wednesday, 28 september of 2016

Beyond the crisis – Real estate opportunities in Brazil

Rafael Bussière

In the last decade, the Brazilian real estate market has considerably fluctuated during two distinct periods: one of breakthrough growth and development followed by a second phase of deceleration and adaptation. This market dynamic originated from external factors to this sector, influenced not only by national politics and economy, but also by the global trade and industry scenarios.

The 2008 US housing market crash had undeniable worldwide adverse impact. But while a housing bubble and high default rate tainted the US market, it created opportunities for emerging countries, which became attractive for investors. Brazil was one such case, weathering the 2008 storm with strong GDP growth and high interest rates.

The economic progress led to stability and trust from investors and the general public. From 2010 onwards, the real estate market was undeniably booming. It was the right timing for many Brazilians to achieve the dream of acquiring a self-owned property. Within this scenario of elevated consumption, the square meter price escalation was inevitable, both for residential and commercial real estate. However, such overpricing throughout the country, especially in the main cities, did not inhibit sales during this period, sustaining the expansion of the real estate market for the next two years. The setting was favorable: an established economy, high employment rate, low delinquency, and, particularly, credit facility deriving from federal government programs or bank loans with longer term and better conditions.

By 2013, the economy showed signs of deceleration, and real estate overpricing led to criticism, but it was only during 2014 that the growth curve stabilized. Infrastructure construction works for the 2014 FIFA World Cup valued the areas close to the soccer stadiums, but were insufficient to maintain the market thriving as a whole.

In 2015, the real estate market circumstances were aggravated due to the politic and economic crisis that hit Brazil. This phase was of chaotic uncertainty, with increasing unemployment, credit shortage, interest rate escalation and, inescapably, demand reduction.

Although it is still premature to state when the turning point shall occur, there are indicia that the economy at least is being remedied. The actions taken by the federal government – although not very popular – such as the reduction of public spending, capping the primary federal expenses, renegotiation of debts, social security reform proposal, among others, are evidence of brighter days ahead, and the approval of such measures is an essential step towards the recovery of balance of public accounts.

The government, thus, has designed a path to overcome the current crisis, which generates expectations of a better future. Consequently, this is the time to invest, considering the presently existing Brazilian real estate opportunities.

As a first example, we point to the city of Rio de Janeiro. Due to the Olympic Games of 2016, billions of Reais were invested in the last years in infrastructure so as to consolidate urban mobility with new expressways, tunnels, highways and alternatives for public transportation such as additional subway stations, BRTs (bus rapid transit) lanes and a light rail to interconnect the several city regions.

One urban project in Rio which is worth highlighting is The Porto Maravilha area, with a unique location adjacent to the city Centre and halfway between the city's two main airports. Based on sustainability principles, urban developers sought to recover public thoroughfares as well as to enhance local infrastructure, by means of tunnel construction, installation of the light rail vehicles, urban landscaping and construction of bikeways. The Porto Maravilha project added value to historic assets and promoted social and economic development, transforming the region into a city icon. An area with irrefutable capacity to receive investments, especially for different real estate enterprises (residential, commercial, shopping centers, universities, hospitals, etc). Porto Maravilha comprises two of the main Rio de Janeiro museums: the Museu de Arte do Rio de Janeiro (MAR – Art Museum) and the Museu do Amanhã (Tomorrow's Museum) projected by the renowned architect Santiago Calatrava. A convention center, for example, would be a great venture for the area.

Another great case for a region in need of investments can be made for the neighboring State of São Paulo. Opportunities exist not only in the capitol city of São Paulo, with excellent perspectives for the high luxury sector and major upscale multi-use enterprises currently under construction, but also in secondary cities within the State of São Paulo, which are booming new business centers.
Furthermore, there is a countrywide excess of offerings on the market, ranging from AAA office buildings to residential units. Many sellers, trying to overcome the difficult period, are willing to negotiate prices and grant discounts, thus leading to great opportunities to build a real estate portfolio of finished properties. There are also promising several green fields on stocks which are currently marketed at a more adequate price than values of 2013.

One other factor that must be considered is the 2015/2016 devaluation of the Real /USD exchange rate that contributes to the price decrease for foreign investors.

Despite the current political upheaval and economic woes, there are signals to suggest that the growth recovery is close at hand. In view of this opportunistic setting and the diversity of options that the Brazilian real estate sector offers, this is undeniably the time to invest, and reap rewards in the post deadlock period.


*Rafael Bussière is partner of the law firm Campos Mello Advogados.

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