Why Brazil Investment

Brazil Property Investment - facts and figures

President Lula has brought great hope and improvement to Brazil. Inflation is at an all-time low and foreign investment is now actively encouraged.

Brazil is one of the BRIC countries (Brazil, Russia, India, China). It is the only one to have a full democracy and low risks of war, terrorism, SARS and hurricanes. Morgan Stanley Capital International recently reported that Brazil has become the world‟s biggest emerging market, displacing China.

The recent discoveries of major oil reserves are prompting predictions that Brazil could join the world's "top 10" oil producers.

Inflation was 3% last year, well below the official target. This has allowed a steady reduction of interest rates whilst much of the world has seen increases.

Brazil's benchmark fixed lending rate has fallen from 21% in 2005 to 12.5% in 2007. The government of Brazil expects this to continue falling to 9.5% by 2010.

Brazil is self-sufficient in energy and raw materials, helping to insulate it from any downturn in Western and US economies. Many press reports state that Brazil is unfazed by the financial crisis in the US and Western Europe caused by the collapse of sub-prime mortgages and house prices.

Brazil's Real (R$) has risen to its highest level for over eight years as demand for commodities plus domestic local stocks and bonds have fuelled currency purchases.7 Brazil has also built up foreign reserves of over US$100 billion, further insulating its economy from recent global financial tremors.

Foreign investment in new construction and real estate projects in Brazil jumped 35% to US$2 billion last year, the fastest expansion in three years.

Starting in mid-2005, more that 25 real estate companies have debuted on the Brazilian Stock Market, raising more than R$17 billion. According to the Sao Paulo Stock Exchange, foreign investors bought nearly three quarters of the shares on offer.

Improvements in housing and rural electricity programs have been recent accomplishments in Brazil. The World Bank has played a catalytic role through a Housing Development Policy Loan of US$502.5 million, approved in June 2005. An additional Sustainability Loan of US$505 million has also been granted to support Brazil‟s goal of balancing economic growth with social development, plus the maintenance and improvement of environmental quality.

The World Bank also approved a US$501.25 million Road Transport Project to improve Brazil‟s federal road infrastructure.

Brazil Housing Deficit Overview:

The housing deficit in Brazil is estimated at 7.9 million units. The state of Ceara in Northeast Brazil has a deficit of 420,000 homes of which Fortaleza, the capital city of the state, has a deficit of 154,000 homes.

The Lula da Silva administration will continue its effort to reduce the country's housing deficit, by concentrating on low-cost housing for low-income families and on affordable housing for middle classes.

The Brazilian government‟s Minister for Cities stated that 2005 was a year in which the federal government of Brazil applied record funding towards habitation - a total of R$15.3 billion.

The recent availability of 240 month mortgages (previously 60 months), record low interest rates and rising wages have led to record mortgage borrowing, and government guarantees for low-income homebuyers are making low cost homes attractive.

By 2006, driven by the record mortgage lending of approx £5 billion (the banking industry predicted further increases in 2007) the property development sector was beginning to address the housing demands of the low and middle classes. Luiz Paulo Pompeia is director of the Brazilian Enterprise for Property Studies (EMBRAESP) and he concurs that this market sector has been neglected during the past six years. He believes that from 2007 it will recover strongly from having become the sector with the largest deficit.

Brazil‟s benchmark fixed lending rate stands at 12.5%. The government of Brazil expects this to fall to 9.5% by 201015 (both figures May 2007)

Steep downward trend of interest rates: the variable rate went down form 12% plus TR* in 2005 to 8% plus TR* in 2007. The fixed rates have gone even lower from 21% in 2005 to 12.5% currently. There is no TR* on fixed rates. *(TR is the Taxa Referencial – a control mechanism that is adjusted monthly and levied by the government (3.25% as at June 2007).

João Crestana, vice-president for urban development for Secovi (the main syndicate of the real estate sector in the State of the São Paulo), stated in the New York Times, (05.07.07): "There is a stronger demand for residential property. There is a deficit of properties and currently there are plenty of people with money to buy them. (Construction) companies can see there is a niche market."

Source: João Pinheiro Foundation - Déficit Habitacional no Brasil 2005
Source: Agencia Brazil
Source: Hines, Calpers May Create $800 Million Brazil Fund by August February 12, 2008, Bloomberg.com
Source: Reuters - Brazil gov't sees Selic rate at 9.5 pct in 2010 (May 2007)
Source: New York Times - Loan Changes in Brazil Motivate New Buyers and Home Building

Brazil Investment - facts andf figures

Location: Eastern South America, bordering the Atlantic Ocean
Capital: Brasilia
Largest City: Sao Paulo Population: 188,078,277 (2006 est. CIA World Fact book)
Religions: Roman Catholic (nominal) 70% Languages: Portuguese (official)
Geographic coordinates: 10 00 S, 55 00 W Map references: South America Coastline: 7,367 km Climate: mostly tropical, but temperate in south Area (comparative): slightly smaller than the US. Total 8,514,215.3 km. Government: Democratic Federal Republic President : Luis Inácio Lula de Silva
GDP: Ranked 9th World Bank. Total: $1.616 trillion (2006 est.18) GDP/Head: $8,600 (PPP) (2006 est.19)
GDP composition by sector: agriculture: 8% industry: 38% services: 54% (2006 est.)
Currency: Real (R$ BRL) Time Zone: GMT -2 to -5 hrs
Calling code: 55 Border countries: Argentina 1,263 km, Bolivia 3,126 km, Colombia 1,644 km, French Guiana 655 km, Guyana 1,298 km, Paraguay 1,339 km, Peru 2.995km, Suriname 593 km, Uruguay 1,003km, Venezuela 1,819km .
18 CIA

Terrain: mostly flat to rolling lowlands in north; some plains, hills, mountains, and a narrow coastal belt Elevation extremes: lowest point: Atlantic Ocean 0 m highest point: Pico da Neblina 3,014 m Natural resources: oil, bauxite, gold, iron ore, manganese, nickel, phosphates, platinum, tin, uranium, petroleum, hydropower, timber Land use: arable land: 5% permanent crops: 1% permanent pastures: 22% forests and woodland: 58% other: 14% (1993 est.) Irrigated land: 28,000 sq km (1993 est.)

Environment (current issues): deforestation of the Amazon Basin destroys the habitat and endangers the existence of a multitude of plant and animal species indigenous to the area; air and water pollution in Rio de Janeiro, Sao Paulo, and several other large cities; land degradation and water pollution caused by improper mining activities
Environment (international agreements): party to: Antarctic-Environmental Protocol, Antarctic Treaty, Biodiversity, Climate Change, Desertification, Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Marine Dumping, Nuclear Test Ban, Ozone Layer Protection, Ship Pollution, Tropical Timber 83, Tropical Timber 94.

For more information visit the UK Brazilian Embassy http://www.brazil.org.uk/

Brazil Economic Situation

Brazil has the ninth-largest economy in the world, with a diversified middle-income economy with wide regional variations in development progress. The Economist reported in April 2007:

“[…] Brazil is the steadiest of the BRICs. Goldman Sachs recently reaffirmed the country's BRIC status. Unlike China and Russia it is a full-blooded democracy; unlike India it has no serious disputes with its neighbours. It is the only BRIC without a nuclear bomb. The Heritage Foundation's “Economic Freedom Index”, which measures such factors as protection of property rights and free trade, ranks Brazil (“moderately free”) above the other BRICs (“mostly unfree”). One of the main reasons why Brazil's growth has been slower than China's and India's is that Brazil is richer and more urbanised”.

Source: The Economist, Land of Promise (12th April 2007)

Most large industry is agglomerated in the South and Southeast. The Northeast is the poorest region of Brazil, but it is beginning to attract new investment.

Characterized by large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other South American countries and is expanding its presence in world markets. Strong external demand and a more active export policy have contributed to booming export earnings since 2003, bringing a large adjustment on the external accounts: the trade surplus swelled from US$2.7bn in 2001 to US$44.7bn in 2005, transforming the current account from a deficit of 4.6% of GDP in 2001 to a surplus of 1.8% of GDP in 2005.

The government continues to focus on reforming the domestic economy to deliver long term cash savings and create a more flexible environment for business.

In March 2005 Brazil concluded its latest programme with the IMF, under which £21.5 billion of emergency funding has been made available to Brazil since 2002. The Brazilian Government chose, however, to use only £8.8 billion of this, drawing down nothing in the final 18 months of the programme. In December 2005 it also announced that it would re-pay its IMF debt (US$15.5billion) by the end of 2005 - two years ahead of schedule, saving US$900 million in interest payments. It has also fully re-paid its Paris Club obligations to the UK, and retired all of its Brady Bonds – also ahead of schedule. The Brazilian Government remains committed to increasing savings and reducing expenditure in order to deal with a high debt/GDP ratio (of around 51%)

The average annual GDP growth in Brazil is projected to be significantly stronger in 2007-11 than Brazil‟s historical average of 2.5%. Domestic demand will be a more powerful engine of growth in 2007-11 than in 2002-06. Lower inflation and real interest rates will foster continued steady growth of real income, investment and employment. Targeted tax breaks and other measures announced in January 2007 will help stimulate investment in infrastructure and IT. The external balance is projected to make a positive contribution as investment expands export capacity.

Since the election of President Lula Da Silva in October 2002 inflation has stabilised and last year, at only 3%, it fell well below the target of 4.5% set by the central bank. The markets expect it to remain below target this year. Real interest rates are at their lowest level since 2001 and Brazil has enjoyed a robust growth that has yielded increases in employment and real wages.

The living standards of the poor have been soaring, thanks in part to handouts from the federal government. The introduction of the Real as Brazil's currency in 1994 ended decades of high inflation. Income inequality, from which Brazil suffers more than most other countries, has at last begun to shrink.

Source: Foreign & Commonwealth Office of Great Britain
Source: The Economist: Brazil Fact Sheet 23 Source: Foreign & Commonwealth Office of Great Britain

Source: The Economist: Economic Data

The Housing Deficit in brazil

The housing deficit in Brazil is estimated at 7.2 million units, whilst informal urban settlements are growing four times faster than the average, overall urban growth.

Available data on housing and land markets suggests that Brazil's urban land and housing markets have not been able to keep pace with housing demand. In 2002 demand was estimated to be 1 million housing units per year.

Although the supply of housing in cities across the country has increased, much of this remains unaffordable for low or middle-income households. Formal sector housing is affordable to households earning the equivalent of more than four times the minimum wage, but less than 50% of the population falls within this category. Hitherto, a major barrier to house building has been the lack of affordable finance; in terms of interest rates on commercial loans, Brazil has long been regarded as one of the most expensive countries in Latin America.

This is now firmly set to change, with reforms currently under consideration by the National Legislature. Once these reforms are in place, Brazil's enormous underlying assets can be financed and it is predicted that this domino effect will unleash a sustained real estate boom.

The Brazilian government's Minister for Cities stated that 2005 was a year in which the federal government of Brazil applied record funding towards habitation – a total of R$15.3 billion (US$6.7 billion).

The Luiz Inácio Lula da Silva administration will continue its effort to reduce the country's housing deficit, estimated at 7.2 million homes, by concentrating on low-cost housing for low-income families and middle class, affordable housing.

The Minister also announced that the target for 2006 is to reach R$18.6 billion (US$8.1 billion) in housing investment.31 By 2006, driven by the record mortgage lending of approx £5 billion (a figure that the banking industry predicts will increase again in 2007) the property development sector was beginning to address the housing demands of the low and middle classes.

The director of the Brazilian Enterprise for Property Studies (EMBRAESP) Luiz Paulo Pompeia concurs that this market sector has been neglected during the past six years but believes that from 2007 it will recover, having become the sector with the largest deficit.
Improvements in housing and rural electricity programs have been among Brazil‟s recent accomplishments.

The World Bank played a modest but catalytic role in these achievements through, in particular, a US$502.5 million Housing Development Policy Loan that was approved in June 2005. This aims to support the Government's efforts to improve access by the poor to better, serviced housing. The World Bank also provided an additional Sustainability Loan of US$505 million to support Brazil's goal of balancing economic growth with social development, plus the maintenance and improvement of environmental quality. The World Bank also approved a US$501.25 million Road Transport Project to improve Brazil‟s federal road infrastructure.

Source: Agencia Brazil
Source: World Bank – Project Information Document
World Bank: Low Income Housing in Latin America & The Caribbean, Jan 2007
Source: Agencia Brazil

Brazil property -Foreign Investment

From 1964 to 1986, approximately 27% of houses built were privately financed to some degree, resulting in an 11% reduction of the overall housing deficiency index, according to the João Pinheiro Foundation (2000).

The general population of Brazil had thus been responsible for the majority of this overall reduction in housing deficit, through individual or collective initiatives, which have highlighted self-construction methods.

In the 1990s, however, the continued reduction of the housing deficit began to be seen as an issue that, whilst not solely the government‟s responsibility, did require government stimulation – especially in the case of lower and middle-income (“affordable”) housing.

In 2007, as a result of government policy, foreign companies are already investing in Brazil, drawn by the falling interest rates and strengthening economic growth that they forecast to boost demand for both commercial buildings and residential properties. In 2006, foreign investment in Brazilian real estate quadrupled from the previous year, reaching approximately US$1.5 billion, according to the Central Bank of Brazil.

Brascan Imobiliaria S.A., a subsidiary of Toronto-based Brascan, now has fixed assets in Brazil worth US$300 million. Sales last year rose to US$180 million, of which US$20 million was profit. Half of Brascan's projected turnover in Brazil for 2007 (US$200 million) will come from residential condominium sales with the other half from luxury hotels and shopping malls.

Business magazine CartaCapital ranks Brascan Imobiliara top of the 12 best Brazilian construction companies. The Company has been a joint-venture partner with Inter-Continental Hotels for more than 25 years, and owns 60 percent of the chain's two five-star properties in Rio and Sao Paulo.

Hines, a U.S. real estate developer, and Calpers, director of the California Public Employees' Retirement System, have already created funds worth US$820 million to invest in Brazilian real estate. The Calpers and Hines partnership created its first fund in 2005, raising US$250 million. In February 2007, they successfully launched a second fund, with a subscription of US$570 million.

Observers are already noting that Latin America's largest economic powerhouses, Mexico and Brazil, are beginning to enjoy a real estate revival that neither country has seen in years with building sprees in residential and commercial properties. This is due to sound economic fundamentals, modernised politics and recent law changes to stimulate foreign investment. As Rogerio Basso, a Miami-based Latin America specialist for Ernst & Young's hospitality and real estate advisory service, puts it: "There are good expectations for growth in both countries." Three areas in Brazil's real estate market – middle-income housing, tourism and "build-to-suit" industrial warehousing – are poised for impressive growth within a three to five-year horizon.

At the Reuters Latin America Investment Summit in March 2007 Gary Garrabrant, CEO of realty investor Equity International, stated that Brazil offers tremendous opportunities in developing affordable housing and other areas related to real estate, such as special purpose finance companies.
Garrabrant is enthusiastic about the country and its investment opportunities. Equity International has stakes in Gafisa SA (home construction), BR Malls (a shopping centre operator that has already filed to go public), and Bracor. Garrabrant even said that so many investors had inquired about Brazil as an investment destination that it was on the verge of being worrisome, as Equity International likes to operate where the playing field isn't too crowded. "On a superficial level Brazil is hot. It's fashionable to be investing in Brazil," he said. “Brazil's middle class is growing and the country's vast poor are about to gain affordable housing.

Foreign investors have not missed that story”, Garrabrant is of the opinion that when major U.S. pension funds and institutional investors are investing heavily, it is a sign something is changing. “There are more durable investments, not just one wave”.

Source: World Bank – Country Brief
Source: Habitat for Humanity website
Source: Real Estate TV, Central Bank of Brazil Source: A mixed-use future from hotels to affordable housing Brascans Jacky Delmar (Latin CEO Executive Strategies for the Americas. April 2000)
Source: Bloomberg - Hines, Calpers May Invest More in Brazil's Real Estate Market