TRENDS AND DEVELOPMENTS – BRAZIL REAL ESTATE MARKET
Lowest interest rate in history. Record levels of fundraising in savings accounts. Exponential increase in the offering of real estate credit. All these factors converge to make Brazil experience another real estate boom soon. It is possible that this combination will result in the biggest turnover in the entire history of Brazil's real estate market, which would contradict pessimistic prognosis in the light of the pandemic. The sector is expected to go through a “V-shaped” recovery.
In face of the basic interest rate (Selic) of 2% per year, and, consequently, the large availability of credit, fixed financial investment income start to yield poorly because of the small advantages offered by banks. On the other hand, the scenario of uncertainty about the economy's ability to pay in the near future indicates an unattractive perspective in variable financial investment income. Without options to invest their money and considering the risk of minimal losses in the real estate market, people tend to buy real estate.
It is also noteworthy that with the Selic rate below the level of inflation, banks stop buying government bonds, which are no longer profitable. With the long-term interest rate still high, real estate credit appears as the best alternative for these financial institutions.
Through a fertile ground, real estate credit grows and explodes with the record levels of fundraising in savings accounts, notably its main source of funds. This is due to the financial concern in face of the instability caused by the pandemic, which results in a substantial reduction in consumption and an increase in the allocation of resources in savings accounts.
The booming of real estate credit converges with the emergence of a new demand originated by new habits created during the pandemic. As a consequence of the home office work associated to the imposed social isolation, there is an appreciation of the domestic environment, materialized in the search for better properties.
This new demand also creates a new trend in the sector. The reduction in traffic and the abandonment of living in a megalopolis, close to the workplace, lead off a race for the hunt of properties in the countryside and small cities, which offer cheaper square metres and greater comfort associated with quality of life.
Furthermore, also as a result of the new habits created by the pandemic, especially of social isolation, properties located in real estate enterprises with common areas that offer varied options for leisure and services are increasingly being sought, which tends to impact on new launches as of 2021.
That being said, despite the troubled beginning of 2020 due to the economic instability caused by the pandemic, the results of the "V-shaped" recovery of the Brazilian economy and the beginning of the real estate boom are already remarkable. In August of 2020, R$11.7 billion was financed in properties with savings accounts resources, which represents an increase of 74.4% in relation to August 2019. On the other hand, the sale value of residential properties grew 0.53% in September compared to August 2020, setting the highest rise in the last six years.
In addition to the promising horizon foreseen for the real estate market in Brazil for 2021, there is a notable margin for growth in the sector. Bearing in mind that the unemployment rate in the country is increasing and tends to drop as the economy gradually recovers, the risk of non-payment in real estate financing will probably decrease and boost the expansion of the sector. In other respects, as a result of the first months of the pandemic, there was a 21.2% decrease in the number of real estate launches in the first half of 2020. Consequently, as these numbers naturally improve in 2021, increasing the offer of properties, the results of demand will be even more impressive.
It should also be noted that new market opportunities provided by legislative developments make the Brazilian real estate market even more attractive for foreign investments in 2021, especially considering (i) Law No. 14.011/2020, which improved the management and selling process of the Federal Government's real properties; (ii) Law No. 13.986/2020, which, seeking to boost agribusiness financing in Brazil, authorized the establishment of fiduciary ownership of rural properties in favour of foreigners and (iii) the Provisional Measure No. 992/20 that authorized shared fiduciary assignment. We will further discuss these novelties below.
Law No. 14.011/2020: management and selling process of the Federal Government's properties
The enactment of Law No. 14.011, in June 2020, was an essential step in the Federal Government’s real estate property destatization. The law brings simplification and modernization of management and sales procedures of the real estate properties without utility to the Government.
Through the creation of better conditions to buyers, speeding up and making the sale process less bureaucratic, Brazil – known as one of the greatest property owners in the world – intends to raise R$30 billion from divestitures in the next 3 years, which represents a small part of a universe of real estate assets that sums up to more than R$1 trillion.
Therefore, allowing the possibility of acquisition offering proposals by any individual or legal entities, promoting electronic public auctions, offering discounts in certain cases and improving the process of properties’ evaluation, there is an expectation that this law will help boost the real estate and construction sectors in 2021.
The new law also set forth that the BNDES can be hired by the Federal Government to provide studies on the selling process and set up projects of destatizations. This movement of selling properties not used by the public sector tends to expand to Brazilian states and municipalities, creating a new trend in the country and countless business opportunities for the coming years.
Law No. 13.986 / 2020: establishment of fiduciary ownership of rural properties in favour of foreigners
In April 2020, Law No. 13,896 was enacted, establishing several mechanisms to boost Brazilian agribusiness, such as the authorization for the constitution of fiduciary assignments of rural properties in favour of foreign creditors.
In this way, foreign investors, previously limited to mortgages, now have free access to fiduciary property – until then only available to Brazilian creditors – upon any rural real estate, which promises to have an effect on the real estate market in 2021.
Furthermore, according to the new law, it is possible for foreigners to become owners of rural properties in liquidation of transaction processes, through foreclosure, consolidation and compulsory conveyance of property (“adjudicação”), giving in payment (“dação”), or any other form of debt payment.
It is noteworthy, therefore, that rural financing may be done with lower interest rates, since the risk exposure will be significantly reduced by the advantages of this type of guarantee.
Provisional Measure No. 992/20: Shared fiduciary assignment
In order to mitigate the impacts suffered from the COVID-19 pandemic and to boost the economy by facilitating credit, the Federal Government enacted the Provisional Presidential Decree No. 992/20, regulated by Resolution No. 4.837/20.
Among others incentives, with respect to the real estate sector, the advantages offered for financing involve the possibility of using a real estate property already subject to a fiduciary assignment as collateral of new and autonomous credit operations provided they are contracted with the fiduciary creditor of the original credit operation.
This innovation tends to make it possible to obtain new credits with terms and interest rates more favourable to the debtor, since they are also guaranteed by the same asset that was previously given as collateral. This factor should encourage even more real estate financing, which is already growing exponentially due to the current circumstances of the Brazilian economy.
It is important to note that the Provisional Measure executed by the President shall be approved by the Brazilian Congress and converted into law up to November 11, 2020. If approved, we will have one more ingredient that may contribute to the real estate boom scheduled for 2021.
Guided by the increase in its financing, either by extremely favourable circumstances in the economy or by interesting legislative developments, the Brazilian real estate market will tend to reach record numbers in 2021/2022, making the country one of the main focuses of attention of foreign investors in the sector.
Rafael Jordão Bussière, partner at Campos Mello Advogados