International investors and developers set to increase their capital in Brazil property market

Brazil’s position as one of the premier global investment target markets is set to further strengthen in 2011 as foreign investors increase the capital they are willing to put into the country’s real estate sector, according to a new research report. 

Two thirds of real estate investors with funds committed to emerging markets in Latin America have set aside money to buy in Brazil in the next 12 to 24 months, the survey of more than 60 international private equity fund managers, investment bankers and real estate developers by Ernst & Young shows.
‘It is pretty substantial for a country that less than a decade ago was considered high risk due to an unstable economy, hyperinflation, mounting debt and a volatile currency,’ said Rogerio Basso, the Latin American hospitality practice leader at Ernst & Young.
He pointed out that today a strong economy buoyed by a broadly emerging middle class and availability of credit is fuelling investment interest across the real estate spectrum from residential to commercial assets and hotels. ‘In fact, the lodging sector is attracting keen attention, with approximately 50% of investors who are interested in Brazil indicating that hotels are a primary target for them Brazil’s lodging sector is benefitting from an increase in middle class disposable income, as well as expanding business travel as a result of a robust economy,’ he added.
The outlook for the hospitality sector in the mid term is particularly promising, since Brazil is set to host two of the world’s biggest sporting events over the next five years. With the FIFA World Cup taking place in South America for the first time since 1978 and 2014 matches scheduled across 12 Brazilian host cities demand is expected to be very high. That is then followed just two years later by the 2016 Olympics in Rio de Janeiro.
The vast majority of foreign investors eyeing Brazil’s hotel sector see the potential for increasing values over the next two years, which is prompting their search for hotel purchases. But it is currently tough for foreign investors to find investment grade hotel assets, and 60% of those entering the market are seeking to do it through joint ventures with established local players.
Development of new lodging facilities is one area of focus for foreign investors, especially as the country prepares for the World Cup and Olympics. According to global hotel data provider STR, only 8,100 new hotel rooms were under construction as of September 2010 but most international lodging operators are aggressively trying to sign up new management deals in the run up to 2014 and 2016.
However, foreign investors do not appear to be looking to build, buy and own hotels with the intent of flipping them for higher prices around the time of the two sporting events. Almost 60% of respondents indicated they would hold assets for six years or more. ‘This suggests that most investors see Brazil’s growth potential and large domestic market as a motivator for investment,’ said Michael Fishbin, Ernst & Young’s Global Hospitality Leader.
Most investors plan to build hotels within the framework of larger, mixed use developments in order to offset the high cost of land. Foreign investors’ commitment to the Brazilian lodging sector is also indicated by the fact that the relatively high cost of financing means that investors typically must put 30% or more equity into each deal.
The survey also points out that obstacles to successful foreign investment in Brazilian real estate do still exist. High taxes and restrictive labour laws can hamper overall investment returns, and although financial transparency has improved in recent years, there is still a relative lack of information available to investors, especially related to real estate debt instruments.