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Brazil
2009 – 2010 “Brazil has more than US$200 billion in reserves and is therefore protected from turbulences in the financial markets”
-Brazilian President, Lula da Silva
Introduction
Brazil offers international investors a unique opportunity as one of the worlds fastest growing economies, even during these turbulent times. With over 185 million inhabitants and forecast as one of the world’s future economic superpowers, Brazil is an increasingly attractive investment.
Top 10 Brazil facts to know:
1. 85 million people represent Brazil’s Middle Class, an increase of 37% in 2 years
2. Middle Class housing deficit exists of between 8 and 10 million homes
3. Domestic Mortgages now available for first time in 25 years
4. Mortgage lending expected to grow 600% by 2014
5. Up to 1 million properties are predicted to be purchased per annum to 2015
6. Protected against global recession with over $200 billion in reserves
7. Best performing of the 4 BRIC emerging economies with Russia, India and China
8. Worlds 10th largest economy & predicted to reach number 5 by 2035
9. Almost $1 billion invested in infrastructure over past 2 years
10. Trade surplus averaging at $40 billion per annum
Overview of Brazil
Covering an area of eight and a half million square kilometers, Brazil is the fifth largest in the world after the Russian Federation, Canada, China and the United States. Brazil is the sixth most populous country in the world, its population is approximately 185 million, and is young, with a mean age 29 years. Only 6.2% of the population areover 65 years old.
Brazil is a beautiful country with fantastic scenery and beaches. It is considered low risk in respect of war, terrorism, SARS or hurricanes. Brazilian people are friendly and cheerful. Cities in Brazil are vibrant and exciting with carnivals and music. The sun shines all year round with average all year round temperatures of 23-35°C (73-91°F). Flights operate daily between North America, Europe and Brazil. New routes are opening upon a regular basis making the region increasingly accessible.
Economic Security
Deep international reserves: Even in the current international financial environment, Brazil has built enough international reserves to continue sustained growth. The diversity of resources and its enormous internal market has enabled self sufficiency.
Investment grade status: Standard & Poor’s has granted Brazil the ‘Investment Grade’ status in April 2008
Leading BRIC Economy: According to the 2003 Goldman Sachs report, Brazil is one of the nations (along with Russia, India, China – the so called BRIC economies) with the potential to become world dominant economies with a good chance of turning that promise into reality.
Enormous potential: London-based economist at Lombard Street Research Ltd, Maya Bhandari, points out that Brazil has enormous growth potential underpinned by vast natural resources – it is self sufficient in oil and natural gas, has large labour pools, potentially huge middle-class consumer sectors and the specter of big rates of investment in the future.
Economic powerhouse: Brazil has ten neighbours and local trading partners and is politically stable. Currently, Brazil is the world’s 10th largest economy with US$1,3b GDP – half of the total of Latin America, and is aptly considered the economic powerhouse of the region. President Lula has brought huge improvements to Brazil and was re-elected for a second term in power.
Low Inflation: Inflation is at an all time low, as are interest rates and foreign investment is actively encouraged.
Sustainable growth: With their 4.7% GDP estimated growth per annum and an average of 4.6% inflation – well within the Central Banks target rate, Brazil is heading for long term sustainable growth even at a time of a global financial crisis, as the source of growth is domestic, rather than international.
Healthy Trade Balance: Since 2003, Brazil has recorded trade surpluses and currently standing at over $40 billion yearly. Brazil is the world leader in ethanol-fuelled vehicle development and technology; it is the 10th largest motor producer and home to major car manufacturers such as; Fiat, General Motors, Mitsubishi Motors, Hyundai.
Natural Resource Reserves: Brazil is rich in natural resources, such as oil (new oilfields discoveries in 2008 place Brazil as a leading oil producer), natural gas and 22% of the land area is highly fertile for mass production of coffee, soya beans, oranges and tobacco.
Manufacturing leader: Brazil is the world’s largest producer of coffee beans and orange juice and the second largest producer of mobile phones, executive jets and helicopters. Good economic performance has encouraged many major international businesses to produce their goods in Brazil at a fraction of former costs.
Infrastructure Investment: While $670 million was invested in infrastructure during 2007 the next phase is reported to be $400 million (The Economist). This is to include 8 new airports (including a major new airport in Natal), national roadway improvements, and environmental preservation and heritage sites.
Job creation: By the end of 2007, 1.8 million jobs were created as prosperity levelsrise (Banco Central do Brazil)
Favourable currency: At time of writing, currency is favorable at the moment making it cheap for foreigners to invest and buy property. The days of economic instability are long gone, and Brazil is now a safe country to invest in, offering high returns in a huge emerging market with almost 200 million consumers, that will be the 5th economy worldwide according to Goldman Sachs. Because of its strong domestic economy, huge oil reserves and growing GDP and prosperity levels, Brazil is one of very few countries left in the world for safe and profitable investments that are not affected by the international credit crisis.
Brazilian Property Market Overview
According to Lehman Brothers, until recent years Brazil had seen limited growth in its property market, whilst the economy has been being brought under tighter control for sustainable growth. This means that currently prices for desirable properties across the country are artificially low and this gives an investor a chance to buy in now and profit well in the short term, or hold for longer term appreciation and income generation. Despite the global financial crisis, Brazil keeps growing strongly and its real estate sector offers very good opportunities for investors. Due to a solid and promising economic climate, Brazil is amongst the fastest growing and most sought-after worldwide property locations, while potential returns on investment from Brazilian real estate are currently amongst the highest in the world. With attractive entry prices, serious investors are recognizing the huge potential for profits on real estate investment in Brazil today. While
prices are starting to see a steep growth curve, early investors can expect excellent returns in the hot-spot areas of Brazil. Brazilian property value increases of 20% over the past couple of years have attracted many a shrewd early investor.
Property Investment Locations
Property investment growth is focused in specific locations:
Major investment is being made in the holiday destinations of Natal and Fortaleza, on the north east coast, which boasts stunning beaches and a balmy tropical climate, bringing with it increased development projects and growing numbers of tourists. Natal and its surrounding area will see more than $1.8 billion being invested over the next 5 years in new hotels, resorts and infrastructure, including a new airport, which will be the largest in Latin America (both passenger and commercial). Natal is tipped as being Brazil’s top property hot spot as the location currently offers optimum conditions for those who wish to invest.
The city of Sao Paulo is at the brink of a real estate boom while it shakes off its past violent image in favor of a thriving city with much business relocation from foreign companies. Experts also predict that Rio, with its long history of tourism, is also about to see a significant growth spurt in terms of real estate development. Brazilian government is working on a number of areas that require improvement,
including its road system and infrastructure. However, in the light of Brazil’s recent performance and strong economic potential, many investors are now willing to take the plunge and have very real expectations of cashing in on high levels of capital growth over the coming years. To understand the investment opportunities, one needs to divide the property market into two sectors: residential first homes and tourist / second homes market.
Residential first homes
Supply and Demand: The new wealth is benefiting Brazilian households, with consumption rising even stronger than GDP.
As a consequence of the strong economy, prosperity levels are rising fast in Brazil, which sharply increases housing demand. In just two years, 23 million people have risen to prosperity level C (middle class), which now counts 85 million people. This middle class has a monthly income between 2 and 5 times the official minimum wage With insufficient first home housing stock to satisfy local demand, Brazil currently has an estimated housing deficit of a minimum of 8 million properties. The middle classes are expected to purchase between 1,000,000 and 1,200,000 units per year until 2015. With this in mind it is clear that the first residence market within Brazil’s major cities is a major investment opportunity and no region has seen faster growth that the North East.
Financing and Mortgages: For the first time in 25 years mortgages are available to Brazilians. In the last two years fuelled by the economic growth, 23 million people have now risen to a middle class status which now accounts for 86 million people. Massive growth in this sector means that domestic mortgages are predicted to increase by up to 600% by 2014. As an investor, this means there is an opportunity to invest in quality well located property that has a well defined target market and exit strategy, attracting middle class tenants and buyers.
Tourist / second homes
Supply and Demand: Tourist / second homes are those properties located at desired tourist destinations, composed by second-home units and large tourism and leisure facilities such as hotels, parks, marinas, golf courses, etc. These facilities enhance the tourist experience, induce tourist flows and provide services to guests and owners. Therefore, they improve desirability and leverage prices and sales speed of residential units.
The past two years has also seen a large increase in the purchase of holiday resort property by nationals, non-nationals and investors. There are an increasing number of home buyers and retirees looking to re-locate, or purchase a holiday home in Brazil, as it is a stunningly beautiful country with a sunny climate and has direct air services to Europe. They are seeking to enjoy a good quality of life and also benefit from a greatly reduced cost of living.
However, the current economic and financial scenarios that have emerged as a result of the credit crunch have interrupted the cycle in which Brazil was increasing its penetration in the world’s tourism real estate market. Nevertheless, strong demand for holiday homes still exists, albeit in lower numbers from international buyers and a new cycle is likely to emerge in the mid-term.
There has been talk that there is an oversupply of planned properties in the North East, but in a report by Newmark Knight Frank it is estimated that actually only 7,000 properties will be built by 2014. This assumes that North American and European economic growth resume in the latter part of 2009 and Brazil continues its current tourism development strategy. They expect future demand for tourism real estate residential units in the North East will be sufficient to absorb projected supply.
Branded, quality beach resorts particularly in the North East run by international hotel chains, well located plots of land for either land banking purposes, or for building dream villas at competitive prices, offer sound medium to long term investment potential.
Prices: Second-home sales prices per square meter of built area averages US$3,000 Comparing to other countries, North East Brazil prices are still low and this leaves room for plenty of appreciation.
Financing and Mortgages: Property mortgages in Brazil are not yet generally available for non-residents. Several international banks are closely reviewing how they offer financing in Brazil to non-residents, as they see Brazil as a huge growth market. HSBC announced in 2008 that it will offer mortgages to its ‘premier customers’ and it is likely that others will follow.
Market forces as ever will prevail and it is highly probable that within the next 12 months various property financing options will be available in Brazil. However, international investors need to be mindful that finance is not guaranteed at this time and that they should have alternative arrangements available to them for raising finance for property purchases. One thing for certain, is that as soon as financing does become readily available to non-residents there will be a huge increase in the number of international buyers and of course this will impact the supply and demand curve forcing prices to go up.
As a pure investor, or someone seeking a wonderful holiday home with the opportunity to achieve some rental income and good appreciation, there is demand from end users, both national tourists and international and that means good rental prospects and an
optional exit strategy.
Focus North East Coast:
Apart from the obvious demand for holiday homes and second homes for Brazilians and non- Brazilians due to its location and wonderful climate, Fortaleza, as the state capital of Ceara is one of the cities affected greatly by the deficit in middle class homes. A recent survey by the Institute for Applied Economics cites Natal as one of the safest of all Brazil’s regional capitals when it comes to personal risk which is part of the area’s huge appeal as a retirement or, relocation destination for the Brazilian population. Fortaleza is witnessing huge growth in its infrastructure, which has, in turn, seen an unprecedented rise in local employment.
Many investors are exploring the possibility of beach condos and tourist resorts which have their obvious attractions. However, the local residential housing market, although less glamorous, also offers excellent investment returns which should not be overlooked
by investors. Summary
As is true of all emerging markets, the early bird catches the worm and early investors will see the greatest returns on investment. In an area of such obvious growth and potential, property investors are confident they will experience substantial financial gains. While the residential tourist property in Brazil is still popular with investors and those seeking a beautiful holiday home with additional rental income, there is no doubt that the current global slowdown has had an impact on this market. Investors buying beach style condo resorts need to view this as a medium to long term investment.
Investors looking into this market might do well in investing in well located, value for money plots of land with a view to building holiday villas or selling on the land at a profit when global demand increases. In the short-term, domestic demand maintains a dominant position with positive perspectives, given Brazil’s current economic situation. Investing in first home, residential real estate developments in Brazil is a safe and very profitable strategy, with high returns and high demand for such developments. With Brazilian real estate prices
increasing between 20% and 30% per year, investing in a residential development can give a return of over 100% in two years Brazilian property is highly recommended to be held as part of a diverse property portfolio.
