Property boom

Rush on Sao Paulo office space pushes rents to record high

Office rents in Brazil's biggest city, Sao Paulo, jumped to a record in the third quarter, underscoring a squeeze in supply and a property boom that is showing no signs of abating, a report by real estate market consultants Cushman & Wakefield showed Tuesday.

Rents for office space in Sao Paulo's upscale business districts soared 23% to a record 111.8 reals ($65) per square metre from the year-earlier period, the report said. Sao Paulo is the country's most populous city and home to some of the nation's biggest financial and industrial firms.

Vacancies in Sao Paulo fell 2.3% in the commercial real estate segment even as new projects were delivered in the period. Prices in the Itaim, Paulista and Vila Olimpia districts were about 14% higher than the city's average.

"High demand, short supply of office space and deliveries of more state-of-the-art real estate had an impact on rental prices for upscale commercial real estate," the report said.

Brazil has limited reliable data for nationwide real-estate prices but there have been clear signs of a steep run-up in major cities, leading to concerns about the market's sustainability. Deliveries of new office projects in Sao Paulo could also hit a record this year, surpassing the 180,000 square metres of 2003, the firm said.

Upward pressure on prices is expected to prevail for the next two years as Brazil's largest metropolitan areas face a shortage of office space. To overcome that, commercial real estate developers in Brazil are launching new projects at a breakneck pace, expanding existing assets and buying smaller rivals to capture a growing customer base.

Red-hot demand for office space underscores Brazil's economic rise and new-found corporate wealth. Latin America's largest economy expanded 7.5% last year, its fastest pace in 24 years and way faster than developed economies.

Hot economic growth and a rally of the real, Brazil's currency, has sparked a surge in the cost of living in Brazil. Goldman Sachs Group and the Bank for International Settlements have said the real was among the world's most overvalued currencies in the first half of 2011.

Sao Paulo topped New York and Paris in a recent cost of living survey carried out by consultancy Mercer, and is now the world's 10th-most expensive city for foreigners.

Recent surveys have shown prices for residential and commercial property gaining more momentum in Sao Paulo than other cities. Market research firm Ibope said last month that home prices soared 85% in the past two and a half years.

The pace of growth is on course to slow sharply to about 3% this year, but Brazil faces a shortage of quality housing that most analysts expect will support overall property demand in the coming years.

The Cushman & Wakefield report found that office rentals in Rio de Janeiro, Brazil's second-largest city, dropped 15% to 120.1 reals per square metre in the quarter, partly because new space became available.

The firm said earlier in the year that Rio, which is drawing a rush of investments for the 2014 World Cup and the 2016 Olympic Games, had become the world's fourth-most expensive city to rent office space, based on prices in its central business district.

(Published by The Globe and Mail - November 8, 2011)

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