Disdain for financial fat cats prevents Brazil falling into toxic property sector trap

Brazil avoids the property sector trap

A strong domestic property market and an economy largely unaffected by the credit crunch is helping the real estate sector in Brazil to avoid the kind of toxic downturn that is plaguing many established markets.While the property news headlines are still dominated by doom and gloom it is often hard to find out what is going on in markets where the economy has not spluttered into recession.

Indeed the sun is very much shining down Rio way. Brazilian President Luiz Lula da Silva meets US President Barack Obama this Saturday in Washington and he will tell him that he does not expect Brazil to fall into recession this year.

Brazil is the fifth largest country in the world with a population of 196 million and it has even been described as a nation that could overtake China in terms of growth.

It has enjoyed considerable overseas investment, not just in the real estate market, and it has an abundance of natural resources including 12% of the world's fresh water reserves, the world's third largest known oil reserve plus a strong export industry. Brazil is also the world's largest exporter of sugar, coffee, iron ore, beef and chicken. Its economy is growing and its finance markets have been recently upgraded.

Significantly for property investors, the Brazilian tourist market is huge. The majority of the market is domestic but the numbers of foreign visitors are increasing and the government has a national plan for tourism that is set to increase the current 4.7 million annual visitors to nine million.

But it is the domestic market that makes Brazil as good option for property investment, according to the experts.

The middle class is growing quickly and starting to buy second homes. According to da Silva seven million Brazilians have moved up to the middle class over the past few years. Brazil's dollar millionaires grew by 19.1% over the last year alone and many prefer to holiday in their own country. All this makes for an aggressive and sustainable real estate environment according to Samantha Gore, Head of Sales and Marketing for Brazil specialists uv10.

'There has certainly been an impact from the global downturn in terms of a slowdown in interest from overseas buyers but local Brazilians are still buying in force. Although there are fewer overseas buyers, many are choosing Brazil over and above other so-called emerging markets as it offers stability and security,' she said.

'The trick is to watch where the Brazilians are buying. If they consider a particular location to be worthy of investment, you should buy in as well,' Gore added.

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Sam Rodgers, the sales & marketing director of BRIC Investment, a company which sources real estate investment opportunities in emerging markets around the world, agrees. 'Brazil is one of the most self-sufficient countries in the world. Negative trade motions, caused by either falling currencies, which make exportation too expensive for other nations; or growing currencies, which result in importation being too expensive due to bad exchange rates, do not affect Brazil in a massive way,' he explained.

'The Brazilian property market offers massive advantages for foreign investors, with high levels of capital growth and no restrictions concerning profits and the return of capital to an investor's native country,' he added.

Indeed even cash strapped British investors are still looking at the market in Brazil. 'The strength of the pound against the Brazilian Real is making property in Brazil increasingly popular with investors. The demand for five-star resorts in Brazil, for example, is huge,' added Rodgers.

So how has Brazil managed to keep itself on track when so many established economies are going to rack and ruin? Well, it has avoided the toxic mortgage trap that has been the downfall of both US and UK banks and lending institutions. Traditionally mortgages have not been widely available. It is estimated that only 50,000 Brazilians have mortgages but that is set to increase with mortgage rates dropping due to better market stability. Even now with interest rates around 12.5% those loans that are around are only really available to those who can afford them.

But there are plans to make mortgages more affordable. The country's second largest real estate developer, Gafisa, says it is in talks with the government about an expansion of government-backed mortgage lending for lower income property buyers.

'The government is talking to all the sectors involved with real estate. We are part of a group of companies that has been consulted. The plan is evolving pretty well,' said chief executive Wilson Amaral.

He revealed that the government wants to expand the housing stock for low income families by about 1 million and is considering measures including direct subsidies and reduced down payment requirements.

Looking ahead the future for Brazil is bright. 'When Brazil starts exporting oil in around 2012 it will quickly become a major player in global affairs and the knock-on effect for the economy and in turn the property market will be massive,' said Samantha Gore of uv10.

Indeed the Chief of Staff of Brazil, Dilma Rousseff, said recently that oil exporting will change Brazil beyond belief. 'It will transform the nation to another level, with exporting capabilities like Venezuela, Arab nations and others,' he said.

There can be no doubt that the economy is slowing. The latest figures show that gross domestic product shrank by 3.6% in the last three months of 2008 from the previous quarter. And while this represents the largest quarterly decline since 1996, the economy is still out performing many others with an annual GDP of 5.1%.

Whilst The Economist predicts only 1.6% growth for 2009 it's not the negative scene recorded elsewhere on the globe. 'If there's a list of the world's fasting growing economies to be made, Brazil will always appear on it,' says Gore.

This means that other nations have to take heed of what is happening in Brazil. This week when President da Silva visits the US he is expected to back Gordon Brown's call against the rising wave of protectionism by rich nations. He is highly critical of protectionist measures and the subject will be one of his priorities during his first meeting with President Barack Obama on Saturday.

Massive investment in infrastructure, especially in the popular area of Natal in the north east of the country and forthcoming global attractions like the football World Cup in 2014 can only add to the attractiveness of the country for investors.

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'Prices are still increasing and thanks to that burgeoning domestic market, there is steady demand for good quality property in prime locations so the investor has an exit strategy in order to realize returns,' says uv10's Samantha Gore.

'For the would-be second home owner Brazil, in particular the north east, has a near perfect year round summer climate with no extreme weather conditions ideal for holidays and rentals,' she added.

Ronan McMahon of Pathfinder International backs this up. 'The domestic mortgage market is opening up and Fortaleza, for example, is becoming increasingly popular as a retirement destination for people from southern Brazil and Europe. Condo prices are up by more than 20% since last April and continue to rise. The short-term rental market is running at close to 100% occupancy for the next three months,' he said.

But it is, perhaps, the rise of Brazil as a major world player that will be the key to rising investment in the country. Relations between Brazil and the previous US president George Bush were not brilliant. 'Bush's policies toward Brazil were dignified. But I think they can be infinitely better with Obama,' da Silva said this week in an interview with the Wall Street Journal.

But it is perhaps da Silva's disdain for investment banks that is rooted in the aftermath of his 2002 election when US and European investment houses led a rout on Brazilian bonds, predicting da Silva would wreck the economy, that points to the most basic reason why Brazil if faring so much better than many other economies.

He is from a humble background – he was a school dropout and industrial worker who lost a finger in a factory accident – and he has no liking for Wall Street fat cats. His vision for the future has no place for bankers with large salaries. Post credit crunch he envisages a much simpler earth. 'The world will be less false. The economy that will count is the one that produces corn, rice, a screw, a car, a suit, a watch,' he said.