Brazil has proven to be one of the most resilient countries during the global economic slowdown, however, the country’s once red hot real estate market is meeting resistance. The slow down will surely pass, though, and Brazil will be well positioned to pick up right where it left off. For an in depth analysis of the current state of the Brazilian real estate market, read the following article from Global Property Guide.
Brazil’s massive housing boom has stalled, through no fault of its own. Consumer demand is weakening and export commodity prices are falling, due to the global slowdown. Brazil’s economy contracted 3.6% in Q4 2008 from the previous quarter.
![filekey=|3126| align=|right| caption=|| alt=|House|]From 2006 to mid-2008, property developers in Brazil witnessed enormous increases in launches and sales. Strong lower and middle class residential property demand fuelled a construction boom.
Economic prosperity ushered in by President Lula da Silva’s government led to rising incomes and lower unemployment. Financial market reforms created a new housing finance system, allowing households to turn their higher incomes into mortgage payments.
However in 2009 Brazil’s economy is expected to contract by around 0.5% – at worst. At best, the economy is expected to grow by less than 1%.
Developers are canceling or suspending projects, due to rising pre-sales cancellations.
- Cyrela, Brazil’s largest developer, and its partners have reported a 75% drop in pre-sales, from BRL2.2 billion (US$990 million) in Q4 2007, to BRL566 million (US$249 million) in Q4 2008.
- Gafisa, Brazil’s second largest developer, has cancelled projects worth around BRL241 million. Pre-sales by Gafisa and its partners have dropped 8% to BRL607 (US$268) million in Q4 2008, from the same period in 2007.
![filekey=|3127| align=|right| caption=|| alt=|Cyrela Pre Sales|]Nevertheless Brazil’s developers are still optimistic that the current crisis is only a hiccup. Substantial pen-up demand still exists in Brazil, Latin America’s largest economy. Developers are also relying on a projected government plan to help build 1 million houses for low-income families.
After his re-election in 2002, President Lula announced a “growth-acceleration package”, including US$236 billion housing and infrastructure investments over the next four years. Despite the global crisis, the government is still continuing to address the country’s housing deficit, estimated at around 7.5 million housing units.
Around 83% of Brazil’s 195 million population live in urban areas. The metropolitan area of Sao Paolo has a population of more than 27 million. The state of Rio De Janeiro has a population of more than 15 million.
Brazil has Latin America’s highest level of inequality. This is very visible in the favelas on the hilly outskirts of Rio de Janeiro and other cities.
![filekey=|3128| align=|right| caption=|| alt=|Population|]Favelas are named after the squatter settlements on the hill Morro da Favela, near the centre of Rio. It is estimated that about one-third of Rio’s population lives in favelas. The situation is the same in other major cities, such as Brasilia and Sao Paolo; perhaps 40% of the cities’ population lives in these squatter settlements.
Home ownership is at 75%, with only about 14% of the 42 million housing stock rented. But around 85% of all homeowners live in low quality, self-built, single-room housing units.
Responding to demand
A look at projects by Cyrela provides a glimpse into the market’s direction. Cyrela is the clear leader of Brazil’s highly fragmented real estate market, with a 10% market share in Sao Paolo, and 25% share in Rio de Janiero.
In response to overwhelming demand, developers like Cyrela have shifted from luxury and mid-high -end projects, to the “economic” segment, i.e., to low- end buyers.
Out of the 10,348 units launched during H1 2008, 4,721 units (46%) were for the economic segment, while 870 units (8%) were for the super-economic segment.
![filekey=|3129| align=|right| caption=|| alt=|Projects launched|]On the other hand, 1,678 units (16%) were for the middle segment, 1,912 (18%) for the mid-high and 1,167 units (11%) for the luxury segment.
In comparison to 2006, out of the 5,822 units launched by Cyrela, only 11% were for the economic segment (629), while 48% was mid-high (2,771), 37% for the middle segment (2,132) and 5% for luxury (290).
Lula’s pro-market reforms have greatly helped expand Brazil’s mortgage market. The first big break was the government’s approval of fiduciary alienation, whereby the buyer becomes the owner of the property only after it has been fully paid. The bank or lending institution holds ownership of property, while the loan is being repaid.
This gives banks security, if buyers default. In the past, banks were reluctant to lend to households, because Brazilian courts were biased in favour of borrowers.
As a result, housing loan terms have become more favorable to borrowers:
- Loan terms have lengthened to 30 years, from 10 to 12 years.
- Interest rates on housing loans offered by banks have fallen to 13% to 14%, from around 16% in 2005.
- Government-owned housing institutions now offer loans at 12% interest, payable over 30 years.
The amount of housing loans is still very small, at 2.2% of GDP in 2008, up from 1.4% of GDP in 2005. However, financial system credit for housing more than doubled from BRL29 (US$12.9) billion in 2005, to BRL 63.27 (US$28) billion in 2008.![filekey=|3130| align=|center| caption=|| alt=|Financial System Credit|]
Cashing in on the boom
Lack of transparency makes property investing difficult in Brazil. There are no official statistics on real estate prices and transactions. The Brazilian Institute for Geography and Statistics (IBGE) does not even have official data on construction output or dwelling permits. Even international real estate firms have no estimates of residential real estate prices.
What can be gleaned from Cyrela’s quarterly earnings releases are average prices based on presales divided by income segment. Average prices are either highly erratic or relatively flat through time. This can be expected in an immature market with a large amount of new supply.
![filekey=|3131| align=|right| caption=|| alt=|Avg Price Pre Sold|]With massive new supply still expected to enter the market, most foreign property investors invest indirectly by buying shares of major property developers such as Cyrela, Gafisa, Rossi Residencial SA, MRV Engenharia e Participacoes SA, Tecnisa SA, and Klabin Segall SA.
Though the crisis has halted the rise of Brazil’s homebuilders’ share prices, their performance has been better than the rest of the stock market.
Increased foreign interest
The lack of quality supply in key cities makes owning-to-rent viable in Brazil. Penthouses in Sao Paolo earn up to 8.4% annual rental yield, while apartments can earn up to 7.65%, according to Global Property Guide research.
Rental yields on apartments in Rio range from 5.7% to 7.34%.
Some analysts note growing foreign demand for second homes in Brazil. Antonio Montes, a business professor at the Instituto de Empresa in Spain, notes that around 5% of the 7 million tourists visiting Brazil annually, say they want to buy a second home there.
Foreigners still make up a small portion of property buyers in the market, possibly because of restrictions on foreign property ownership in Brazil, which include restricted areas, and limited property sizes. Foreign nationals need the approval of the Brazilian government when acquiring property.
Lula, the reformer
The election of left-of-center Lula da Silva, a fomer union leader, in 2002, brought fears that he would embrace a socialist agenda similar to other countries in the region.
Instead, he introduced a pragmatic approach that combine the free market with social support for the poor and workers – similar to a European social democracy.
His reforms of government spending led to a budget surplus, within the first two years of his term, lowering Brazil’s credit risk.
![filekey=|3132| align=|right| caption=|| alt=|GDP Growth|]Sound economic management has led to falling inflation and foreign debt. After weak 1.15% growth in 2003, the economy grew by an average of 4.5% from 2004 to 2007, in sharp contrast to the average annual growth of 1.7% from 1998 to 2002.
The government also launched Bolsa Familia, a family grant programme for poor families that has helped more than 44 million people. The minimum wage was also modestly raised, at above-inflation rates.
Government efforts to make Brazil energy independent in 2006 paid off when global oil and energy prices skyrocketed in 2007 and the first half of 2008. Inflation slightly rose from 3.6% in 2007, to 5.7% in 2008, but this was far lower than the 14.8% inflation seen in 2003.
![filekey=|3133| align=|right| caption=|| alt=|Inflation|]The global economic slowdown dented Brazil’s economic ascent. GDP growth slowed to 5.3% in 2008. The economy is expected to contract by 0.5% in 2008 before recovering in 2010, with economic growth of 3%.
Yet developers remain optimistic, believing that the recession does not diminish the housing deficit. Luckily, the government is with them, and plans to implement a stimulus plan, which includes additional lending, and subsidies for homebuyers.
This article has been reposted from Global Property Guide. You can view the article on Global Property Guide’s international residential real estate website.