Brazilian Real Estate Market – a Brief Overview – 2020
As a result of the economic difficulties that have affected Brazil for the past five years, the real estate industry has been also affected by the lack of public investments in infrastructure, confidence and funding of both private sector and consumers, and although it has recently shown signs of recovery, its complete comeback is still waiting for additional signs that the reforms promised by the recently elected government of free-market profile will be carried out and approved in the Congress, for instance the approval of the New Social Security Reform Bill.
Even so, many areas and states in Brazil, notably São Paulo, have already been showing signs of recovery in their real estate markets, as indicated by an increase of 11% in the number of transactions registered in the Real Estate Registry Offices of that state in the last twelve months, the highest performance since 2012. At national level, the number of new real estate developments has also risen in the first quarter of 2019 in relation to the same period of 2018. The Real Estate Investments Fund market has also increased by accumulating a 24% rise and 133% more investors in the last twelve months.
Nevertheless, as soon as the main reform expected by the market is approved, namely the New Social Security Reform Bill, a favourable environment for new investments and transactions in the real estate sector should be already set in place, contributing to the recovery of the economy and of the Brazilian real estate market in particular, including: (i) a recent intense reduction in the Basic Interest Rate (SELIC), benefiting investment in real estate, notably for Real Estate Investments Funds, which once again has become attractive given reduced financing costs; (ii) the successful action by the Brazilian Central Bank to control the annual inflation rate; (iii) the existence of large domestic reserves helping Brazil cope with the current turbulent times in the global economy; (iv) credit is cheaper and more available, as Caixa Econômica Federal, the largest state-owned bank, responsible for significant part of the real estate financing in Brazil, has reduced interest rates; and (v) private and public-owned assets are still undervalued, when compared to pre-crisis prices.
If, on one hand, public investments remain scarce, on the other hand, the government is carrying on several infrastructure projects via privatisation and concessions, and has indicated the intention to sell approximately 3,750 state-owned real properties (estimated in the value of R$36 billion) which, combined with a devalued Brazilian currency, offers good investment opportunities for foreign investors.
One important change in the legal framework encouraging the development of the real estate market was the approval of the Federal Law No. 13,786/18, also known as “Termination Law”, which entitles purchaser and the real estate developer to a terminated purchase and sale commitment agreement of a future unit to demand, respectively, the restitution and retention of the transacted amounts, according to the percentage established in that law (i.e., 30%, or, in a special regime in which the development is subject to segregated estate, 50%), thus seeking to put a term to a recurring dispute that has been taking place in Brazilian courts regarding the percentage of transacted amount that could be retained by the developers. This law would have the effect to restrain the termination at will by purchasers of future units, which had been burdening developers with multiple terminations, and gives more predictability and legal certainty for these transactions.
Another relevant matter is the acquisition and lease of rural lands by foreigners, more specifically by Brazilian companies held directly or indirectly by foreign shareholders, which has been, since 2010, intensely restricted by the federal government, and, given the new political scenario, there would be the expectation that the Federal Bill No. 2963/2019, which has been recently proposed in the Senate, could be approved. The proposal intends to overcome the distinction between entities incorporated in Brazil which are controlled by nationals and those which are controlled at any title, directly or indirectly by foreign capital or shareholders. It also aims to restrict the acquisition of rural properties by specific types of entities, such as non-governmental organisations; foundations held or controlled by a foreign individual or foreign company; entities which have more than 10% of their capital controlled by sovereign states; sovereign funds; entities controlled, direct or indirectly, by foreign shareholders, when acquiring lands in the Amazonia biome or which are subject to legal forest reserve equal or superior to 80% of the land.
Moreover, the Federal Bill No. 2963/2019 would also bring a long-desired modification in the current law for acquisition and lease of rural lands by foreigners related to the energy sector. The proposal has in its articles the permission for foreign companies to obtain real estate rights, have the possession and to hold the permission, concession and authorisation over rural lands for the purpose of generation, transmission and distribution of electric power. This new intended regulation for rural real property acquisition is receiving attention from foreign investors, since it could make feasible the acquisition of farmland by means of a more rational and organised procedure. This discussion is currently underway in the National Congress, and in the event it is actually approved, such a new regulation could also significantly increase investment in Brazil with consequent economic development, use of new technologies and creation of new work positions in the local agribusiness industry.
The current federal government has also initiated studies for implementation of the reverse mortgage system, which is common practice in other countries, such as the United States, Canada, and Spain, and could bring a significant amount of money into Brazilian economy. The objective is to offer a new option of loan specially for the elderly, using their real properties as collateral, therefore receiving either a monthly amount or a sole payment. The debtor would be able to cancel the mortgage at any time by paying the total loan amount, or the real estate would be transferred to the financial institution after the debtor’s death.
Additionally, a new form of condominium was created by the Federal Law No. 13,777/18, known as “multi-ownership" condominium, which allows co-owners of a property to each use it for a pre-determined period of time as its single owner, consecutive or not, for no less than seven days in a year. This new mechanism may foster new investments by, for instance, families which now will have financial means to own a vacation home for a period of time, as well as by the hospitality sector.
The recovery in the real estate market also allows developers to create interesting new products suitable to new modern ways of living, including (i) co-working projects, based on the flexible working model in which office space area and resources are shared; and (ii) co-living projects, a new trend reflecting the will for coexistence of specific groups, such as the elderly and students, with the use of individual rooms having common services and shared areas of all kinds.
Therefore, considering the expected reforms and new legislation, combined with the good economic fundamentals, such as inflation under control, lower interest rates and more credit, the Brazilian real estate market has been experiencing a gradual recovery in growth and investment and also is more optimistic towards 2020, confirming the existence of good opportunities for investors in a more mature Brazilian real estate market.