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NATAL, BRAZIL—Most real estate investors with designs on Brazil have focused on popular southeastern hubs like Sao Paulo or Rio de Janeiro. But the northeast region—relatively obscure to foreign investors—is emerging as a growth market ripe for hotel and residential development.

“There are so many facets that support investment in the northeast,” said Martin Bellamy, chief executive of London-based Salamanca Capital, during a press conference kicking off the Association for Real Estate and Tourism Development’s (ADIT) 2010 Nordeste Invest conference here on Monday. “Besides its diverse industries, this area has a lower barrier to entry than Rio or Sao Paulo, where competition is fierce.”

Bellamy was among some 1,300 international and local investors who converged on Rio Grande do Norte’s capital for a three-day event to draw private equity to Brazil’s burgeoning commercial real estate market. Of particular interest for many participants has been the fertile investment ground of the northeast region, which is witnessing 7% economic growth, according to the ministry of tourism.

Much of that growth—almost twice the rate of the rest of the country—is the result of government-sponsored tourism initiatives, pouring more than $736 million into infrastructure and transportation projects to support the industry. This has spurred job growth in the region as well as a mushrooming middle class.

Local property players have been targeting this upwardly mobile demographic with a spate of new high-rise residential towers, spotting the coast of the tropical locale. For its part, Salamanca—with commercial real estate investments in Europe and China—has teamed with local developer, Ecocil, to construct 25,000 residential units throughout the northern state within the next five years.

But Bellamy, like so many other foreign investors, expressed great interest in what he sees as an underserved hotel market. By the ministry of tourism’s estimates, there are about 42,000 hotel beds in the northeast, reflecting a steady 4% rise in rooms over the past decade. This roughly equates to one or two hotels a year.

“There are no international hotel operators in Natal,” related Bellamy, who is looking into the logistics of such a deal. “The city could benefit from an international brand hotel, something like a Hilton, serving business or leisure travelers.”

A number of international flags, such as the Ritz Carlton, are said to be eying Natal for new lodging, but no official agreements have been made, according to Hermano Carvalho, director of the financing and investment promotion department of the Brazilian Ministry of Tourism.

International investors, such as Orlando’s EuroVest Partners and Bridge Rock Capital of Coral Gables, FL, are also looking for local partners to develop or acquire resorts in the region. Traditionally, Brazilian hotels have been developed through a condo-hotel type of structure, whereby investors purchase a unit or floor of a lodging pre-development. Independent operators are then charged with the care of the entire project upon completion, similar to a management company in a cooperative.

Many investors at the conference balked at the idea of pooling their money into such a scheme because of the minimal control they would have over the hotel. With a nascent capital markets and limited private equity, these kinds of club deals have become an investment standard. But an influx of foreign capital could change the tide.

One strong selling point for foreign hotel investors is Brazil’s role as host for the 2014 World Cup—many of the games will be played in Natal. This is likely to draw international fans as well as local soccer enthusiasts to the region. The ministry of tourism is forecasting an increase of 55,000 to 60,000 new hotel rooms.

“In a city like Natal, where a very strong part of the economy is based on tourism, the World Cup will have a very positive impact,” said Marcelo Freitas, chief financial officer of Ecocil. But the question is whether demand will be sustained once the soccer stars have packed up and headed back to their home countries.

Carvalho rejected the idea that Natal will go the way of many other host cities that see real estate demand taper off post-event. “The demand in tourism has been growing independent of the World Cup because of the middle class in Brazil,” he said.

Nevertheless, the Brazilian government is scrambling to finish a handful of infrastructure projects, including a massive airport in Natal, to support the event. Despite having a local airport, Natal is not quite equip for a flood of fans.

“One of our biggest concerns is can infrastructure in Brazil keep pace with the growth aspirations of the country,” said Bellamy. “Everybody knows the potential of Brazil, but there are going to be some challenges.”

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