Brazilian Real Estate Market – a Brief Overview - 2018 [20/06/2018]
The Brazilian real estate market has experienced a period of gradual economic recovery in spite of the current political election scenario.
The country has reached the end of a previous economic cycle marked by a two-year recession that was very challenging for economic agents, with negative GDP, falling sales, an increase in the return of properties by buyers, and falling investment. The end of that cycle now allows for the current recovery in the economy and production, ushering in a new period of greater growth.
Therefore, despite the current scenario of increased tension and political upheaval, good opportunities can be found in various segments of the Brazilian real estate sector.
Accordingly, we have seen the return of positive results and growth in Gross Domestic Product, linked to structural reforms of great significance (providing the foundations for a resumption of economic growth) and the implementation of significant macroeconomic adjustments. The labour legislation reform, for example, was designed to promote greater rationality and balance in the sector.
Other positive factors have been gained that are contributing to the recovery of the economy as a whole, and the real estate market in particular. These include:
(i) a very sharp drop in the Basic Interest Rate (SELIC) to a historic low, benefiting investment in real estate, which once again has become attractive given reduced financing costs.
(ii) a drop in the annual inflation rate and stricter control of inflation by the Central Bank of Brazil.
(iii) the imposition by law of certain limits on government spending, seeking a better balance in Government public accounts.
(iv) the existence of vast domestic reserves that will help Brazil overcome more turbulent times in the global economy.
With these positive new aspects, the page on the previous recession is gradually being turned. It is also in the current changing global economy context that Brazil can show its ability and commitment to investment, given that the long-term positive economic fundamentals are also present, including: (i) historically repressed demand for real estate; and (ii) ongoing demographic growth putting further pressure on demand. These aspects, and the fact that real estate credit still accounts for less than 10% of GDP (in contrast to over 75% in other more mature and developed markets), point towards the possibility of future high growth for Brazil’s real estate market.
Good opportunities and deals are evident, particularly given that the national currency (real) is significantly devalued with the recent depreciation in the foreign exchange rate.
Accordingly, the combination of these factors will lead to good opportunities in Brazilian real estate sectors, such as:
(i) residential: highlights include compact and studio apartments, especially in large urban centres.
(ii) commercial and office buildings: a marked drop in the vacancy rate has been identified particularly in São Paulo, and from the perspective of agents and real estate developers there may even arise untapped demand over the next few years. The return of investment is already driving many real estate developers to launch new ventures.
(iii) hospitality: after major sporting events in Brazil, such as the World Cup and the Olympics in Rio de Janeiro, this sector continues to develop and attract resources.
(iv) logistics and warehousing: the need for warehouse space has increased substantially, as online retailers need storage units and delivery centres.
A recovery in the retail industry and shopping mall sectors has also been observed, with the return of consumer confidence regarding purchases of goods and property associated with some improvement in the economy as a whole.
The changes also include ongoing legislative innovations with new and necessary regulations, which may also drive the market. These include: (i) the change concerning concentration of acts in the title records of properties which may facilitate operations and lower costs and is also expected to make the legal procedure for the purchase of property safer, concentrating different information on the property record itself, resulting in an increase in the reliability of the deal. Nevertheless, a system of complete concentration of acts on the record has not been reached yet, since there are a number of situations that will not be included on the record and need to be analysed case by case. This innovation leads to a greater degree of security for buyers and also motivates any creditors to manoeuvre themselves more quickly to safeguard their rights.
(ii) the regulation of a new credit instrument called the Letra Imobiliária Garantida (LIG), based on covered bonds, should also help to capitalise the real estate sector, whereby the investor will be ensured priority in payment backed by a portfolio of real estate assets if the financial institution issuing the bill does not meet the agreed remuneration (i.e. the issuer must back the issue on properties that are separated from their equity, as a means to mitigate the risks of the transaction).
One issue of great anticipation is the required new legislation to make the acquisition of rural property with foreign capital more rational and organised. This discussion is currently underway in the National Congress, and, in the event it actually occurs, may provide for the entry of significant investment into Brazil with consequent development and opening of new jobs in the Agribusiness sector. Another highlight is the new regulations, also under discussion, that will organise the buyer’s ability to back out of property purchases and the return of housing units, thus helping to lessen legal uncertainty.
Other areas should also generate new business opportunities in real estate, such as the current discussion to include adjustments to the new Zoning and Master Plans in the City of São Paulo which will affect new estate developments in the city, as well as the emergence of new sources of business, technologies and products to meet the changing needs of consumers.
In this new technological and participatory world now taking shape, very attractive new products that meet new demands, such as co-working and co-living projects, are emerging. The first covers a flexible working model in which the sharing of office space areas and resources takes place, bringing together people who do not necessarily work for the same employer or have the same area of operation. This subverts the traditional forms of work organisation and today accounts for a small fraction of existing offices but may account for up to 20% of the global total over the next 20 years. Co-living also presents itself as an important trend, reflecting the will for coexistence among people, especially the elderly, and covering the use of rooms with common services and areas of all kinds.
Brazil and its real estate market have been experiencing a gradual period of recovery in growth and investment, which, although not necessarily fast paced, has nevertheless been significant, in spite of the political electoral scenario. Great efforts are being made so that 2018 may be seen as the year of recovery and when the challenges of recent years were overcome. Therefore, there are many good opportunities in the Brazilian real estate industry, with the additional advantage that assets and real estate property are benefiting from a very favourable exchange rate.