ADIT Brasil’s Webinar confirms Brazil’s Real Estate is booming

Economic fundamentals like credit availability, increased foreign direct investments, higher purchasing power, lack of housing and a rising GDP are among the many reasons boosting Brazil’s real estate market. Northeast Brazil’s GDP in particular is growing at a faster rate than that of the rest of Brazil; cities that are experiencing some remarkable growth include Recife, Salvador and Fortaleza.

These are just some of the subjects covered by Luiz Lessa, Chief Investment Officer at ADIT’s Investment Agency in an informative webinar broadcast on 15^th September about Brazil’s real estate and hospitality investment market.

He expanded on the factors which bring Brazil to investors’ attention:  At the moment there is a 10 million unit deficit on affordable housing in Brazil which is now becoming a more pressing issue due to the fact that there is now mortgage financing available from the middle class.  “Minha Casa Minha Vida” the federal social housing programme for the low income families has also brought significant results in tackling the housing problem putting in US$35bln of investments and US$20bln in subsidies. Minha Casa Minha Vida is predicted to create 2million houses between 2011 and 2014.

In view of the major sporting events of the World Cup in 2014 and the Olympics in 2016 there are major plans put in place for the improvement of the country’s infrastructure with US$ 400 billion put in place by 2011.

In the Hospitality sector there is a need of 162,500 new rooms for the World Cup. Luiz Lessa points out that most of the tourism supply in Brazil has been so far offered by family businesses. However the number of hotels affiliated with hotel brands, is growing, , international hotel chains including Accor, Starwood Hotels and Hilton Hotels confirming their plans of expansion in the country.

ADIT Brasil has recently announced that it will be broadening its fields of activity to also include commercial -based investments. According to Luiz Lessa there is an increased international investor interest for shopping centre investments, offering attractive yields of 10-12% for acquisitions and 14-16% for developments. Nearly $5 billion has been committed by foreign investors to Brazilian real estate ventures over the past two years and there are at least 10 new real estate funds currently raising equity.

During the webinar Luiz Lessa stressed the importance of finding a local partner whatever the nature of the investment.  The Investment Agency is a business unit focused on organizing partnerships between Brazilian executives and foreign investors. The Investment Agency offers informative analysis on available investment projects in the country and conducts necessary negotiations – leading into deals.

Senior members of ADIT including Luiz Lessa will be coming over in London from 10-17 October for a week of business meetings and will be hosting a series of seminars and workshops.

For further information about ADIT’s scheduled visit in London, please contact ADIT’s representative in the UK, Tideway Communications on+ 44(0)20 8878 0787  (kerry@tidewaycommunications.com) or ADIT’s head office in Maceio, Alagoas  on +55 82 3327 3465 gepro@aditnordeste.org.br

Sunshine states

ADIT’s fourth Nordeste Invest expo attracted a record number of global developers and agents seeking out opportunities to partner with Brazil’s large and small-size developers.

Bernadette Costello reports from the event in Pontanegra, Natal in the state of Rio Grande do Norte.

The north east of Brazil was dubbed an investment “sweet spot” by foreign visitors and Brazilian developers who formed partnerships at Nordeste Invest last month.

From May 10-12, the states of Rio Grande do Norde, Bahia and Céara became hot property, with a focus on residential projects, hotels,shopping centres, social housing and Brazilian infrastructure. The expo was organised by ADIT,which has promoted investment in real estate in the north east for the past four years.

It is helped by APEX, the Brazil government’s investment promotion agency, and the Ministry of Tourism. ADIT predicts that up to R$1.8bn foreign investment will now flow into the north east as a result of its Nordeste Invest event in the coastal town of Pontanegra – 30 minutes from Natal airport in the state of Rio Grande do Norte.

Global asset managers, agents,developers and the world’s media were both curious and rigorous with their questions during three days of business rounds, site visits, panel debates and speed-networking events…

Agents were assured that the north east would be ready for the 2014 World Cup with stadiums, Natal s new airport and more hotel rooms. Talk centred on how ready the infrastructure and stadiums will be in the north east for Brazil’s World Cup in 2014. Other investors focused on the lack of major hotel brands but learned many are set to invest heavily in the north east states of Rio Grande do Norte, Bahia and Céara.

In fact, around 30m new hotel rooms will populate both city and coastal towns over the next decade. This includes Pontanegra which only saw its first tall hotels spring up on its beach less than five years ago.

Hotel brands on their way include Hilton, Ritz Carlton, Accor and Ibis, which will launch 55 new hotels in Brazil in time for the World Cup. But UK investors, such as Dominic Seely, co-founder of asset management firm Townhouse Capital, said holiday resorts eeded to offer more, such as water parks, golf and family entertainment.

And not all of this foreign Direct investment is focused on the burgeoning tourism industry, which is set to surge when Latin America’s largest airport open in Natal in 2011.

The building of first homes for the domestic population is seen as equally important, with 3m new social housing homes to be built across Brazil by 2030. This is the backbone of Brazilian president Luiz Inácio Lula da Silva’s policy to get people off the streets and into their own home. The “Minha Vida, Minha Casa” or “My Life, My Home” initiative is for low-income Brazilians, with each household eligible for a government subsidy of up to R$17,000 topped up with a mortgage from the Caixa Economica Federal. The bank is financing the entire Minha Vida, Minha Casa project and it’s hoped finance rates will aslo fall to 7.5% over the coming years.

Lula – as Brazilians affectionately refer to their Workers’ Party president – has also put increased standards in education and more workers’ rights at the forefront of government actions.To achieve the goal of building more than 1.5m social housing a year, plus extensive plans for holiday resorts, airports, and R$100bn of rail and road infrastructure, there is a demand for quality labour, says ADIT president Felipe Cavalcante.

Silvio Bezzera, founder of developer SindusCon and vice president of ADIT,added that the north east is tackling this issue head on. “The civil construction sector and local governments are reacting with new labour training schools – R$3m has already been put towards qualifying 15,000 people to finish projects that were started a year ago,” he said.

The transparency of Brazil’s property professionals, who were open about the drawbacks to investors, and then showed what the country is doing toimprove its problems, was evident at Nordeste Invest. This includes the lack of basic infrastructure in smaller suburbs of major cities – including roads, transport links, sewage and water quality. But to some investors this is an opportunity to help Brazil’s developers improve and prepare for the north east’s explosion in real estate.

Brazil powers up

The country’s economic stability and the fame it has gained from overcoming the international financial crisis are a few reasons why the world has their eye on Brazil. Recently Will Jackson, the deputy editor of Fund Strategy magazine, attended Nordeste Investe 2010 in Natal, Brazil’s most important event for real estate and tourism.

The suggestion that Brazil could be the world’s fifth-biggest power by the next decade would have once sounded far-fetched, but the election of Luiz Inácio Lula da Silva heralded a new era. But how well placed is Brazil to cope with the challenges ahead? Will Jackson reports.

Passengers travelling with TAM, a Brazilian airline, were last month posed a provocative question as they settled down and chewed their complimentary toffees. “Brazil will be the world’s fifth-biggest power by the next decade,” read an advert in Portuguese, attached to the headrest in front. “How will your company benefit from this fact?”

The suggestion that Brazil could be on the cusp of becoming a major economic force would have sounded far-fetched a decade ago. But the election of Luiz Inácio Lula da Silva – or “Lula” for short – as the country’s president in October 2002, heralded a new era of economic stability and wealth creation. Brazil’s GDP grew 3%-6% each year between 2004 and 2008, while interest rates fell by over 10 percentage points.

Even the banking crisis which engulfed the developed world in the fourth quarter of 2008 failed to put a significant dent in Brazil’s economic progress, and the country experienced a relatively mild contraction of 0.2% in 2009. Indeed, the International Monetary Fund (IMF) forecasts a rebound to GDP growth of 5.5% this year.

”Instead of becoming a victim of globalisation, Brazil emerged a victor to claim a leading role in world affairs”

This resilient growth, coupled with economic decline in the established world powers, has imbued Brazil with a growing self-confidence, and nowhere is this more apparent than in Lula’s desire for political influence beyond the country’s borders. The president joined forces with Turkey’s prime minister in May, to negotiate a nuclear fuel swap with Iran – despite direct lobbying from America to support sanctions.

Commentators, including Kevin Casas-Zamora, a senior fellow in foreign policy at the Brookings Institution, a public policy organisation based in Washington DC, noted the significance of Lula’s defiance. “A reformed Brazil has shed its subservient past,” he wrote in April. “Instead of becoming a victim of globalisation, like many in the underdeveloped South, Brazil emerged a victor to claim a leading role in world affairs.”

But despite Brazil’s development, risks to future growth remain. A recent uptick in inflation and interest rates has led to fears that the country could overheat, as wages rise and the country’s creaking infrastructure struggles to cope. Concerns also surround the potential impact of speculative inflows from overseas, and the country’s growing dependence on exports to China. So how well placed is Brazil to cope with the challenges ahead? And what has made its economy so apparently sturdy?

Mario Fleck, the president of Rio Bravo Investments in São Paulo, says the mortgage and credit markets will develop further, albeit slowly. “In the old days of high interest rates and high inflation, people would not buy houses with terms beyond 2-3 years and most people would buy their cars almost for cash,” says Fleck. “The mentality in Brazilian culture is that it doesn’t matter how much you pay as long as your income is enough to pay the monthly instalments, and that’s true for buying a fridge, a car or a house. But the trend is still very positive for the internal market here.”

Poverty remains a significant problem in Brazil – the World Bank estimates that 9% of Brazil’s 200m population was living on the equivalent of less than $2 a day in 2008, down from 22% in 2003. But the impact of rising wealth and credit creation among the middle classes can already be seen on the streets of Natal, the state capital of Rio Grande do Norte in north-east Brazil – one of the poorest areas of the country. Housing developments are springing up across the city, as middle class buyers move into apartment blocks for security and parking.

”With this capitalisation of the economy and more reasonable inflation and interest rates, we have big opportunities”

The region is attracting foreign money, and organisers estimate that this year’s Nordeste Invest conference – designed to boost real estate and tourism in north-east Brazil – generated about R1.8 billion (£660m) of new business. British companies already operating in the area include Charlemagne Capital and Salamanca Capital, which owns 50% of Ecocil, a local developer. Rupert Hayward, a director at Salamanca, says the north-east is attractive because of a lack of competition from the bigger listed construction firms, and lower land costs.

Outside of real estate, Fleck says wider credit availability offers “a huge opportunity” for other sectors. “With this capitalisation of the economy and more reasonable inflation and interest rates, we have big opportunities for retailers, for consumption, for electronics, and everything that comes with an emergent middle class,” Fleck adds. “That could mean insurance and tourism – things on which people are not used to having the money available to spend.”

In addition to credit expansion, higher wages in the public sector are also enabling consumers to spend more. Between 2003 and 2009, the number of civil servants increased by about 10%, but the total federal wage bill more than doubled in nominal terms. Wood says the government increased the minimum wage by 12% in 2009 – an increase of 7% in real terms, which will feed through to about 40% of workers.

But while higher wages and greater access to credit is bringing better housing and living conditions, fears about inflation are once again coming to the fore. The country’s economy grew by about 2.5% in the first quarter of 2010, an annualised rate of 10%. The EIU forecasts growth of 6.3% this year – well above the IMF’s estimate and too fast to be sustainable, according to Wood.

In particular, there are concerns that the country has spent too much money on higher wages and too little on infrastructure to support greater consumption and trade. Wood says Brazil is “notoriously poor” at infrastructure, in contrast to other emerging nations such as China. “Brazil has spent very little in public investment as a share of GDP – it’s only around 1 or 2%,” he says. “During this boom, you’ve had an increased tax take but unfortunately the quality of spending hasn’t been great. In the crisis, it went into civil servants’ pay packets rather than being used to fund projects to increase productivity.”

According to the World Bank, Brazil could significantly reduce its expenditure on logistics through investment in transport infrastructure – at present, it takes twice as long for Brazil to export than America. The government has ramped up spending by introducing the “PAC” accelerated growth programme, which aims to spend up to R40.5 billion on logistics, including R27.7 billion on almost 5,000 kilometres of roads – although Wood notes that only 50%-60% of PAC money has been spent so far.

”Everything is going very well so far, but down the road Brazil does not have the infrastructure to grow beyond 5%, maybe 6% a year”

Investors sense an opportunity. According to Jonathon Ong, a portfolio manager at Macquarie Funds Group, demand for electricity is growing at 1.2-1.3 times GDP a year, while vehicle traffic is rising at a similar rate. He has been overweight Brazilian infrastructure for several months, including investments in electric utilities, toll-roads, railways and ports. Ong points to government estimates that R90 billion will be spent on Brazilian infrastructure in the next five years – much of it related to the country’s hosting of the World Cup in 2014 and the Olympic Games in 2016.

But some commentators remain sceptical on PAC. Fleck recalls that even before the economy slowed during the banking crisis the country’s ports were struggling to cope with increased shipping. He dismisses the programme as “window dressing” but says that better infrastructure is crucial. “Everything is going very well so far, but down the road Brazil does not have the infrastructure to grow beyond 5%, maybe 6% a year,” he adds. “Doing some work on this infrastructure might change Brazil forever.”

Going hand in hand with the uptick in inflation are fears that Brazil could attract speculative capital inflows from overseas. In its April World Economic Outlook, the IMF noted the strong recovery in Latin America and the Caribbean, but also warned that inflation-targeting countries in the region may be vulnerable to short-term inflows as they seek to prevent overheating. “There is [an] argument for keeping interest rates low for a longer period than justified by domestic cyclical considerations, because higher interest rates may attract speculative capital inflows,” it said.

Brazil took measures to limit speculative foreign inflows in 2009, with the introduction of a 2% tax in October. “The received wisdom is that it doesn’t have much effect, but it coincided with the exuberance towards Brazil in the third quarter,” says Wood. “One could argue that the signal sent by policymakers was that they are ready to do something, to throw some sand in the works. Managing the capital inflows will be a challenge, but they’ve done reasonably well so far.” Wood says he does not expect the tax to increase, unless there is further appreciation in the real.

Despite the risks of inflation and speculative capital inflows, Wood says most of the concerns centre around Brazil’s ability to manage growth – a problem that is “a luxury to have”. However, the full realisation of Brazil’s potential is still some way off. “The next period is about consolidating the stabilisation story,” Wood says. “Brazil is well positioned to grow 4.5 – 5%, but even at those rates you’re not going to see a rapid convergence with income levels in developed markets. So although it’s doing well, and the middle class is doing well, the economy will still be lagging behind the developed markets for a while.”

Will Jackson was a guest of the Association for Real Estate and Tourism Development (ADIT) at the 2010 Nordeste Invest conference in Natal, Brazil.