Real Estate Opportunities in Brazil

How about acquiring the Fasano Vieira Souto Hotel in Ipanema Beach, Rio de Janeiro, for US$ 20 million? Or buy one of its apartments, sold at prices ranging between US$ 350,000 and US$ 700,000 guaranteeing an investment annual return rate of 10% through the management of the renting pool? This is only one example of the diversity of business opportunities in the Real Estate sector currently existing in Brazil.

Stimulated by GDP growth and the improvement of financing lines, the Real Estate sector goes through an excellent moment, with a projected growth of 10% in 2007 (compared with a 5% GDP growth), as a result of the combination of the following  factors: economic stability, reduction of interest rates, improvement of wages, contracts balancing, reduction of insolvency, Internet sales, grants for fiduciary alienation,  initial public offering of incorporation, construction and real property trade companies, direct foreign investments and foreign investments in participation funds, among others. The civil construction material inputs sector follows with a growth reaching 7.5% in 2007, registering constant increases in sales.

As for the residential Real Estate sector, from January to July of this year, the Brazilian Saving and Loan System financed US$ 4,5 billion in real property, a number 72% higher in comparison with the same period last year. Investment in this segment has also increased 14.7% in real terms since 2005. Moreover, the maximum financing fixed term, that was 36 months in 1997, moved to 100 months in 2002 to reach its current term of 360 months, or 30 years.

In the business sector, the use of Built to Suit operations becomes more and more popular. Under this system, industrial facilities are made-to-measure to suit end-users.  Investors assume the costs of acquisition of the real property, the construction and installation to then grant the rent to end-users, generating effective return on investment.

In the hotels sector, the growth in tourism (18% in 2007) stimulated new investments. In the next two years, 135 new projects leaded by top hotels chains will be realized. In the next 15 years the Brazilian hotels network will become five times bigger. The impact will be an increasing demand for areas destined to projects of hotels development for tourism and business, therefore creating multitude of opportunities of exploitation in the real estate sector.

Investment that was before concentrated in Rio-São Paulo region, as now extended to other regions such as the North, Northeast and Center-West. In the North Region, Manaus revealed itself as the paradise for real estate companies. Since the beginning of 2006 the city welcomed more than 150 real estate projects, among them residential building, hotels and shopping centers – generating at that time a growth of 300%.

Between 2006 and 2007, the initial public offering in the Brazilian Stock Exchange of more than 20 companies related to civil construction, the hotel industry, shopping centers and incorporation sectors injected more than US$ 8 billion in the economy. Financial resources have being destined to the acquisition of new areas, launching of projects, construction of tourism and business hotels, expansion of shopping centers, among others. For investors that do not intend to take the risks, the creation of real estate investment funds and credit rights investment funds, both regulated by the Brazilian Securities Commission, allowed the creation of new mechanisms of fund raising on the market.

At last, there exist in Brazil many options of investment in the real estate sector. Emerenciano, Baggio e Associados Law Firm has assisted a wide range of businesses in the simple acquisition of an area destined to resale, legal and environmental due diligence, the establishment of partnerships and joint-ventures, the creation of investment funds, giving orientation on tax benefits, registering capitals, raising capital, searching for investors, among many other issues related to businesses opportunities that have been created as a result of the sustainable growth that the sector experiences.

Robertson S. Emerenciano
Partner at EBA
BRAZIL