Real Estate Forum - October 2008

International Beat
By Marcelo Horcel
Improved Transparency, GDP Growth
Make Brazil New Investment Hot Spot

THE TIMES OF RAMPANT INFLATION, CURRENCY crisis and political uncertainty in Brazil are long gone. The country has experienced economic stability for several years now and foreign investors have begun to increase their investments there. On a macro level, the Brazilian economy is strong: GDP growth averaged 4.5% annually from 2004 to 2007 and is expected to surpass 5% this year. Brazil ran a trade surplus of nearly $40 billion in 2007, with exports well balanced among North America, Europe and Asia. Fortunately, Brazil’s economy has withstood the global credit crunch reasonably well.

From an institutional standpoint, a major turning point came in April when both Standard & Poor’s and Fitch Ratings upgraded Brazil’s long-term debt to investment

Brazil has surpassed Mexico as Latin
America’s largest recipient of foreign
direct investment.

grade. That gave many institutions and pension funds the go ahead to invest in the country for the first time. The transparency of the real estate market has made significant strides and, in that respect, Jones Lang LaSalle rated Brazil as the most improved country in the world from 2004 to 2006. As a result, net foreign direct investment grew rapidly to some $34.6 billion in 2007, an 84% year-over-year increase. Brazil has surpassed Mexico as Latin America’s largest recipient of foreign direct investment and is now the world’s 10th largest economy.

These positive factors have led to a shift in the fundamentals of the real estate market and, accordingly, the appetite for property ownership in the country. Government reforms have provided incentives to increase homeownership and residential mortgage lending. Easier access to long-term loans, coupled with Brazil’s young population—the median age in the country is 29—is increasing the demand for better, more affordable housing. The World Bank estimates Brazil’s housing deficit at between 5. 4 million and 7. 9 million units, while the country’s birth rate implies a need for another 680,000 homes each year.

More than 20 home-building companies have gone public in the past two years, but many will need additional capital to grow. In addition, private developers are also looking for experienced partners to execute their expansion plans. Most residential building has occurred around Rio de Janeiro and São Paulo, while other areas of Brazil are underserved. Strong investment opportunities lie in providing multifamily housing for the lower- and middle-income segments of the population.

The country’s strong economy is creating greater purchasing power for the middle class, estimated at about 86 million, or 46% of the population. Yet only 18% of retail sales are made in shopping centers, suggesting that there is significant room for growth. Several global chains have already announced plans to expand their presence in new malls and hypermarkets. Because about one-quarter of the country’s shopping malls are in the São Paulo region, investment plays will be available in less saturated areas.

Along that vein, Brazil’s strong exports and rising consumer spending make industrial properties a natural opportunity for investors. More than 75% of industrial assets are owner-occupied, and there exists a growing desire for companies to take real estate assets off their balance sheets through sale-leasebacks. There is increasing demand for more specialized and modern facilities, including build-to-suit warehouses and distribution and logistics centers.

While Brazil’s investment outlook is bright, the future is not without potential risks. The biggest threat is that a deep, prolonged global economic slowdown will halt the country’s growth by reducing exports and foreign direct investment. On the other hand, great opportunities would arise should foreign investors need to quickly sell their assets there. Concerns about high inflation have diminished, as the Brazil Central Bank has done a solid job in keeping inflation under control.

The views expressed in this article are those of the author and not REAL ESTATE FORUM.

Marcelo Horcel is managing director of Latin American investments at JER Partners, based in McLean, VA. He may be contacted at marcelo.horcel@jer.com.