BRAZIL: An Introduction to Real Estate
Defying Global Headwinds: Brazil’s Economic Resilience
Amidst global financial turbulence caused by global inflation, post-pandemic supply chain reorganisation, high US interest rates, the war in Ukraine, China’s slowing economic growth, and the uncertainties in the Middle East, Brazil stands resilient, undergoing economic and legal enhancements that are set to spur its growth.
The country’s inflation rate has dipped below 5% annually, with projections for 2024 ranging between 3% and 4%. A robust trade surplus exceeding USD90 billion has bolstered the stability of the local currency. While moderate GDP growth is projected in the coming years, the challenge of high interest rates – currently around 12% per annum but on a downward trend – persists. In Brazil, however, rates below 10% are considered low and are instrumental in invigorating the credit market as well as stimulating broader economic activities. It is anticipated that interest rates will fall below 10% by the end of 2024.
From Housing Deficit to Investment Boom: Brazil’s Real Estate Landscape
The real estate sector is a key driver of this growth. Brazil faces a housing deficit of approximately 6 million homes, a gap partially bridged by a successful housing programme. This initiative, a collaboration between government incentives, bank financing, and private enterprise, aims to deliver two million new homes over the next four years. Even if this deficit is fully addressed, the annual demand for new housing in Brazil is estimated at 1.5 million units, not including secondary residences or commercial, logistics, and tourism properties. Laws and regulations permitting out-of-court repossession of assets granted as collateral have kept default rates below 2% for several years. This reduces the financial risks for entrepreneurs, financiers, and investors, thereby fostering a more secure investment environment.
Legal Milestones and Regulatory Reforms
In October 2023, Brazil enacted a pivotal piece of legislation known as the “New Security Statute”, which has significantly streamlined the rules governing loans secured by real estate. This law not only reduces bureaucratic hurdles but also enhances legal certainty. One of its key provisions allows a property to serve as collateral for new credit transactions even if there is an outstanding balance from a previous loan. This provision, along with other new rules, is expected to substantially increase the volume of new loans – by tens of billions of US Dollars in the coming years – leveraged against existing properties.
It is crucial to note that this increased availability of credit does not equate to elevated loan risks. The granting of real estate credit in Brazil is subject to rigorous scrutiny of the debtor’s repayment capacity and is capped by a loan-to-value (LTV) ratio of 70%. These stringent measures are among the reasons why the Brazilian banking system and real estate market were less impacted by the subprime crisis that shook global financial and property markets in 2008 and 2009.
Real estate credit in Brazil accounts for 9.5% of the country’s GDP, a figure that, despite its rapid growth, pales in comparison to other nations. For context, the United Kingdom has a rate of 75%, the United States 67%, Portugal 59%, and Spain 55%. Even neighbouring Chile outpaces Brazil, with real estate credit making up 18% of its GDP –nearly double the Brazilian rate. These statistics underscore Brazil’s untapped potential in this sector.
In 2022, Brazil introduced the Electronic Public Registration System (SERP), facilitating electronic signatures and document filing with public registries. Additionally, all requests for certificates and documents filed at Registration Offices can now be accessed online, streamlining transactions and reducing both costs and processing times. Given Brazil’s vast territorial expanse, this system is still being rolled out in some states but is already operational in most of the country.
Regulatory reforms have also been significant. The Brazilian Securities Commission’s new Instruction 175 has aligned the country’s investment fund rules more closely with those of developed international markets. This includes the introduction of different classes of fund shares, limiting the liability of fund shareholders, and increasing the accountability of asset managers. These changes make Brazilian investments increasingly appealing to foreign markets.
The Brazilian investment fund industry is on an impressive growth trajectory, currently managing assets exceeding USD1.5 trillion. According to the International Organization of Securities Commissions (IOSCO), it is one of the largest markets globally. Real Estate Investment Trusts (REITs) serve as a prime example. Our law firm conducted the legal structuring of the first REIT to be traded on a Brazilian stock exchange back in 2002. Since then, the number of listed REITs has surged to 461 out of a total of 825. Investor numbers have also skyrocketed, growing from 208,000 in 2018 to 2.2 million in 2023 – an approximate 1,000% increase over five years. With interest rates in Brazil expected to decline, the volume of both investors and resources funnelled into investment funds is likely to rise even further.
Brazil's Green Economy and the Untapped Potential for Growth
Moreover, the burgeoning green economy offers huge opportunities. Brazil is home to the world’s largest forests and contributes a mere 3% to global greenhouse gas emissions, positioning it well to capitalise on the energy transition. While carbon credit regulations are still being discussed and regulated by Congress, the market is already operational and poised for significant expansion. Brazil’s natural assets extend to its vast river basins, year-round sunshine, and extensive coastline with consistent winds – all potent sources of clean energy with untapped potential for growth. The increasing local and international focus on sustainable socio-environmental practices further broadens the scope for development. However, it is crucial to exercise due diligence, particularly in more remote areas, to ensure appropriate and efficient legal structures are in place prior to any acquisitions.
Challenges and Opportunities: The Road Ahead For Brazil
Certainly, there are challenges that must be navigated when conducting business in Brazil, notably the complexities of the tax system and the state of transportation infrastructure. However, these issues are being actively addressed. A major tax reform is underway, aimed at simplifying the system and aligning it with international best practices. While the country’s airports, ports, and railroads may be dated and in need of upgrades, this presents a unique opportunity. The private sector will be a major contributor to the overhaul and development of these facilities, thereby opening up avenues for investment.
The ongoing modernisation of laws and regulations has already fostered a more dynamic business environment, enhancing legal certainty within the country. Coupled with economic stability and a robust demand for products and services, Brazil offers a market ripe with potential. Legal professionals in Brazil recognise their pivotal role in this landscape and are approaching their duties with a level of commitment and dedication that further enhances the country’s business environment.