The value of commercial real estate in Rio should grow more than 50 percent over the next seven years, experts say
When the Olympics committee announced in October that Rio de Janeiro was selected as the site of the 2016 games, the members of the Brazilian delegation had good reason to celebrate. Brazil entered the history book of sports as the first country in South America to play host to the Olympic games, which will take place just two years after it hosts soccer's World Cup. These events will give an even greater boost to many key parts of its economy. According to experts, Brazil’s real estate market – already buoyed by lower interest rates, a rising middle class and an uptick in public housing investment -- is among the sectors that stand to benefit most from the Olympics.
To begin with, Rio de Janeiro itself will be the main beneficiary in terms of investments. The benefits of the Olympic games are not just isolated to the host city. According to Sérgio Cabral, Rio’s state governor, the state's coffers will increase by $50 billion thanks to various public and private initiatives as a result of hosting the Olympics.
Media impact is important, too. At a recent conference on Brazilian real estate opportunities held at IESE in Spain, Fernando Pulin, head of Spanish real estate development firm Developing, said that the games “mean that the city will be exposed to the entire world through 40 billion hours of media.”
According to Pulin, these factors and others will facilitate “an improvement in the city's business infrastructure and attractiveness, and enable it to develop even more of its great potential as a tourist destination for both Brazilians and foreigners.” Most of the major investments made in the run-up to the games are expected to go towards urban infrastructure, hotels and sports complexes, which many hope will benefit the city beyond the event in 2016. “The really impressive thing is the multiplier effect for the country’s economy," he added. "For every $1 of investment, we expect the economy to expand by $4.26. Fifty percent of that effect is expected to materialize in the state of Rio and the other 50 percent in the rest of the country.”
Beyond improving the image of the country abroad, “there will be an improvement in its renowned quality of life, new business activity, more jobs, more income and a larger middle class, which is the motor of any global economy,” Pulin noted. Inevitably, all this will have "positive repercussions in the real estate market, residential as well as tourism, commercial, industrial and logistics [real estate].”
SUPPLY AND DEMAND
Investment in Brazilian real estate will appreciate at double-digit rates, especially in areas near where Olympic activities will take place, predicts Anita Kon, professor of economics at the Catholic Pontifical University of São Paulo (USP). The value of housing near or in Rio de Janeiro will likely increase "by about 50 percent over the next seven years," and forecasts for commercial real estate are even higher, in not only Rio, but also the entire country.
The surge in Olympic investments takes place at a time when the public sector is investing more in housing to address a shortfall of supply currently plaguing Brazil. “The housing deficit in the country is estimated at about eight million homes, according to the Ministry of Cities (which is responsible for urban development policies), which means 14.5 percent of the country’s housing,” Kon notes. In rural areas, the shortage is even more acute, at 16.1 percent. But critically, she says, “the deficit is concentrated in [housing for] lower income families.… 90 percent of all these families need housing.”
Such initiatives as Bolsa Familia, a program established by the government of President Luiz Inácio Lula da Silva in 2003, enable the poorest Brazilians to receive a minimum income on condition that they comply with certain criteria for human development, such as having their children attend school and making periodic visits to the doctor. As a result, this segment of society does have access to public housing.
Another factor contributing to the real estate's development is the relative stability of the Brazilian economy in spite of the global economic crisis. According to the International Monetary Fund, Brazil's GDP grew 5.1 percent in 2008. Current forecasts call for its GDP to decline by 0.1 percent in 2009, but rise by 2.9 percent in 2010. Peixoto Accyoli, executive director of the Association for the Development of Real Estate and Tourism in Northeast Brazil (ADIT Nordeste), said at the organization’s conference in April, “The results achieved by the Brazilian economy presage a promising, less turbulent future for Brazil. Although it is not exempt from suffering some consequences of the financial crisis, [Brazil] is prepared to face it.”
Beyond that, interest rates have dropped from 25 percent to 9 percent over the past few years, and that enables more of the country’s 191 million citizens to access consumer credit and loans to buy homes. According to Accyoli, “consumption capacity increased last year by 6.5 percent, the highest rate in a decade, permitting Brazil’s emerging middle class to increase its buying power. This means enormous potential demand, which has been increasing year on year, requiring the government to build 1.6 million homes a year in coming years.”
Pulin adds that there is enough demand for eight million homes from low-income families, which number more than 50 million. With the country's rising quality of life and life expectancy, the segment is expected to increase. According to Pulin, “through 2020, we expect that each year there will be 1.6 million new families, 80 percent of which will be low income. So by 2020, Brazil would need to construct almost 18 million new housing units. Add the current deficit of eight million units, and the total is 26 million. That amounts to daily construction] volume of 6,380 housing units.”
HOME SWEET HOME
In addition to other programs, the government recently approved an ambitious plan to eradicate substandard housing found in the country's many shantytowns. This includes stimulus measures for the construction of low-income housing, under a federal government housing program called My House, My Life.
As part of the program, the government wants to create a market for first-time home owners, with houses priced at about 50,000 reals (17,000 euros or 28,700 dollars). Along with the construction of more homes, the government has approved a measure to change the current taxations system to spur consumption as well as property ownership. In some areas, municipal authorities provide incentives through rebates and exemption from property taxes.
Nevertheless, some real estate experts say the global financial crisis has made it difficult to develop the program fully. But according to Kon, its slow development has less to do with the downturn than with "bureaucratic factors [given] that the Brazilian National Bank for Economic and Social Development, which had to apply for a line of credit of five billion Real for construction firms to finance the project, has yet to open the line officially.” She adds, “Entrepreneurs in real estate believe that the program's slow pace of development so far is attributable to the model for financing basic infrastructure in each project."
Perhaps the good news is that the big benefits are still to come. “The My House, My Life program will inevitably impact investments in the sector even in 2009, although it will have a greater effect in 2010 and 2011,” says Kon. Both local authorities and investors forecast that next year, more liquidity will enter the real estate market thanks to loans provided by governmental banks such as Bank of Brazil, Federal Bank of the Northeast and Caixa Federal, as well as Bradesco, Banco Itaú and other private-sector banks.
Experts note that another opportunity for Rio is hotel development. It was one of the weakest aspects of its candidacy for the Olympic games since it only had 19,000 hotel rooms, and the International Olympic Committee recommended 40,000. Yet beyond Rio, with more than 3,000 kilometers of coastline, Brazil's tourism real estate has a bright future. In fact, it has already begun substantial developments through, for example, initiatives in the northeast of the country aimed at attracting foreign investors.
FOREIGN INVESTMENT HURDLES
Nonetheless, Miguel Hernández, a real estate expert at IE Business School, cites three major obstacles for foreign investors in Brazil. First, he says, there are legal obstacles. He says government contracts in Brazil “have had such a short track record … that they are not even comparable [to those in other countries]. There is always a legal barrier for entry in another country, and this is obviously complicated.”
Second, Hernández notes the importance of local considerations when it comes to launching and managing real estate projects. Doing business with the local government "is not the same thing for a foreigner as for a local person who has a good understanding of the way people use language, the culture and so forth.” Meanwhile, in the construction process, “you need local companies that can build at appropriate prices, with the right materials and have economies of scale, and so forth. That is not so easy or quick to carry out. You either [choose] good [local] partners or it gets very complicated.”
Finally, Hernández says that for the moment, at least, investors need to be aware of the uncertainties associated with the Real. “It is not the same thing to invest in the euro zone.” In addition, he says that issues around financing have changed since the economic crisis and because “a priori, companies don’t have the same balance sheets in one location as they do in another.”
What's more, it is hard nowadays for an international construction firm to win contracts in Brazil because the country has big real estate projects that tied to the infrastructure plans that the government has committed itself to pursuing. “The [entry] barrier for real estate developers will be lower than for construction companies, who will find it more difficult. The Brazilian [construction] sector is very powerful,” he says.
Nevertheless, Hernández says the Olympics will have a positive impact on the real estate sector. He reckons that if a host country is struggling economically, the event generates more tension, but if the country's economy is relatively healthy, as in the case of Brazil, the games help resolve political uncertainties, and that will filter down to the real estate sector.
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.