BRAZIL IS MAKING INVESTORS DANCE

Brazil appears to be flavour of the month with property investors. It might be a long way from Asia and Europe, but favourable exchange rates, solid economic prospects and low cost housing are luring investors and developers from these distant continents to make the journey south. For example, 37 apartments at two developments in the city of Sao Paulo were sold to buyers from Japan, Hong Kong and Singapore by British estate agents Dehouche Land, recently.

In addition to Sao Paulo, overseas buyers target Rio de Janiero and north east coastal resort towns, like Salvador in Bahia province, and Fortaleza, further north up the coast. Occasionally a buyer wants something exotic, like a few hectares of Amazon virgin rainforest or a private island off the country's long coastline.

These buyers are entering the market at a time when exchange rates are favourable to buyers spending in euros, dollars and currencies linked to the Greenback. The US Dollar has appreciated by 20 per cent against the Brazilian Real over the past year. Even the British Pound, struggling on currency exchanges elsewhere in the world, has held its own against the Real.

The Real has slumped against major currencies, because Brazil is taking a battering from the global economic storm, even though it's debt levels are relatively low compared to Britain, the United States and many other countries.

“There is nowhere that has not been affected by the global contagion of economic downturn,” says Nick Barnes, residential research partner at estate agency, Knight Frank, “Even though Brazil's economy is self-sufficient, the banks are feeling the pinch, the consumers too.”

Despite the downturn, estate agents consider the Brazilian property market undervalued, particularly when compared to fellow BRIC nations, Russia, India and China.

“Of all the BRIC countries, Brazilian property is considerably underrated,” says Henry Madden, partner at Dehouche Land, “A premium apartment in central Sao Paulo has an average price of USD2,000 per square meter, compared to USD12,000 per sq m for a central apartment in Moscow.”

Knight Frank figures show average prices in Bahia's luxury resorts are USD3,500 per square meter. In Sao Paulo's Cidade Jardim district, developer, JHSF, is offering 236 square meter apartments at its mixed-use Parque Cidade Jardim scheme for R$1.5 million (USD727,000).

Brasil Sothebys International Realty is marketing upmarket homes like a five bedroom house at Itu outside of Sao Paulo for R$6.5 million. The 2,600 square meter home features a cinema room, swimming pool, Jacuzzi, party room, garden and orchard. Staff accommodation and garage also included. Or there is a four bedroom home at the Reserva de Paiva resort community, on Brazil's north east coast, on offer for R$2 million. Located 14 kilometres from Recife airport, this beachside house and the 66 other homes at the development are surrounded by rain forest.

With prices static in des res city districts and pushed down in coastal resorts, developers were offering incentives to buyers, either price cuts or give-aways, Barnes says. Exact figures on how far prices rise or fall across Brazil don't exist, but the Global Property Guide estimates Brazilian property prices doubled over three years to the end of 2008.

Past price rises may have been even greater if credit had been available to buyers. Brazilians have traditionally bought homes with cash, because high interest rates, which hit a whopping 2,500 per cent in 1993, have deterred buyers from taking out mortgages – only 800,000 Brazilians have a home loan. What's more, the government has kept a tight rein on mortgage lending historically.

However, interest rates are down to around 11 per cent now and mortgage lending rules have been relaxed, enabling the country's emerging middle class to purchase homes without needing to rely solely on savings.

The economic downturn has dampened this middle class housing demand, but estate agents and developers are confident it will revive when the global recession ends. They point to a number of pluses that will stand Brazil in good stead in the years to come – its 195 million population is young, only 15 per cent of national GDP is export reliant, so the domestic economy is strong and diversified, and an oil field, the third largest in the world, was recently discovered off the Brazilian coast.

A revival in housing demand will not lead to a debt-fuelled housing bubble provided the government continues to regulate mortgages carefully, Barnes says.

“In the medium-to-longer term Brazil has tremendous prospects,” he says, “Its economy has grown largely off domestic demand and they have just found two of the world's biggest oil fields which will come into production over the next decade. Unlike much of eastern Europe where there has been too much construction, Brazil is big enough to absorb new housing developments.”

John Hitchcox, chairman of international designer-developer YOO, expects Brazil will emerge from the global economic downturn faster than most other countries, because it is not burdened by debt. As their affluence grows, the country's middle classes will want to live in higher quality housing which remains in short supply he believes.

“There is a real emergence of sophistication in Brazil and new housing reflects this,” he says.

His own company is planning to build three residential developments in Sao Paulo and Rio de Janiero.


BRAZIL HOME BUYERS GUIDE

Foreigners are free to buy property anywhere in Brazil. However, they ought to seek expert advice when doing so, because little English is spoken, the legal system is different to that found in most other countries and scams abound.

First, the good news. According to the Global Property Guide, Brazilian property law is pro-landlord, yields are “good” and transactions costs “moderate”. Gross yields are between 6.5 – 8.5 per cent in Sao Paulo and slightly lower in Rio de Janiero Knight Frank reports.

In north east Brazil's resort towns, rental guarantees of 5 per cent or more are available for a couple of years at new developments. However, lettings in Brazil's holiday resorts are highly seasonal, so void periods can be lengthy.
Now for the warnings.

“A lot of developers are new to the game, so buyers need to question the viability of the developer and the scheme,” Barnes says, “Due diligence is absolutely vital on a project.”
Buyers need local expertise to help them buy and manage properties he adds.

“It's a long way away, so investors are entirely in the trust of local managers to manage the property,” he says.

Hiring a local lawyer is advisable, because of the complexities of Brazilian law.
Buyers, and their lawyers, must ensure contracts are properly registered. In some cases, unscrupulous sellers have sold their home many times over leaving unfortunate buyers in a legal tangle.

Overseas buyers must get a tax ID form called a CPF from the Brazilian government before making an offer on a property. They can do this through their local embassy or a Brazilian lawyer. Lawyers can represent a buyer at the completion stage of the buying process when all the parties come together to sign the official transfer of deeds. The buying process normally takes four to six weeks.

Purchase costs, including stamp duty, which is variable depending on location, amount to about 7 per cent of the value of a property. When it comes to selling, the vendor pays an estate agent a 5 per cent fee.

Rental income is taxed at 15 per cent and capital gains 25 per cent usually. Mortgage lending to foreigners is tightly controlled by the government, so Brazilian banks may not be that forthcoming with loans, but large international banks like HSBC will fund overseas buyers.