) from 450,000 square meters to around 380,000 square meters. This adjustment comes with an estimated average construction cost of R$2,500 per square meter and an all-in cost that could surpass R$5,000 per square meter.

Adjusted for IGP-M, the initial R$557 million purchase is now valued at R$720 million. Despite this increase, the owners only realized a profit of R$129 million, overlooking expenses incurred in demolition, land preparation, and annual costs totaling R$20 million over the past three years.

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