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Incorporating material kindly provided by Property Frontiers PDF Print E-mail
Friday, 16 October 2009 12:21

Focus on Brazil

Introduction


The fifth-largest country in the world, Brazil borders every country in South America except for Ecuador and Chile and straddles four time zones. Thirty-five times the size of the United Kingdom, it boasts a huge variety of landscapes, from the dense jungle of the Amazon rainforest, to the beautiful white beaches of the 7,250-kilometre coastline, to the mountains, valleys and waterfalls of its interior. Such diversity, along with the climate, the rich cultural life and the hospitality and passion of the Brazilian people, has made Brazil one of the biggest tourist destinations in the world, with something for everyone.


Historically, Brazil’s economic fortunes have been mixed. However, it is now keen to assure the world that it is a country on the way up. In 2002, whilst America was focusing on security and a potential war against Iraq, Brazil became part of the BRIC alliance, signing a trade and cooperation agreement with Russia, India and China and securing an agreement to supply these countries with raw materials and natural resources. Since then, its annual GDP growth has enjoyed healthy increases particularly in 2007 when it increased by 5.4%, the fastest rate since 2004.

Since 2003, President Lula’s administration has steadied exchange rates and aided social stability and confidence meaning Brazil now ranks as the 8th largest economy on the planet – jumping a huge 5 places from 2007’s ranking. What is more, Goldman Sachs has predicted that it will become the fifth largest economy by 2050, making it one of the most compelling equity investment cases among the world’s large countries.  

Is This A Good Place To Buy?

With GDP growth continue to grow by a healthy 4.8% in 2008 (IMF estimates) and following a 100% increase in 2007’s FDI, Brazil’s economy is clearly going from strength to strength. As the largest exporter of iron ore and soya, the 2nd largest exporter of frozen meat and grain, being self sufficient in oil and the world’s 2nd largest bio-fuel producer, Brazil does not rely on any one economy (particularly the US) and is thus  protected from any global fluctuations. Moreover it doesn’t face the stark energy crises many of the world’s other countries are battling as 80% of its power is currently supplied by hydroelectric dams. Further, the discovery of what is claimed to be the world’s largest offshore oil field from the coast of Rio de Janeiro is expected to have a total value of US$25bn – US$ 60bn and to generate healthy industrial interest in the country.

Since Standard and Poor raised the country’s long-term foreign currency debt rating from BB minus to BBB minus and awarded it an investment grade rating for the first time, the country’s benchmark stock market index has shot to a record high, further confirming Brazil’s convincing economic maturation. This confidence was echoed by the Wall St Round Up who ranked Brazil at the number 2 spot on NuWire Investor’s list of the Top 5 Latin American Real Estate Markets in 2007, whilst Morgan and Stanley’s Capital International Global Emerging Markets pole named Brazil the world’s biggest emerging market in 2007 (www.knightfrank.com).

This, coupled with the country’s soaring tourism industry which is predicted to continue to rise by 5.3% per year until 2017, means Brazil is likely to develop not only into one of the world’s hottest holiday destinations but also one of the globe’s more lucrative investment hubs. Property and land prices, though rising, are still undervalued meaning entry costs are lower than in much of Europe and leave a lot of room for growth. In some areas, capital growth has been as high as 20% in recent years and rental returns of between 9 to 14% per annum are achievable on well placed units.  Further, with the announcement that the 2014 Football World Cup will be held in Brazil it can be expected that demand across the breadth of the country will be bolstered.

Aside from the tropical climate, spectacular and varied scenery, the culture of enjoyment and the year-round sunshine (giving an annual potential occupancy rate of around 30 weeks), there are a number of practical reasons to buy property here. Brazil is considered low risk in terms of war, terrorism and natural disasters, and the economy, as figures show, is stable. Infrastructure improvements are being put in place throughout the country, thanks to the government scheme PRODETUR which is dedicated to implementing tourist infrastructure with funds of more than $670m. Following the success of PRODETUR 1, a second phase is now in place which will channel an additional $400m into the country’s infrastructure. Accessibility is therefore being increased and in line with these developments, British Airways recently announced that it is upping its London/Buenos Aires flight quota to a daily service. It has also announced that it will now fly direct to Rio, instead of via Sao Paulo, meaning almost two hours will be cut off this flight time (www.propertyinvestornews.com).

Property can be purchased on a 100% freehold basis, and both property rights and title are secure. Taxes remain low and the purchase and selling processes are relatively straightforward for urban investments with simple transfer of title. The cost of living in Brazil is some 20% lower than in the UK and the currency exchange rate is also favourable.

All of the above mean that demand for property in Brazil is on the increase.  The most attractive areas for property ownership are currently in the coastal north-east of the country, notably Natal, Ceara, and throughout Bahia. Here prices are still very affordable, but in areas where infrastructure improvements are underway they are rising extremely quickly. Rio de Janeiro is still an attractive area although the market here is much more developed meaning entry prices are higher and percentage returns lower.

Aside from increased interest from foreign buyers it should also be noted that the lower end of the market is set to experience significant increases in demand over the next few months. As the Brazilian economy expands, domestic wealth is also likely to increase, meaning local inhabitants will be able to enter the market seeking medium grade accommodation. Foreign investors opting for these kinds of purchase then have a secure exit strategy which should result in high returns. Wherever you buy in Brazil, it is important to ensure that your property is relatively close to key amenities - there is always higher demand for properties within easy reach of an international airport and the beach.

Something to be aware of is that due to Brazil’s somewhat emergent status in property investment terms, buyers may face problems with inexperienced or unscrupulous developers. Where possible it is advisable to purchase from a developer with some kind of proven track record so that satisfactory completion of your property can be relied upon.


Which Type Of Property Should You Go For?

In urban areas, the best option is probably to invest in a serviced apartment in a reputable and secure suburb. In major cities such as Sao Paulo, the highest returns can generally be made on smaller apartments which are in constant demand from the young professional population. Those wanting to invest inland might like to consider building a pousada, or guest house, in a small village in one of the chapadas (valleys) which can also be profitable.

The vast majority of Brazilians live within 300km of the coast and it is here that an increasing number of luxury resort developments are appearing. Properties with good access to the beach, nearby cities and an international airport, as well as a range of on-site facilities will always be popular with tourists and thanks to the country’s tropical climate, should secure relatively high occupancy figures for most of the year.

As in any market, ensure that the chosen property stands out from others in terms of quality and amenities.

Hotspots

As the largest and most famous cities in Brazil, Rio de Janeiro and São Paolo are the safest opportunities for investment, although prices are likely to be high in the desirable areas and percentage returns will diminish proportionately.

The two cities have a relationship similar to New York and Los Angeles – Sao Paolo is the centre of government and finance in the country, and is therefore likely to be popular with those looking for commercial and office properties or accommodation to serve the prolific professional population, whilst Rio, the cidade maravilhosa (beautiful city), has a reputation for carnival and the arts. Sandwiched between mountains and the sea, Rio has 45 miles of white-sand seafront, including the famous Copacabana and Ipanema beaches, and is therefore likely to be popular with those wanting to take advantage of high tourist numbers and the city’s reputation as one of the great romantic destinations.

Sao Paulo is the largest and richest city in Brazil with a modern infrastructure, educated workforce and one of the highest qualities of life in the country. Its real estate market is unique in that it is fuelled solely by local demand. Brazilian buyers in this booming city are generating high growth and even higher yields in the region of 9-14% gross for functional serviced properties. Occupancy levels are extraordinarily high with minimal void periods making this an excellent investment choice. Luxury one bed apartments in desirable Campo Belo are available from £78,500 whilst one bed apartments close to the city centre are available from £37,500.

Further north, investors will find more opportunities in the less developed and beautiful regions of Rio Grande do Norte and Ceara. With rainforest sweeping down to some of the finest beaches in the world, the north combines a fresh, unexplored feel with properties designed to a luxury standard. Confidence in this area is sufficiently high for some agents to offer guaranteed returns of up to 5%. According to www.uv10.com at least 80,000 houses and apartments will have to be built in the northeast if existing demand is to be met. Supportive infrastructure is under development especially in Rio Grande do Norte where investment of around R$400 million in hotel construction is scheduled over the next four years.

The city of Natal offers exceptional food, scenery and entertainment at a fraction of the cost of its more southerly competitors. Boasting the lowest crime rate and one of the highest quality of life rankings in the country, it is becoming a firm favourite amongst tourists especially Europeans, who only have to fly 7 hours to reach its sandy shores. With an average temperature of 30°C and 360 days of sunshine a year and some 400km of truly spectacular beaches it is not hard to understand Natal’s popularity. Currently devoid of sophisticated luxury resort developments, investment in high end property is likely to be lucrative. The nearby opening of a David Beckham soccer academy in Cabo Sao Roque should also increase Natal’s global profile.

Aside from Rio Grande do Norte, other states which are proving popular in the north include Ceará which is just 6 hours from Europe, functions as a major tourist hub and has already reported significant returns on property. Ocean fronting plots can be bought for £12,000 whilst apartments with sea views sell for £23,096.

Other areas worthy of consideration are Pernambuco; Alagoas; Sergipe; Paraíba; and Piauí whose interlinking infrastructure has recently undergone improvements.
                         
Bahia is also tipped for increased growth, although the tourist industry is already somewhat more developed here than in the above-mentioned areas. Supported by the national government, this town’s economy is thriving and has one of Brazil’s largest economic growth indexes with a cost of living that is 20-40% less than in Europe. Infrastructure is modern and efficient and average annual temperatures of 25˚C along with an absorbing landscape make Bahia a pleasure to visit. Coastal land plots here cost from £19,700, studio apartments with ocean views from £20,000 whilst more luxurious beachside apartments are available from £67,500.


Buyer’s Guide

Non residents are given the same rights as foreign nationals when buying property in Brazil although special conditions apply for those wanting to buy near the coast, frontiers and certain areas designated as national security. Rural areas can be acquired by non-residents according to specific law denominations. Under Brazilian law, right of possession and right of ownership are both sanctioned.  

Mortgages

Finance is not yet available in Brazil.

Key Risks

There are a few risk factors associated with buying in Brazil, as there are with pretty much every country. Because of its emerging market status, dubious ‘due diligence’ and heavily-inflated prices have led to one or two horror stories in the past. Although comparing properties agent by agent is laborious, it does reveal discrepancies in pricing, which can differ by up to 25%. Rigorous analysis also uncovers the small print behind lofty promises of 15% guaranteed rentals etc. As they say in Brazil, Brazilians sabe jogar (know how to play) and any investor must make sure that he has his wits about him. Verification of all rental agreements as well as employing reputable agents will avoid the shortfalls which can beset the more naïve investor. Trading practices also differ considerably from those in the UK and occasionally unusual pricing structures will be enforced. Prior research into all aspects of the contract should safeguard against nasty surprises.

Brazil’s somewhat turbulent price history may discourage some investors as well as its lack of available finance. However, those able to see past these risks will realise that this country’s strong potential does help to allay such fears.

Key Opportunities

On a more positive tact, rising tourism, encouraging economic growth and vast infrastructure improvements throughout the country all point towards Brazil’s very bright future. Low entry costs are resulting in very high gains and extremely palatable investment opportunities. As the country powers towards its predicted economic prowess in the years to come, investors shrewd enough to have invested today will be able to sit back and enjoy their spiralling returns.
   

 

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