Ruban Selvanayagam is a full-time property investor / developer / trader with business interests in the UK and Brazil. Ruban has kindly provided us with this article for our blog.
He has been involved in UK property since 2005 and has built a residential buy-to-let portfolio located in the East Midlands and London as well as co-developing PS Investor Services and its associated information sites (see the organisations regularly updated blog here: http://www.psinvestors.co.uk/blog/).
Since 2008 – with a strong desire to travel and diversify his business objectives – he has been making regular trips to Brazil to explore property and land opportunities in what is one of the worlds fastest growing economies. Investors interested in finding out more about this country can access his free information site with detailed guides, hints, tips, strategies, statistics and more: http://www.brazilinvestmentguide.com/.
Property and Land in Brazil - Pros and Cons of Investing in Latin America’s Largest Country
The effects of the economic downturn on the global housing industry have bought into light the importance of analysing investment destinations from a broader and more detailed perspective. Despite the difficulties in marketplaces across the world, Brazil has continued to be publicised as a so-called ‘emerging’ country that offers investors solid and stable returns. However, as with any developing economy, risks do occur – many of which are not mentioned in the glossy sales brochures and marketing hype. So, is Brazil really the next global property hotspot?
The Economic and Political Growth of Brazil
Currency wise, the situation is very stable – the Brazilian real has, for a long time, been unpegged to the US dollar and the country has one of the highest international reserves in the world today; enabling it to be well placed in the face of worldwide debt issues and economic crises. Indeed, Brazil emerged out of recession much quicker than most developed countries: the economy shrank to its lowest point of 3.4 percent in the last quarter of 2008 and, by mid-2009, climbed back to record a 1.9 percent positive growth rate (GDP estimates for 2010 range from between 5 to 8 percent). Its economy has also become significantly more open to trade and investment (exports now account for 25-30% of Brazils national income, up from 15-20% in the 1990s). According to the World Economic Forum in 2009, Brazil was also the number one country in upward evolution of competitiveness for the year – gaining eight positions, higher than Russia and closing the gap between China and India.
Business Monitor International statistics pointed to the fact that, despite global financial uncertainty and lower purchasing power, tourism continues to increase. Brazil has the sixth largest number of world heritage sites of the 130 countries evaluated by the United Nations World Tourism Organization (UNWTO) as well as 7,490 miles of coastline, a largely warm climate and a vibrant culture. The arrival of both the 2014 World Cup and the 2016 Olympic Games look certain to also boost the country’s tourism industry.
The growth of the country’s alternative energy industry, initiated in the 1960s and 70s, have bought unprecedented benefits to the countrys economy. As post-Kyoto political pressure mounts on the need to protect the fragile global climate, it is highly likely that a premium will be placed on carbon-efficient energy sources and sequestration. Brazil remains in an excellent position to capitalize on this trend, particularly in bio-energy, wind and hydro-electricity, complemented by having vast reserves of freshwater and bio-diverse rainforests. The discovery of over 50 billion barrels of offshore stockpiles near the southern coast has been publically stated as enough to make Brazil a global gas and oil leader. However, as the government themselves have stated, the huge windfall that these findings will bring could end up being a curse as opposed to the countrys passport to the future. In light of this, Brazil has been seen reforming its oil laws with the intention of diverting a significant portion of the countrys oil wealth towards improving education systems and combating poverty, such as through the ‘Jovem Aprendiz’ (an educational support programme sponsored by the nationally own petroleum company, Petrobras).
However – whilst the country is relatively self sufficient in terms of its natural resources – export growth is an ever-important driver in the future and it has had to deal with the consequential effects of the global downturn (including price falls of primary goods, decreases in money remittances, a reduction in foreign direct investment and a reduction in lending ability). Due to its huge size, concern also remains as to the countrys ground transport network and ICT (information and communications technology) infrastructure – although a significant amount of investment is expected in the coming years for example via the ‘Programa de Aceleração do Crescimento’ (‘Growth Acceleration Programme’, a high profiled government sponsored initiative focused on energy distribution, transport, housing and sanitation improvements across the country).
Another concern of some investors refers back to the hyper-inflationary period that severely stalled the countries growth in the 1980s and 1990s – this was caused inefficient macro-economic management combined with excessive public spending. As a result of adopting a variety of counter reaction strategies, a ‘back-to-basics’ economic approach was the one that proved to work. Despite some recent worries with regards to an over-heated economy, inflation has broadly remained under control to date (more recently as a result of monetary tightening).
The countrys banking system was commended for its high regulatory standards at the 2009 Financial Stability Forum in Basel. The minimum Basel Ratio of the Brazilian banking system is 11 percent, 3 percent higher than what is suggested in the Basel Accord. Most banks, in reality, operate much higher than this level (at over 17.5 percent) with low leverage ratios (at over six times their capital holdings). In turn, credit rating agencies have therefore increased their ratings of the Brazilian economy: in September 2009, Moodys gave the country its BAA3 rating citing the country’s ‘strong economic and financial resilience’ whilst, a year before, both Fitch and Standards & Poor awarded higher ratings.
Politically, Brazil’s role on the global stage has also increased considerably – in the last 5 years over 300 additional diplomats have been bought into the government (with the same amount to be expected over the next 4 years). The country is a member of a number of world organisations including Mercosul, the G8+5, the G20, SACN and the Cairns Group (and is likely to gain seats at the OECD, OPEC and the UN Security Council in the near future) and it has continued to reinforce its ties with its fellow BRIC nations (Russia, India and China) in the form various favourable trade agreements and regular meetings to discuss collective growth strategies. Whilst some international commentators have accused the government of overly ‘pushing its weight’ – particularly with regards to its controversial relationships with Iran and Venezuela – such landmark events are particularly important to note with regards to the future of the nation.
The Housing Market
The real estate industry – on a general level – is comparatively immature and there is estimated to be a 7.9 million housing deficit (a figure that continues to rise). The majority of the Brazilian population has very little debt; saving is encouraged in the form competitive rates via the mainstream banks and the leverage ratio of the mortgage market is comparatively low (secured lending represents only 3% of the countrys GDP compared to 68% in the US, 11% in Mexico, 20% in Chile and 45% in Spain). Additionally, government schemes such as the ‘Bolsa Família’ (a programme of cash transfers to the poor) and the ‘Minha Casa, Minha Vida’ housing initiative (grants and financing for lower-income communities) as well as an ever-rising middle class are serving to bolster the housing markets’ growth.
Nevertheless, Brazilian real estate finance is evidently dominated by public controlled banks (who currently own 73% of outstanding loans) and there is a concern that the mortgage markets ability to grow in line with the economy will be impeded with the weight of government legislation and barriers to entry for private banks. At the present time it is also difficult for a foreign investor to leverage the purchase of real estate through mortgage finance largely due to the fact that the loans market itself is so underdeveloped (payment plans offered by real estate developers are the most common option currently being used). A further issue facing investors is the lack of public access to concrete sold housing data (there is no official property and land registry) meaning that reliance needs to be made on agents and sales personnel whose pricing estimates may be questionable. Investors should also be prepared for the detailed yet often complex legal system and bureaucratic procedures when doing business in the country (the World Bank’s 2010 ‘Doing Business’ report placed Brazil 129th out of 183 countries).
Due to its vast size, it would come as no surprise that a number of microcosmic real estate markets exist within the country. Whilst it is ever-important to monitor the wider housing market, investors should be aware that some parts of the country are over-saturated and inflated – naturally, detailed due diligence is required upon looking at any property or piece of land.
Brazil undoubtedly offers genuine opportunity for the real estate and land investor – yet, as a country witnessing never seen before changes, risks are materialising that need to be monitored closely. As one of the largest nations in the world, it should be appreciated that there is no uniform strategy and time should be spent understanding the Brazilian housing industry and the complex legal system that supports it as well as general factors such as the economic, political, cultural and attitude shifts that occur as the country continues to grow.
The ‘Brazil Real Estate and Land Investment Guide’ provides objective and detailed information for those exploring one of the world’s fastest growing economies. We offer an entirely FREE support system based on fundamental investment principles and not speculation. Please head straight to the website and sign up for reports, state guides, up-to-date statistics, strategies, interviews, articles, weekly broadcasts and more: http://www.brazilinvestmentguide.com/
Ruban Selvanayagam, Property Investor / Developer (UK & Brazil)
Linked In Profile: http://br.linkedin.com/in/rubanselva