Mauro Costa no longer lives in a rented apartment on the periphery of
REGULATIONS SPUR GROWTH
Mauro’s story provides an example of the new reality that the Brazilian real estate market has been experiencing ever since the middle of 2005. With continued stability and economic growth, the market has recorded positive growth since 2001, according to Abecip (the Brazilian Association of Real Estate and Savings Institutions). Until recently, however, the market lacked regulations that made conditions for purchasing real estate more flexible. These changes were carried out by the government in 2005. Ever since, loan activity in the sector has shot up. In 2004, 53,787 real estate loans were made in the country, according to Abecip. In 2007, that number reached 195,900.
“The changes revolved around real estate guarantees,” says Jose Carlos Oliveira, professor of economics at the Unb (
Once the institutions that granted loans had more security, the government could expand the options for obtaining funding. According to the regulations of the Brazilian central bank, 65% of all the government’s savings had to be used to provide housing credits, as specified by conditions set by the SFH (the Housing Financing System, which caps interest rates for acquiring and constructing housing to 12 percent and 13 percent, respectively). The rest of the credits had to be provided at market rates and used for financing residential real estate. “These measures were designed to set up a specific budget from various governmental sources, and they encompass the expansion of credits for the financing of housing and the reduction of taxes on industrial products and a broad range of construction materials,” adds Anita Kon, professor at the PUCSP, the Catholic Pontifical University of São Paulo.
LENGTH AND FLEXIBILITY
Adds Kon: “The private financial sector also implemented measures to provide incentives for increased real estate financing. It lengthened the time periods allowed for financing and made the regulations more flexible for verifying the incomes of borrowers.” Currently, payment conditions are more stable, and financial institutions have reduced the requirements when it comes to providing proof of income. Even self-employed workers and small entrepreneurs can get financing based on conditions offered by the SFH, whose funding is subsidized by the government.
Despite this growth scenario and favorable real estate market conditions, Kon believes that this phenomenon still cannot be defined as a boom. However, Antonio Montes, professor at the Instituto de Empresa in
However, not every Brazilian social class is equally enjoying the larger housing supply. Kon explains that although the government has dedicated specific funds for the lower and middle classes, the biggest beneficiaries of the real estate boom are upper-middle-class and upper-class buyers. “At this level, the housing supply is very high, which leads to strong competition among sellers and makes business opportunities more flexible. On the other hand, even though there are funds specifically aimed at the lower class, a very large part of the Brazilian population is on the fringe and doesn’t have the buying power to take on these loans.”
One significant factor in this scenario – and the key difference between Brazilian conditions and those in the
Domestic buyers are not the only players in this ongoing festival. Foreign investors, notes Montes, “have become aware that they can continue to expand in countries like
Santamaría launched his project after building 40 promotional housing units that tested demand from foreign investors. So far, his company has put on sale 90 percent of the area of the
As Montes explains, “There is a growing demand from people who want to have their second homes in
In that region, notes Montes, property values have more than doubled over the last year. “Add to that, Lula’s 2006 plan that contemplates using up to 32 percent of fiscal surplus for real estate investments. Also, taxes have been reduced on construction materials. Labor is cheap, and interest rates have dropped a great deal, from 25 percent to 12 percent, and they continue to drop. Prospects are very positive.”
Regarding accelerating sales growth in various regions, “This was initially more intense in the region of
On the other hand, Juan Ignacio Sanz, a professor at ESADE, believes that we can indeed talk about a real estate boom in
According to Montes, prices in the residential and commercial real estate markets are going to shoot up over the next year, “if they continue to reduce interest rates, contain inflation and the growth rate continues to be stable. I think that there can be a significant surge in prices. So you have to take advantage of the investment opportunities now. There are a lot of international real estate funds that have their eye on
At the moment, most of the companies that compete in this market are Brazilian. Montes notes that the sector is consolidating. “When they began to talk about the growth of the sector, many companies wanted to issue shares on the stock market so they could undertake grand projects. The real estate market shot up after that. Some companies took a wallop but others survived. By the end of 2008, we’ll see what the results of the consolidation are.” Montes predicts that the big companies will survive, along with those firms that specialize in one specific sector.
In the current consolidation process, a large number of small construction companies are also growing, and they are confident that they will continue to make money. A quick walk through
LATIN AMERICAN CONTEXT
In Latin America, notes Montes, three countries are comparable from the viewpoint of real estate –
Montes notes that foreign investors have also shown a great deal of interest in renovating buildings in
According Montes, prices will increase at a spectacular rate. “A rental property [that you lease to someone] in
Kon believes that real estate sales in
Nevertheless, Kon notes, “in the medium and long term, this movement is not sustainable since the supply of real estate for the medium and upper classes is growing in a way that exceeds demand.” Over the medium and long term, “there is a major chance that the net assets of the less privileged classes will decline since there is a need to give priority to other basic infrastructure projects and to other social problems, such as education and health projects, that support development.”
Montes is much more optimistic. For him, the major risk revolves around knowing whether the Lula government will continue all the structural reforms that it has initiated and still has in the works, as well as whether it is able to battle against corruption and the shortage of security. Another danger is the energy crisis, which could affect the domestic market.
Oliveira notes that the Brazilian government is working hard to create fewer barriers to investing in the manufacturing sector, and to make it easier for foreigners to enter the Brazilian market. According to Oliveira, these types of investment will make it more attractive for foreign investors to come back to the market, as positive conditions in the country reduce the risk of massive capital flight. “The government is working on regulations that do not restrict foreign investment in liquid assets, but which provide incentives for investing in real assets both in the manufacturing sector as well as civil construction. These regulations should not be extremely rigid, or they will alienate investors. They should help avoid volatility.”
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the