The World Cup ended on Sunday and despite their loss the early consensus is that Brazil was generally well-regarded as host by the international community. The next big hurdle that awaits Brazil are the Olympic Games in 2016. While Brazil can take a sigh of relief now that one of their major forays onto the world stage appears to have successfully passed, investor skepticism has not lifted quite yet. Their recent economic slow-down and the civil unrest that preceded the World Cup still dominate global headlines, making investors somewhat wary.
The bad press Brazil received before the World Cup was largely blown out of proportion. The media took something that is cyclical in nature and sensationalized it. The economy, which is quite large with over 200 million people and vast natural resources, was growing very quickly, and a dip in growth was inevitable. Further, Brazil has a young burgeoning population and is only just beginning to enter the world stage in a big way. They will have extensive real estate needs in the future across all sectors, which is something that investors definitely should be taking into account.
Still, the World Cup and the upcoming Olympic Games remain contentious issues for many Brazilians. Some believe the money would be better spent in health care and education, and that the projects have been managed very poorly. For example, several stadiums, like the one in Manaus, are not likely to be used now that the World Cup is over and may even be torn down. Despite this, the World Cup brought an enormous amount of attention to Brazil, more than they have ever experienced. It is believed that this attention will result in increased foreign investment and ultimately job growth. It is also believed that this recent boost may pull them out of the current economic slump and propel them further ahead than they were, or would have been had they not hosted these games. Nevertheless, protests and unrest will likely return in two years with the Olympic Games. It is likely, however, that the success of the World Cup may temper some of this next time around.
With regards to the asset types that are piquing investors’ interest, it depends on how much is being invested. For example, 30-50 million euros would be an insufficient investment to become a major player in shopping malls, which is dominated by large operators. There has been some interest in secondary and tertiary cities but it’s hard to get retailers to go there. Despite rising vacancy rates, office has been a good property sector for some of the smaller players to enter into in the long-term. Not only do international businesses continue to move there, but Brazilian businesses are growing as well. Office and retail are the two main sectors to keep an eye on as they are great opportunity investments, particularly if you are able to purchase at or below replacement costs.
On the back of strong price growth, Brazil’s housing market has been named as one of the hottest markets on the planet. Right now, the residential market is primarily focused on low income housing where the demand is immediately evident, but master planned communities that represent all income classes are becoming increasingly popular. The main bottleneck in big cities is land, which is obviously very expensive at this point, but with some creativity and diversification, developers are managing to operate normally. They are, of course, not seeing pre-crisis levels of activity, but things look relatively stable right now. In fact, the Knight Frank Global Price Index indicates that housing prices have jumped 12.1% between first quarter 2013 and mid-year 2014, which places Brazil sixth in worldwide annual price growth.
In terms of financing, Brazil has always had much less compared to other countries. Banks require down payments of 20-30% regardless of the investment grade, so default risks are very low and consequently, margins are lower. However, developers are trying to offset this by diversifying products and taking care of matters internally so they are able to make more money. In one example, a land developer in Pará (located in a very poor region in north of the country) chose not only to develop but also construct all the necessary infrastructure such as light posts, pipes, etc. in order to increase gains across the board.
It’s always difficult to determine the length of a cycle and it’s clear that the political unrest that was witnessed in reaction to the World Cup will likely be repeated to some extent when the Olympics come around, regardless of what political faction is in charge at the time. That being said, we view Brazil as a more long-term investment strategy. Although the economy and real estate market may face some near-term challenges, the fundamentals of their economy are strong enough to warrant a recovery in the near future. This turn-around is expected as early as 2016, but cycles are getting shorter and some immediate benefits of the World Cup may take hold even sooner than that.