Fabio Appendino and Andre Maruch*

During the pre-crisis period, the Brazilian real estate market was very active, subject to substantial demands of construction and to high levels of development. However, the world crisis commenced in the end of 2008 restricted the credit for financing of real estate undertakings, what aggressively contributed to a slowdown of the rhythm of such development.

Brazilian economy, however, is demonstrating an outstanding power of recovery, what is substantially supported by the new raising of the Brazilian real estate market. As an example of such power, the forecast of funding for financing construction of houses in 2009 is expected to achieve R$ 45 billion, with R$ 15 billion from the Unemployment Compensation Fund (FGTS).

As an additional demonstration of the strength of the Brazilian real estate market, it is expected that the recent governmental program “My Home, My Life”, designed for financing houses of low income families, may achieve 800,000 houses until June 2010, what represents 80% of the goal determined by the federal government (1 million houses).

Furthermore, according to information provided by the Brazilian Securities Commission (CVM), the issuances of real estate securities by funds achieved R$ 1.382 billion in 2009, a 124% increase in comparison with 2008, when such issuances achieved R$ 616 million. Moreover, the numbers get even more impressive with the offers currently under CVM’s analysis, which totalize approximately R$ 2 billion.

In this context, three rules have been recently published in order to modernize the real estate market: (i) Law 12,024, published on August 28th, 2009; (ii) Instruction CVM 478, published on September 14th, 2009; and (iii) Resolution 3,792 of the National Monetary Council (CMN), published on September 28th, 2009.

Law 12,024/09 modified Law 8,668/93, which rules in the incorporation and taxation of the Real Estate Investment Funds (FIIs), and provided that the investments made by such funds in mortgage bills, certificates of real estate receivables and in real estate credit bills, and also in quotas issued by other FIIs, are not subject to taxation by withholding income tax.

Instruction CVM 478/09 modified Instruction CVM 472/08 in order to eliminate the requirement of approval of the appraisal report by the FIIs’ general meeting for the acquisition of assets (including properties) and rights, what grants more flexibility to the administration of such funds.

Finally, Resolution CMN 3,792/09 allows entities of supplementary social security (pension funds) to increase their investments in real estate, what was made possible due to the reformulation of the funds’ portfolios. Thus, the FIIs, which were allocated in the real estate investments account, were transferred to other account (structured investments), allowing the pension funds to increase their investments in the real estate market.

These rules now join Resolution 578/08 of the Unemployment Compensation Fund (FGTS) Council, which, with the purpose of increasing the liquidity of the real estate market, authorized such fund to acquire quotas of FIIs and also of Credit Rights Investment Funds (FIDCs), as well as debentures.

By the way, the debentures, when issued by the real estate developers and acquired by FGTS, have become an important instrument of financing the Brazilian real estate market by bringing agility and less bureaucracy to the authorization of the funding. Note that this alternative may be used also by closely-held corporations, considering that the issuance of the debentures is not public – they are fully acquired by FGTS.

It is expected that these new rules strengthen the development of the Brazilian real estate market, increasing the role and presence of the FIIs and pension funds in real estate businesses.

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* They are respectively partner and associate of the Brazilian law firm Rolim, Godoi, Viotti & Leite Campos.