Interview to Money and Business Show with Samuel Ezerzer
Radio Shalom- Montreal Canada – May 9, 2012 th 4 pm – 5 pm
By: Marcelo Sicoli- Executive Manager at Enterbrazil
Brazilian Real Estate market Questions and Answers – May 2012
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1- In order to understand the Brazilian Real Estate market, it's important to have an overview about the current political and economic situation of the country.
Can you briefly paint this scenario ??
Brazil is the fifth largest country in the world in terms of territory, with almost 200 million inhabitants. Portuguese is our official language, unlike many of our neighbors which speak Spanish. The largest cities are Sao Paulo (business capital of the country), Rio de Janeiro, Salvador (in the northeast of the country) and Brasilia (political capital and where i'm based). Good investment opportunities are not restricted to these cities.
Brazil in 2011, surpassed the UK, to become the sixth largest economy in the world.
The 2012 A.T. Kearney FDI Confidence Index ranks Brazil in the third place in terms of willingness to investment by top global executives, ahead of the USA and only behind China and India.
In 2010, Brazil jumped to 5th place ranking in attracting foreign investment from 2009 to 2010, or 10 positions, according to report of UNCTAD.
The Country received U.S. $ 48.4 billion and attracted 3.9% of direct investments in the world, a figure 86.7% higher than the $ 25.9 billion attracted in 2009.
Brazil only lagged behind the United States, China, Hong Kong and Belgium in the ranking of preferred destinations of the flows global foreign investment.
In 2011, we received US$66,6 billion placing Brazil in the 4th position worldwide.
We have a Woman as a president now. Ms. Dilma Rousseff who replaced president Lula who stayed in power for 8 years or two terms.
Although at a slower pace, the class C has continued to grow in Brazil in 2011. The participation in this social stratum total population was 54% last year,. In 2011 class C received 2.7 million Brazilians in 2011. Today, 103 million people are part of this class.
To belong to the class C in Brazil an individual needs to have an monthly income of R$1115(around US$620) to R$4800( US$2670).
Today in Brazil 54% are in this middle class, 11% in upper middle class, 24% in lower middle class and 11% are considered extremely poor.
Brazilian economy is expected to grow at 4,0% from 2011 to 2014, from a small growth of 2,7% in 2011
Most importantly four major events/trends tend to attract huge investments or to propel development in infrastructure:
1- Pre-salt exploration. Brazil is a world leader of extracting oil from deep waters. Many foreign companies are willing to explore this market directly or to be a service or product provider to PETROBRAS, the largest company in Brazil.
2- Brazil has a housing deficit of 8 million residential units.
In 2009, under president Lula a program called “My house, my life” was launched aimed at building 1 million homes for low income individuals. After 2 years they were able to build just half of this and in 2012 president Dilma launched “my house, my life 2”, with the goal of building 2 million homes at this time. The housing deficit in Brazil nowadays is roughly 8 million units. Most of this deficit in the poorest income bracket (below two minimum wages). The minimum wage in Brazil R$622( is equivalent to US$345)
3- World cup of soccer in 2014. The event will be held in 12 different cities.
4- Summer Olympic games in Rio in 2016. In 2007 the Pan-American games were in the city with great success so part of the infrastructure is already prepared.
All these 4 events or trends if you wish will generate and demand billions of investment in transportation, sanitation, housing, stadiums, telecommunication, security and infrastructure in general. Airports and ports in Brazil in general are not very good. Maybe the work will not be completed on time for the events. Nowadays, the construction sector accounts for 20% of the Brazilian GDP,
So summing it up: Pre-salt oil exploration, millions of houses that have to be built(8 million) , especially for the poorest Brazilians, World cup of soccer in 2014 and Summer Olympic games in 2016 in Rio de Janeiro.
2- Marcelo, Foreigners (here I say Canadians and Americans) many times tend to see Latin American countries as being the same thing. How would you differentiate Brazil with other neighbouring countries like Chile, Bolivia, Argentina etc.
Samuel, inexperienced international investors tend to see Latin American countries as being the same thing. Actually, countries are very different. With different levels of development, and with huge differences in terms of political organization and economy.
Since we are talking about the Brazilian Real estate, I would tell your listeners that as far as safety is concerned Brazil is a very safe country. Laws are respected (unlike things we saw recently in Argentina and Bolivia that I don’t want to detail here).
In the Real Estate market, either in the eyes of a small family who is buying its first property or through the eyes of a big corporate investor, they will deal with big companies. Usually companies with stocks in the Brazilian stock exchange, who tend to be very serious and professional. There are no hidden fees, paying off officials or any kind of bribery involved.
Very important information is that historically interest rates in Brazil (for loans in general, or for remunerating the Brazilian bonds) were among the highest in the world.
President Dilma, is making serious efforts to start a constant decrease in the interest rates. A lower basic interest rate will result in lower remuneration for investors in fixed income or Brazilian bonds, and also increase consumption in general (electronics cars etc) as well as because it becomes cheaper to finance a house or any consumer good. Nowadays the interest rate on a loan for residential properties will range from 8% to 12%.
3- Talking more specifically about the construction sector in General. What are the most important trends? How the Government is acting towards this?
Pre-salt oil exploration, millions of houses for the poor, World cup in 2014 and Olympic games in 2016 are important elements to foster development and investment.
The construction sector in Brazil, especially the one focused on the housing market has been growing constantly in the last decade. This generates an increase in prices of land. Also increase in prices of machinery and heavy machinery and inputs (concrete, material in general) which reflected in an increase of prices of houses in general of course.
Due to the shortage of specialized labor in the civil construction (here including very qualified professionals like engineers and managers as well as blue collar workers) salaries in the construction industry have grown substantially.
It's interesting to note, that While Brazil makes up about 40 000 engineers a year, Russia, India and China make up 190,000, 220,000 and 650,000, respectively.
According to estimates by the Federal Council of Engineering Brazil has a deficit of 20 000 engineers per year. In the country's 600,000 engineers, equivalent to six workers per thousand workers. In the United States and Japan, the proportion is 25 engineers per thousand workers, according to publications from ministry of Education.
In the recent years one could see the IPO of many construction companies or companies directly linked to them like real estate companies. Nowadays in BOVESPA (the Brazilian stock exchange) there are 5 companies selling construction material, 23 in properties construction (including residential, corporate buildings and shopping malls), like Cyrela, MRV, Brmalls, Gafisa, Tecnisa, Brookfield etc and few others in construction retail, consultancy, commercial brokerage and so on.
So from 2006 , on these companies raised a lot of money in the stock market(through IPOs), a great part of this money coming from international investors(around 75%). These companies went to the market to buy land to build their projects and started many constructions at the same time. The companies then realized they were not capable of having so many projects simultaneously (due to lack of material, workers, management skills, etc) many buildings ended up not being delivered on time……….. People got mad because of these delays…..and even moved a few lawsuits on these companies etc.
Finally, it's important to mention that although Brazil is facing this “so-called” real estate boom, the stocks of these companies in general were not performing well in the market. Their prices lost a lot of value recently.
4- Going more in details about the real estate market in Brazil, I understand that prices have increased a lot recently. In cities like Sao Paulo, Rio de Janeiro or Brasilia even an upper middle class family is not able to finance most of the new residential buildings. How is that?
As I told in the beginning The housing deficit in Brazil nowadays is around 8 million units. Most of this deficit (let's say 90%) in the poorest income bracket (below two minimum wages).
The minimun wage in Brazil R$622( is equivalent to US$345)
Dilma lauched “my house, my life 2”, with the goal of building 2 million homes at this time. However, when you are talking about homes for the middle class the prices of houses and apartments grew a lot recently. Although, in my city (brasilia) for example you can see an immense offer of units. There are huge neighborhoods with those high buildings which were born no more than 10 years ago with hundreds of units available. Despite of that, prices still are going up.
Last year( 2011) our country had a real estate valuation on prices of 28% compared to 2010, only behind India, whose index was 35% . From 2009 to 2010 the increase on average stayed at 24%. However, the growth will be more modest in 2012.
In the last year three years an increase of more than 50%.
So when you think of Real estate as a form of investment, it was indeed a good one. Very few financial investments (like stocks, funds, gold etc could generate this kind of return). But these huge jumps in prices are not expected to be seen this year neither in the following years.
Sometimes when you think of an average income of an upper middle class family and the price of some apartments in good neighborhoods in Sao Paulo, RIO or Brasilia, it is just impossible for them to think of buying them. So a few families find a better deal to rent apartments instead of buying.
Although, recently the basic interest rate in the country (regulated by the Brazilian central bank) has been lowered again, making loans in general cheaper for consumers.
In Brazil a long term loan for buying properties, will have a interest rate ranging from 8% to 13% per year. One individual can compromise up to 30% of its income and finance the property up to 30 years.
Just opening a quick parenthesis, Brazilians in the last years have invested A LOT in the American real estate market, especially in the State of Florida, city of Miami. I have even written an analysis about it. Brazilians would see a price of a luxury building in Miami and compare it to options available in Brazil, to be shocked by the difference. Miami was much cheaper than most major Brazilian cities. So a few people (of course rich Brazilians) decided to buy a second home in Florida for leisure only.
5- Marcelo, as we every now and then say in our program, 2 jews, 3 opinions. I know that you are not jew, but of course in the Brazilian Real Estate market there are two ways of seeing this recent spike in the prices.
Could briefly tell us why some think there is a bubble and why some think that there isn’t?
Is there a real estate bubble in Brazil ??
There is a big debate over this here in Brazil Samuel.
A few analysts believe that prices just underwent a phase of readjustment, since they stayed low for many years. Besides, considering the recent economic stability of the country, which enables people to make long term plans and well as more money available for loans and an increase on the purchase power and income of families, there is not a bubble.
Another fact worth mentioning is the most of purchases of real estate in Brazil (either residential or commercial) are done by final users. Investors represent no more than 15%. Besides, when you compare the Real estate credit as a proportion of GDP, Brazil has a still a lot of space for development.
In Brazil, only an equivalent to 5%(repeat 5%) of the GDP goes to housing credit, while in countries like Mexico you have 11%, Chile 18,5%, UK (87%) and in the USA, who has an economy 7 times larger than the Brazilian around 81%. So there is as I said considerable room for increasing the credit in Brazil, which represents only 5% of its GDP.
6- What the pessimists say about it?
Well, the pessimists don’t believe that the bubble will burst as you saw in the USA with properties losing a lot of their value. However, as I said in many regions prices are so high that regular families are not able neither to buy nor finance them. Besides, a regular and very conservative financial investment in Brazil, like a savings account will pay you free of taxes a net 0,5% per month, many apartments in major cities we have mentioned are not being rented by 0,5% per month of its price. So in a few cases, it's a good moment to sell properties and invest your money in something else.
I have already told my parents about this. They have always invested in properties to earn rents. I told them to choose one or two and sell but I was not able to convince them so far.
Besides, when you invest in Real Estate you might end up dealing with payment defaults, you must do repairs, painting etc. On the other hand, the price of the asset can go up, and in some moments very aggressively as we have mentioned before.
7- For big foreign investors, interested in investing in the Brazilian Real estate market in Brazil, what would you recommend?
There are basically three ways:
Number one: In the stock exchange. As I said there are around 30 stocks of construction companies or companies directly linked to them. If one is interested in recommendation of a brokerage company I can suggest a few names. There are other financial instruments available in the market, that I don’t want to discuss in details right now.
These investments (usually acronyms CRI, FII LCIs) are tax free.
Number two: Real Estate funds. Although they have existed for decades in other countries they are beginning to be known by Brazilians recently. These funds as you probably know, is when a financial institution buys or builds a building and rents it to this particular company. The rent will them be divided to the members of the fund discounting all taxes and management costs.
I see this as a very interesting alternative for individuals of for companies.
You can be part of this fund, or “quote and quote” owe a building or part of it with little capital (let's say US$1000 ) or you can invest even millions of dollars in this fund if you wish.
Finally, number three: I think more restricted to big investors, is to buy a whole building or floors on a building and then rent it. Corporate buildings in cities like Sao Paulo and Rio for example, can generate to its owners incomes of 0,5 % up to 1% per month. According to the Brazilian legislation, foreigners will have to pay 15% on its earnings.
So as far as I can see in the developed economies, it's not easy to have a monthly return of 0,5% let alone 1% per month. I believe the real estate market in Brazil it's a good alternative to diversify investments.
Rio de janeiro: (barra da tijuca e Recreio, Freguesia-Jacarepagua)
Brasilia: Hotels and commercial (plano piloto e lago norte).
Brazilian Real Estate market Questions and Answers – May 2012
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