Tax exemptions announced for foreign investors in real estate trusts in Brazil
Foreign real estate investors are exempt from paying a financial transaction charge on real estate investment trusts traded on the country’s stock exchange, it has been announced.
It is part of an overall plan to develop funding alternatives for local builders, many of which are overly dependent on loans from the state development bank BNDES, the main source of long term corporate financing in Brazil.
A government official said that the measure was designed mainly to boost investments in the country's buoyant real estate market.
‘The objective here is to stimulate long term investment in the real estate sector. This measure should not have a relevant impact on the currency,’ said Dyogo de Oliveira, a finance ministry official.
At present yields on an average local Real Estate Investment Trusts are between 7% and 8%, depending on size, compared with less than 4% for a 10 year local government inflation linked bond.
Last year about 14 billion Reais worth of REITs and similar instruments were sold in initial public offerings in Brazil, compared with 7.66 billion Reais a year earlier.
The Brazilian government is keen to boost the construction sector and recently reduced payroll taxes for construction firms because of weak economic growth.
Brazil is considered one of the most attractive emerging market countries for commercial and residential real estate, topping China for the first time in three years, according to a survey conducted by the US based Association of Foreign Investors in Real Estate.
Sao Paulo, Brazil's largest city, climbed to 4th from 26th on the list of top global cities for foreign investment in real estate, the association said.
Nevertheless, some Brazilian builders are facing problems after years of poorly managed growth and runaway construction costs. Major Brazilian homebuilders like PDG Realty SA are scaling back operations to focus on executing old projects and generating cash to reduce debt.
Government officials said foreign investors, who have little participation in REITs, could bring some needed cash to the industry.
Meanwhile, figures from the Brazilian Association of Mortgage and Building Lenders shows that property lending, covering both mortgages and loans to real estate developers reached 82.8 billion reais in 2012, an all time high.
Credit for real estate development and mortgages has risen steadily in Brazil. We expect this to continue at an annual expansion of 15%,’ said Octavio de Lazari, president of the association.
The association also said that Brazilian mortgage holders saw an increase in levels of indebtedness in 2012, but rising salaries more than compensated for the increase in debt loads. In addition, the many holders of new mortgages gain, in terms of family income, because their mortgage payments are equal to, or below, what they previously paid in rent.
Further good news for potential investors looking to invest in the Brazilian Real Estate Market is that banks in Brazil are likely to broaden their focus in terms of mortgage and development lending.
‘There isn't the slightest risk of a real estate bubble in Brazil. Brazilians are cautious when it comes to mortgages. It's not a case of impulse buying,’ added de Lazari.