The ongoing growth of Brazil’s property market has become ever apparent with some estimations pointing to a doubling of prices between 2009 and 2010. Whilst most professionals consider such figures to be hugely speculative and based on ‘one-off’ sales there are, nevertheless, several indications of a very bright future including a lowly leveraged debt market, improved inflation control, social housing programs, national credit rating upgrades, a rising middle class, higher wages and lower unemployment to name a few.
In turn, the market has come to witness a new level of sophistication with a range of financial mechanisms akin to what has long existed in countries such as the USA, the UK and across Europe.
One prominent example is the emergence of real estate funds: an increasingly popular choice for investors wanting exposure to the Brazilian market without the relative responsibilities of physical ownership.
The Brazilian Mortgages organization stated that the level of fund investment has increased by 9 percent in the last year – a pace that is widely expected to continue in spite of recent monetary control mechanisms that have been installed to cool down the economy.
Frequently marketed as offering increased flexibility and liquidity, the funds are enabling Brazilian investors to spread risk across their portfolios whilst also avoiding the occasional volatile nature of stocks and shares.
Additionally, there is the benefit of being exempt from income tax if the fund is traded on a recognized exchange platform (considering rental property income can be taxed by up to 27.5 percent, this represents a significant advantage).
The growth of associated management companies also essentially enables the investment to be passive and other hedging measures can be incorporated including specific insurance policies.
This relative safety of such funds is further reinforced via their general association with public procurement projects and in what are considered more secure real estate investments. Some examples are demonstrated below:
* the Caixa Cedae: a fund created for the development of what will be the headquarters of the national water and sewerage public organization (Companhia Estadual de Águas e Esgotos) in Rio de Janeiro;
* the Anhanguera Fund: formed in August 2009 as a means to acquire property for the objective of housing a broad range of educational institutions;
* the CSHG fund: administered by Credit Suisse – aimed at the exploration, acquisition and development of logistical buildings throughout the country;
* the Edifício Almirante: a fund which will be used for the acquisition and development of a commercial building located on Avenida Rio Branco in Rio de Janeiro with a long term leasehold contract in place for administrative offices and agencies of the Caixa Econômica Federal;
* the Hospital da Criança fund: to be employed in the development of a modern children’s health complex to be located in the Jabaquara region of São Paulo;
* the Torre Almirante fund: established in 2005 to be exclusively used in the acquisition of the 34 level, 62,232m² building in central Rio de Janeiro (home of one of the Petrobras headquarters);
* the Hotel Maxinvest fund: will be used for the acquisition of commercial property of various types (pre and post construction) located in city centers across Brazil.
The most reportedly successful performing funds, however, are the shopping center projects which usually have or will have prime tenants (such as Brazil’s leading retailers) and high occupancy levels – a commonly quoted example of this is the Shopping Pátio Higienópolis which, according to the Brazilian Finance & Real Estate (BRFE), has tripled in value since its launch in 1999.
Other prominent funds in this sector include the Florianópolis, the ABC (São Paulo), the Parque dom Pedro (São Paulo) and the Shopping Center Piedade (Salvador).
It is also worth mentioning the growth of residential real estate funds although they are, generally speaking, deemed higher risk due to the fact that returns are not delivered until after completion.
Investors are therefore advised to engage in detailed due diligence on the experience, fundamentals and track record of the development company. Many such funds – such as Panamby, RB Capital and Opportun Imobiliário – incorporate commercial and industrial property as part of their portfolios to minimize such potential issues.
From a medium to long term perspective, it should be expected for the trend of investing in Brazilian property funds to continue – particularly considering the relative immaturity of the marketplace.
Whilst the net yields on funds are reaching comparably similar levels to those of physical ownership of property, capital gains returns tend to be more spread over time which is widely viewed as the main disadvantage by investors looking to profit from Brazil’s current rising market.
Ruban Selvanayagam is a Brazil Real Estate and Land Specialist. For free e-books, state guides, up-to-date statistics, strategies, interviews, articles, weekly broadcasts and more please head to the Brazil Real Estate and Land Investment Guide via the following link: http://www.brazilinvestmentguide.com/brazil-property-real-estate-land/
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