Background: Land investors discover Brazil in early 2000
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In the early years of the 2000 millennium, the Brazilian economy was still a question mark, and was perceived by many as a risky country for real estate investments. In these years, a majority of property investors focused on other markets. Many European markets were witnessing a real estate boom rarely seen before in history, and countries like Spain, Portugal and France saw a very large influx of foreign buyers looking for holiday homes in the sun. Along with the growing popularity, cost of coastal land in these countries increased rapidly as well, and many savvy developers started looking at new areas for land banking investments where they could invest part of their profits.
One of these new areas that caught the interest of property developers was Brazil, and especially the coastline in northeastern Brazil. In those times, foreign developers perceived cost of land in Brazil as very low, and an increasing numbers of foreign developers started to invest in large pieces of Brazilian coastal land for land banking purposes. Many applied for building permissions for beach and golf resorts on the acquired land, and even though some did so with the intention of actually developing future beach resorts, this was mainly done in order to add value to the land.
This "first investment wave" consisting of mainly land banking investors, usually happens in the very early stages when a destination is perceived as having future real estate potential. Brazil has long been seen as a promising future market for holiday home buyers, and the lank banking phase usually takes place long before the actual end user market starts to invest in properties in the area.
In recent years, a "second wave" of land speculation has been taking place, where foreign owned groups have acquired land parcels in mostly deserted areas along the coastline in northeastern Brazil. Typically the land developer splits the land in smaller lots of around 500m2 and markets these for prices that seem appealing to novice land investors with little know-how of Brazil. However, investors are advised to learn about the real market fundamentals before making any investment decisions.
Demand drivers for land in Brazil
Moving on from speculative land banking, most end users buy land in Brazil either for residential living or holiday home purposes. In each scenario the demand driver is the end-user market that has a real need and desire for a property in the area.
There have been several very successful residential plot projects from large developers in Brazil. In these projects the land developer typically sources large land parcels in the outskirts of the state capital, puts in infrastructure and facilities, and then their clients can build villas themselves on the plot. Prices of these plots are usually around 400-1000m2 in such developments, and are often sold for over 50 000 -100 000 Euros. These projects are often sold out long before the first houses have been built. The primary reason these projects sell out so quickly is that they fulfill a "real" demand, as the Brazilian population wants to live in an area that offers excellent infrastructure with easy and quick access to the city.
The second type of end-user who buys land in Brazil does so for building a property for holiday purposes. In this scenario, the end-user is interested in an area that offers a good holiday experience. This often means that the area, in addition to having beautiful beaches and nature, also needs to have infrastructure and amenities in place, like shops, bars and restaurants —otherwise the area will not be appealing to holiday buyers. The primary reason plots sell in these areas is that they fulfill a "real" holiday demand, as Brazilians and foreigners alike, want to have a property in this type of location.
Not all areas fulfill the holiday demand criteria
By studying the coastline along the coastline in northeastern Brazil a bit closer, it quickly becomes apparent that not many coastal areas actually fulfill this real holiday buyer criteria. Many areas in the northeast of Brazil are extremely undeveloped, and offer very little if any, infrastructure. In these areas, it could take well over 10-15 years before progress eventually comes their way, and they actually start to offer some kind of end user real estate demand.
Buying a piece of land in such an area is similar to gambling, as there are too many uncertainties, and it could well be that the area remains deserted for a very long time.
Some areas, though, have taken a different route, and have developed into popular holiday coastal villages with nice infrastructure. Among the most famous ones in northeast Brazil, are areas like Praia da Pipa, Porto de Galinhas, Arraial D’ajuda, Trancoso and Itacaré.
Don’t focus only on cost of land – Think about the potential sales price of a finished property on the land
One of the biggest mistakes many foreign land investors make is that they only look at the price of the land. In order to illustrate this point, let’s look at a very simplified example of two different scenarios:
- An investors buys a 500m2 plot in a deserted beachfront location for 19 900 Euros. He then decides to build a villa of 200m2 on the plot, for a total cost of 500 Euros/m2. Total build price comes out at 100 000 Euros, and including the price of the land, the total amount invested is 119 900 Euros.
- The investor buys a 500m2 plot in an area with an existing tourist market for 50 000 Euros. The plot is not beachfront, but it enjoys a nice setting and is close to the beach. He then builds the same villa of 200m2 for 500 Euros/m2, and the total investment comes out at 150 000 Euros.
Many novice land investors will think the first scenario is a better land investment. The fact is, however, that cheap land tends to be in deserted locations with very little interest from a tourist point of view. The area is probably not very popular, and it is likely that the investor’s house has no appeal to any end-user buyer. In this scenario, the likely outcome is that investor will not be able to sell the house, or the plot, because there is no demand. In this scenario, even though the 500m2 might be bought for 9000 Euros, it still would not be a good investment.
The second scenario is completely different. A 200m2 house in a desirable location will always attract end-user clients, both for sales and rental purposes. Properties in highly desirable locations do not need to be beachfront either, as the area will offer many other attractions. The investor could probably sell the house for a decent profit, as the end-user market sees value in the property because of its location in a highly desirable area.
This is obviously a very simplified example, but it does clearly illustrate the importance of location. Unfortunately many novice land investors tend to only focus on a low purchase price for the land, and they forget about real investment fundamentals.
When buying land in Brazil for investment purposes, it is very important to first ask yourself what makes the piece of land attractive for future buyers. Secondly, it is important to understand why a client would buy the land from you at a higher price than you initially paid.
It is easy to be lured by the cheap land prices being marketed by opportunistic land developers, but this can lead to you making the wrong investment decision. Land investing in Brazil can be very profitable, but instead of searching for cheap land, it is wiser to look for good value in an already popular area with existing end-user demand. Buying Brazilian land in a good and popular area, will assure that you have an exit strategy for your land investment in Brazil.