According to a new analysis of the country’s property market by Savills, Brazil is an investable proposition which has the capacity to add value while not becoming as overheated as other real estate markets in some fast growing new world economies.
The report says that Brazil has a relatively high level of owner occupation in its urban areas particularly in relation to developed, old world economies such as France, the UK, the US and Australia. Higher levels of urban owner occupation are characteristic of many of the new economies and tends to reflect less mature rental investment or subsidised markets.
It points out that as the Brazilian market develops and more international and domestic investors are attracted to the market, particularly in urban areas like Rio, it may be that rates of owner occupation will fall as rental alternatives become more numerous.
Indeed, the rate of house price growth in Rio has slowed in the last 18 months, having peaked at an annual rate of 45% in October 2011. According to the FIPE ZAP index, by April 2013 annual growth stood at 13% in Rio, the lowest rate since 2009, but still substantial by world standards and significantly higher than Brazilian consumer price inflation.
The report also says that affordable housing is a new sector for Brazil, but offers significant investment opportunity, and several private equity funds are already operating in this sector of the market.
Although house price growth over the last five years has averaged 23% per annum in Rio and 17% per annum in São Paulo, residential rental yields are on a par with many of the troubled old world economies with house price to income ratios much lower than many of the Asian tiger economies.
‘Despite this spectacular price growth, Brazilian residential property appears good value when compared to the top tier of the world cities,’ said Yolande Barnes, director of Savills World Research.
‘This suggests sound fundamental reasons for income investment in the country’s lead cities, Rio and São Paulo. The country’s relative accessibility to foreign investment is expected to make the country a target for international investors beyond North America,’ she explained.
A like for like comparison of the capital and rental costs of residential real estate shows that despite having nearly three times the GDP per head of India, Brazil’s premiere cities still have cheaper real estate than Mumbai. The economy in Brazil is a similar size to that of France and Britain, and far bigger than Australia, Hong Kong and Singapore, yet it doesn’t seem to have been channelled into the real estate of its real estate in the same way.
Annual yields are a useful sign of how overheated capital values are in relation to underlying occupier demand and the report shows that in cities where large quantities of investment capital have been pressing on real estate markets, these yields are often very low by global standards. Not so in Brazil. Gross residential property yields for the SEU in Rio and São Paulo are higher than in any other of the new world cites in recently emerged economies and are on a par with London, New York, Sydney, Tokyo and Paris.
The report says that Brazil’s residential markets have been buoyed in recent years by oil discoveries, the forthcoming FIFA World Cup and the forthcoming Olympic Games. The biggest cities are being cleaned up and improved access to credit and a rapidly expanding middle class has enabled increasing number of people to buy their own home, putting an upward pressure on prices.
‘This, in turn, makes the country very appealing to international investors. It is relatively easy for foreigners to buy real estate in Brazil and overseas nationals can buy Freehold without restriction except for very large farms and islands and coastal land tracts.
São Paulo and Rio are two of the cites leading the way. Prices in São Paulo have risen by 127% since the beginning of 2008, and by 189% in Rio. Rental growth is up by 86% in São Paulo and by 129% in Rio over the same period. However rates have slowed in the last 18 months.
‘We expect to see substantial, yet lower than recent, capital growth and sound income returns. Overseas investors will need to have an eye on exchange rates and beware the prospect of rising interest rates and, or inflation. However, they may well find Brail more rewarding than some of the other new world markets, especially in Asia. Assuming they can get to the product before the locals do,’ concluded Barnes.
