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By Jaylan Boyle, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – Fears among some analysts of an impending Brazilian real estate ‘bubble’ that could burst with familiar results appear to be intensifying as foreign capital continues to pour into the country. This bubble is seen as affecting not just realty circles, but the wider Brazilian economic environment.

Finance Minister Guido Mantega speaks at a recent Mercosul conference, photo by Marcello Casal Jr/ABr.

Following the onset of the international economic crisis affecting traditionally strong markets such as Japan, the U.S., and the UK, investors have increasingly looked to so-called ‘emerging’ economies for better returns, principally the BRIC nations China, India, Russia and Brazil.

While the former three are seen as having inherent difficulties that may hinder growth, many analysts have seen Brazil as the pick of the crop. Some are now saying however that the Brazilian economy is showing signs of ‘overheating’, despite steps by central government to reverse the domestic stimulation measures instituted by Lula’s government while the global recession briefly bit deeply here.

While the International Monetary Fund (IMF) have committed to address the problem of large movements of liquidity into countries like Brazil, Finance Minister Guido Mantega has been pointedly critical because the IMF seem reluctant to “draw practical conclusions from it’s analysis”.

Central government is however, clearly beginning to take steps to control China-like growth, notably by doubling the tax on capital inflow from two to four percent recently. However, some analysts have remarked that this measure appears to have been less effective than anticipated, as the Real continues to appreciate, putting pressure on local exporters to stay competitive.

According to Newsweek in it’s end-of-year predictions for 2010, Brazil is at a distinct advantage over others in the ‘less advanced’ category. Russia is seen as having dropped out the race, as the government made it’s less than friendly monetary policies, as well as then-president Putin’s alarmingly authoritarian tendencies more transparent. India does business in a volatile neighborhood, and China, while still booming, especially where real estate is concerned, remains under a cloud of possible central government intervention.

Anecdotal evidence around Rio de Janeiro would support the idea that real estate prices are rising rapidly, with many telling of sudden rental hikes and overseas-based landlords coming home to manage properties that are appreciating in value. This could be in anticipation of the upcoming 2014 FIFA World Cup and 2016 Olympics. The danger is that property, as has been seen in other parts of the world, becomes over-valued to the point where a crash is inevitable.

Real Estate market booms in Brazil, image by Salvatore Vuono.

A recent report from one of Brazil’s leading research agencies, the IBGE (Brazilian Institute of Geography and Statistics), has come out about housing affordability. The report states that 17.9 percent of households have great difficulty paying their commitments at the end of the month, 21.4 percent have difficulty; and 35.9 percent have some difficulty.

Of families who have ‘great difficulty’, 64.2 percent receive up to 3 times the minimum wage in monthly family income (R$1,395). Of families with incomes between 3 and 6 times the monthly minimum wage (R$1,395 to R$2,790), 24.2 percent indicated ‘great difficulty’.

At a press conference during this year’s IMF Spring Meetings, Western Hemisphere Department Director and former president of Chile, Nicolas Eyzaguirre offered a macro view warning, that “cheap and abundant external finances raise the risk of a boom-bust cycle”.

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20 COMMENTS

  1. This means 75,2% of Brazilians have some degree of difficulty in paying their commitments. That is a lot, I’m sure this is one the most expensive countries in the world to live in, our prices many times are dearer than US and in many case the UK. But our salaries are not even near the minimum income in those countries.

  2. What Brazilian property owners need to get their heads round, is that ripping people off with exhorbitant rentals, hotel prices and property sales prices, leading up to the 2014 World Cup and 2016 Olympics, will not help anyone.

    By way of example, in South Africa, which by all means is a much smaller economy than Brazil, the greed factor led to many people getting their hands deservedly burned by spending money on property upgrades and new builds for the specific purpose of tapping into the World Cup 2010 foreign tourist demand money that was never really there.

    Also by artificially raising prices on premium properties based on hype puts properites out of the reach of locals and the deemed value on an unrealistc plain. It’s a short term fix that’s unltimately self defeating. Rio and Sao Paulo are already grossly overpriced and when the hot money leaves Brazil, which will happen when international markets pick up, the bottom of the property market will fall out, which won’t be a pretty sight.

    Sustainability is the name of the game as El Dorado is just a shimmer on the horizon that’s not really there.

    I plead for sanity people, not greed.

  3. I plead for my rent to drop… Zona Sul is becoming more overpriced each month, thanks to the Cup and Olympics and UPPs…

  4. I doubt Rio will bust before the World Cup as why would you sell? I keep seeing my value go up but why would I leave now when this is going to be the place to be in the next few years?

  5. Realizing that a real estate bubble is starting to take place is possibly half of the problem I think.If locals who are making the actual real estate deals see what has happened elsewhere, it could alone make a huge difference in any bubble. America’s real estate bubble was partially caused by that former American standard…. confidence. Over confidence in this case.
    Brazil has the opportunity to build it’s future projects and economic future in a way that has never happened before.By building it in a newly educated world that is living and seeing the world through modern electronic media.That has the potential to become a huge advantage to whom ever uses it wisely.
    Brazil is ahead of the curve on many other large challenges like energy and food production. They seem to realize what is happening and have their own confidence. But they don’t have the arrogance that Washington DC does…

  6. There may be a bubble, but remember that many real estate deals in Zona Sul in Rio are Cash deals that do not involve mortgages. Lending money for homes in Brazil is extremely expensive.

  7. I see quite a few educated / experienced comments. I am originally from a Chicago construction company and have been living & working with real estate investment advisory in Brazil for a bit over 7 years.

    First I will address a few persons before I make my own comments.

    @Lily >>> The mentality has not changed much for this takes drastic measures like a crisis, recession or depression or civil war. Brazil is way too pacific for the latter.

    Many cultural changes need to take place which will take decades such as education programs to raise the income levels on large scale basis ( but then certain spheres of Brazilian society lose control so this is the last thing that will take place ) and this is exactly why Brazilians study abroad and actually are quite educated. Today, Brazil is one of the more expensive countries to live in especially i respect to income / cost ratio. Things like My House My Life and the intentional fraud ( people make a commitment based on a certain interest rate make a downpayment and later banks [ Caixa Federal Economica which is owned by the Brazilian Government ] evaluate those dwellings at higher values to jack up that interest rate would be one good example ). Corruption in the environmental licensing & approvals is too wide spread and most stadiums for 2014 World Cup are having difficulties retaining building permits.

    The list goes on….World Bank rates Brazil #138 out of 169 researched countries in business environment difficulty. That should give you a clue.

    @Rio Real Estate, Really? | The Rio Times

    The reason that your buying power has diminished is not only due to value appreciation or inflation in some cases but also to your home currency being devalued.

    Natal would be a very severe example of property hype and over price artificial-inflation.

    São Paulo had two consecutive years ( 2008 & 2009 If I remember correctly ) where average price increases where between 40% – 50% per annum. Who can keep up with this ?

    @Barry Varkel

    In the past 2-3 years there was a drastic market shift of trends & tendencies. The FDI has changed. Today it is 75% – 85% institutional only which leaves the volume of different persons investing much lower. The amounts are larger but that can very easily cause an artificial spike thus problematic to control.

    Your middle class foreigners have decreased by at least 80% their retirement, rental, vacation and small investment property purchases in Brazil. This is not a good sign. Of course, this is definitely due to the global economic crisis but nonetheless brings a domino effects.

    To follow up on your exorbitant and unrealistic property rentals in the hospitality industry I must fully agree with you. People that pay that kind of money expect a certain level of service, quality, comfort and accommodations which are still scarce here. This is not justifiable at all. They will go somewhere else where they get better treatment and premises. There are only so many high-net worth individuals on this planet and they are the small part of the pie. Prudence is needed.

    In my professional opinion unless there are serious and enforceable measures taken the situation will get to verge of ignorance and the house will fall apart.

    Real problem is immediateness mentality and not thinking to the future. Sustainability is not being considered at all.

    @ Diego

    Good Luck.

    @Todd

    Samuel Zell invested in commercial ( mostly shopping malls, centers and office complexes & towers ) through his funds approximately 4-5 years ago. He already has exited. why do you think that is ?

    If you hold on too long you run a grave risk of nobody picking up your investments…

    I have seen too many times in Brazil ( residential & tourism sectors ) large institutional or ultra high-networth individuals develop property and sell to smaller investors who then have sold on to others and now those properties are sitting empty…hundreds if not thousands of units with low rental capabilities. Brazilian market can pick up the slack but only so far.

    @G20 Booms & Bossa Nova

    Would love to hear everything you want to tell me about this market anomaly or tendency. Sounds very interesting.

    @ David

    Brazilians surely have an enormous advantage seeing what has happened before. Will they learn on the mistakes and history of others….Good question. I think most will not and they are just out for themselves and have no sense of unity. Not yet, anyways. This has been improving in the past years as things are as well and there is more and more hope and things to look forward to…

    @Sven van’t Veer

    Cash is King in Brazil. Very good observation…This is another reason why the recession hasn’t hit much in Brazil. Credit is not an option in many cases or has been dreaded in the past with astronomical interest rates. However, in the past 5-6 years that has been thrown in reverse gear…If you compare 120% annual interest rates 12-15 years ago, 60% 8-9 years ago and today’s numbers at 9% – 12% annual variables are without a shadow of doubt on the bright side.

    My comments:

    If you are an investor small, mid-sized or large / institutional the best property investments are still in local residential rentals, commercial, ( A investment rating ) health industry, local hospitality and income producing cash generating real estate on high volume renting out to middle class tenants and small businesses. Another A investment grade investment are educational facility properties.

    The very reason why local residential rentals are such a good option has been explained in all of your comments above. Most still cannot afford their own property.

    AA – B+ ( this rating has many variables affecting it and can be upgraded to AA – A- investment grade ) Office space development and rentals will be sustainable for a long time to come and shopping malls, even though maximum potential has passed on, are a BB+ rated investment.

    Just my two cents…

    Hopefully this sheds some light on the key issues being discussed here.

    My name is Martin Gajewski Jr., I am the Founder of Invest in Brazil Club on Google Groups and you can readily find me on the internet.

  8. The worst in Brazil, is the corruption of politicians bad-intentioned. The amount they collect in taxes, which are extremely high, especially if applied in education (which in my opinion is what is missing in some states of Brazil) certainly could have a fair distribution of income and a better quality of life .
    More like the chi and not trade for any other.

    Rio de Janeiro, November 25

  9. @Brazil Real Estate, as a holder of commercial and residential real estate in the states, I see the low rent to value in Rio as the biggest disadvantage. It is hard to hold real estate here.

    Sam Zell did not exit Brazil. He is still currently a buyer here. His company sites the low amount of debt as the reason for future growth of values.

  10. Brazilian real state has been cheap for decades due to economic crisis.
    Now the general public is percieving improvements in public policies.
    Prices are undergoing realignment as a result there of.
    There are price distortions in the most expensive areas but a bubble is far out of sight.
    The financial market is under heavy government regulation and the secondary market ( the trigger for the bubble ) for morgage papers is virtually non existant.
    Therefore, those who do not pay their contracts will simply have heir properties siezed and sold and the prices are probably going to hold.

  11. bla bla bla… rio real estate market will collapse soon or later…question is:

    2 years? 3 years?4 years?

    ive seen this happen in otther countries before…next in line is brazil.

    like Martin Gajewski Jr worte:

    Real problem is immediateness mentality… like almost everything in brazil and any third world nation.

  12. By and large, apartments are bought with cash. Very few people are barrowing to purchase these apartments, pay monthly taxes and condo fees. I don’t see a bubble in Rio I see an increase in confidence,spending and upgrading lifestyles. I don’t see a crash in real estate market but I do feel it cannot sustain the price growth. I will hold my apartment, collect my rent and be happy that I purchased three years ago for 1/4 of today’s value.

  13. My girlfriend and I were looking to buy an apartment in Sao Paulo but have given up. The prices there are now about double the prices here in Dublin for a similar apartment, and I cant afford one, despite earning multiple times the average salary of a Brazilian. SP is getting more expensive, Dublin is getting cheaper. I think we will be buying in Dublin instead, and wait and see what happen in SP.

  14. Todd>>> Zell exited commercial shopping mall scene and office space from Sao Paulo, he still holds a majority share in residential construction company Gafisa…other than that not so much more activity ( granted company is in top ten in the country )

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