Special Reprint of Three recent exame covers stories on the brazilian economy

An unprecedented survey shows that Brazilian real estate appreciated 22% over the past year - the third highest increase in the world. Why that's good news for the country Giuliana Napolitano At the end of last year, Rubens Dias, 39, bought two lots for 400,000 reais in a high standard condominium that had just been launched by Alphaville, a real estate developer controlled by Gafisa, in Porto Alegre. He thought he would need to hold on to them for a few years. That is what he has been doing since first investing in real estate nearly a decade ago. Two days after closing the deal, he received an offer for 540,000 reais. He sold them on the spot. "I hadn't even discounted the check for the down payment," says Dias. In fewer than two months, the money was already invested in an apartment in Barra da Tijuca, Rio de Janeiro, another thriving market. The Wonderful City's newest thing is the interest foreigners have in the noblest areas - and those who think about things too long are left behind. "An American tourist spent Carnaval in Rio and became interested in two apartments in Ipanema," says Rodrigo Caldas, vice-president of Concal, a Rio construction firm, who assisted the American. "But he wanted to think about it for a few days and lost out on both deals. One was sold, and the other's price went up."

Meanwhile, in Sao Paulo, MaxCasa, a real estate developer, decided to limit the purchase of the apartments it launches to one per person. The reason? Reduce action by very short-term investors who buy and sell in a matter of days just to profit from immediate appreciation. "This can be a dangerous investor for companies. If the market turns, he could default and knock down prices," says José Paim, president of MaxCasa. There may be no sector of the economy more important than the real estate market, for better or for worse. A thriving market has the power to catapult countries to unprecedented levels of development. "There is no mature economy without a solid real estate market. Historically, the experience in rich countries shows that first there is a strong expansion of credit. Followed by development of the real estate sector. Only then does prosperity kick in," says economist Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University. When the system works, people consume more, since the investment in home ownership is financed over years. Following the same logic, they save more too. On the other hand, a real estate market in disequilibrium can have a devastating effect. The United States is a good example of this equation's extremes. From 1995 to 2005, the housing sector was responsible for 20% of GDP and it helped drive one of the longest growth cycles in the world's biggest economy. The collapse of this market in 2008 drove the country into recession, and in 2008 alone, it threw 2.5 million Americans into poverty. Thus, monitoring the real estate market's vital signs should be a maximum priority of economic authorities. But in Brazil, this runs into a very serious problem - the almost total lack of consolidated information. Without any reliable statistics, how can we judge whether the stories that open this report are indications of an increasingly stronger market, or, to the contrary, a bubble in formation? In order to bridge this gap, EXAME ordered the most comprehensive study ever conducted in Brazil on the subject from Ibope Inteligencia institute. For the first time, a research institute not tied to the sector dissected market behavior in the residential and commercial segments for new and used properties. The study also lists the most expensive homes or apartments in four major capitals - Sao Paulo, Rio de Janeiro, Porto Alegre and Salvador - and the income profile for every neighborhood in these cities. The main aggregate result is learning that residential prices for new and used properties increased on average 22% over the past 12 months. In Rio, the city with the highest appreciation, price increases for new properties reached 27%. Some already cost more than 15 000 reais per square meter (see price maps for each of these cities throughout this report). This study also makes it possible to compare the local market with other countries - and what we see is one of the greatest appreciations in the world. According to a study by British consulting firm Global Property Guide, only Hong Kong and Singapore appreciated more. The firm points to Brazil as one of the obligatory destinations for investors. This is the first time Brazil's market, normally timid and not very vigorous for international standards, assumes a prominent position in the global scenario. Several foreign funds began to invest in real estate in Brazil in recent years, like Abu Dhabi Investment Authority, the largest sovereign fund in the world, and the British administrator, Autonomy. Now the big question is how to qualify the moment we are experiencing. Are there signs of irrational exuberance, to use a famous definition coined by economist Robert Shiller, of Yale University, as in the American real estate delirium? Or are we still taking the first steps of the trajectory described by Nicolas Retsinas, of Harvard? There are no simple answers, and it may take a few years for the current phenomenon to be fully understood. One way to appraise the market is to compare prices practiced here to those in other countries. Brazil is still not expensive in the residential market. It is only ranked 64th in prices out of 90 countries according to Global Property - on average, the price per square meter is half what is charged in South Africa and China. The market for office space has considerably higher prices. Over recent weeks, EXAME has listened to some of the most important personalities tied to the sector, as well as economists, researchers and consultants. There is a unanimous perception that although there may be some exaggerations here or there, we are on firm ground. "Everything indicates Brazil is heading towards sustainable expansion," says Susan Wachter, professor at the Wharton Business School in the United States.

This optimism is greatly due to the unprecedented availability of credit. More than any other sector, the real estate market only grows if there is credit. For decades, this market operated as if Brazil was a country of millionaires and companies were full of cash. They bought apartments or offices paying almost half the price, in cash, which was obviously only possible for the wealthiest. This anomaly only began to be reversed about five years ago, when government incentives and new rules to protect creditors were created, and interest rates fell in general. From then to now, the number of financed homes rose from just over 350 000 to 700 000. "That includes a lot of people in the market, not just low-income families, but also young adults from classes A and B," says Wilson Amaral, president of Gafisa, one of the country's biggest real estate developers. "Today, 90% of our sales are financed. In 2005, that number was only 20%." Growth has been vigorous, but the potential for expansion is even more interesting. Compared internationally, Brazil's numbers are timid - the volume of funds for the sector is responsible for 3% of GDP here, compared to 9% in Mexico and 18% in Chile. "Real estate credit did not accompany growth seen in other lines, such as consumer goods and companies, which are at international levels today," says Ilan Goldfajn, head economist at Itaú Unibanco bank. "Only now, after years of stability, do people and banks feel more comfortable about borrowing and lending for longer periods."

If credit effectively reaches international standards, the country could take advantage of some phenomena that conspire on behalf of market growth. The most important is the demographic change underway, something seen in countries that experienced real estate leaps in recent decades like the United States and Spain. A study by consulting firm Ernst & Young shows that in the past 20 years, the number of Brazilians over 30 years of age rose from 37% to almost half the population - and is expected to reach 60% by 2030. "That is the age people form families and look for a place to live," says Ricardo Freire, senior manager at Ernst & Young. Every year, 1.5 million homes are built in Brazil - a number that could exceed 2 million in ten years. Constructors can no longer raise homes and apartments to meet this demand, which explains the country's housing deficit, estimated at 8 million homes. This is one of the most important foundations for local market development. Different from what has been seen in countries now in crisis, where a good part of the homes were bought not out of need, but rather pure speculation, Brazil has a solid demand from people seeking their first home.

It is true that much of this deficit is concentrated in the low-income sector, which depends on public incentives to thrive and is being met by the government's Minha Casa, Minha Vida program. But properties are also lacking for the higher classes. It is estimated that wealthier families living in major cities need 100 000 new homes per year, almost twice the number developers are able to build. The situation worsened with the 2008 crisis because large developers canceled plans for new launches out of fear of a sudden drop in the search for properties - works were only truly resumed in the second semester of 2009. "This created disequilibrium and huge pressure for launches," say Leonardo Diniz, director at Rossi, a developer that created a division to build properties for the middle and upper classes in Sao Paulo. This gap between a supply that grows gradually and a demand that soars has led to price increases that at first seem make no sense at all. In Brasília, where few lots are available and growth in civil service has created a new mass of potential buyers, the price per square meter for an apartment under construction in a noble neighborhood can reach 10 000 reais - 30% more than just six months ago. Those who want to pay less have moved to cities near Brasília, like Águas Claras, which has experienced a real estate boom over the past five years. In Rio, a curious phenomenon is the appreciation of neighborhoods near shantytowns, which have become targets for public actions to combat organized crime, initiated in 2008. The best example is Botafogo, which is near Morro Dona Marta, which has already been pacified by Rio police. The reduction in violence increased the search in the region and drove prices for high standard properties up about 50% this past year. "We launched more than ten developments in Botafogo recently," says Zeca Grabowsky, president of PDG Realty. The next neighborhood in the constructors' sights is Tijuca, whose shantytowns are being occupied by the police.

In the wake of the economy

Because it affects millions of people, the appreciation of residential properties may be the most visible point of Brazilian market effervescence. But there is a similar movement taking place in the office sector, which responds directly to the economy's performance. When GDP grows, new companies emerge, and already established firms generally grow and need more space.  The vacant commercial property rate is the lowest of the decade and the projection is for this to continue at least a few more months. "There will be big launches starting in 2011, but if the economy grows more than expected, they may not be enough," says Walter Cardoso, president of the Richard Ellis consulting firm. In other words, prices could continue to go up - which would stimulate more construction. Rent prices, which is the measure used for international comparisons, have become one of the highest in the world - the average price is 40% greater than in China and 62% higher than in India. "It is hard to believe there is room for much higher increases in the future, which is why it is risky to invest in this sector," says Roberto Miranda de Lima, president, in Brazil, of Autonomy. The search for lots has grown, especially in Sao Paulo - the most expensive ever sold in Brazil is on Avenida Faria Lima, in the city's west zone. It was purchased by the developer, Brookfield, for 640 million reais. They are building a complex appraised at 1.3 billion reais there, which, due to a lack of space, may be one of the last large new commercial buildings in the region.








Price increases in Sao Paulo should accelerate one of the most interesting movements underway in the economy, decentralization of productive activity. Ever since its beginning, Brazil's industrialization has been extremely centered in Sao Paulo, a state responsible for 34% of the nation's GDP. This is a pattern seen in almost every country that developed. For decades, the search for scale forces this concentration, although at a cost that involves many social and regional problems. Excess concentration costs gradually raise their heads in the form of criminality and deficient health and education coverage. That is when other regions are expected to demonstrate they are economically competitive. The high price of rents in the country's most developed region is one of the main stimuli for decentralization. That's why many people believe in development of the real estate market outside the large urban centers. The idea is for companies to establish themselves in different regions of the country, in search of lower costs and access to raw materials and labor. "The real estate market is going through a similar cycle to what took place in several other sectors, like the automotive: institutional innovations generate credit expansion, which leads to more consumption, production, and later, new investments," says Marcos Lisboa, former Secretary of Economic Policy at the Ministry of Finance and executive director at Itaú Unibanco. For now, decentralization is an incipient movement. Large developers only began to invest consistently outside the Rio-Sao Paulo axis over the past three years. Prices took off due to the great need for properties. An example is what happened in Alphaville, a new middle and upper income neighborhood that developed in Salvador over the past five years. "Lot prices have gone up eightfold since 2005," says Guto Amoedo, director of real estate at Brito & Amoedo, a Brasil Brokers subsidiary.






Those kinds of increases raise doubts about real estate investment risks - and it is healthy for them to exist. The general climate among investors is one of caution. Prosperitas, Brazil's largest private equity real estate fund administrator has not purchased new lots in Sao Paulo since 2006 because it feels prices have gone up too much. Carlos Antunes, owner of the men's clothing group, Via Veneto, and one of the main investors in real estate in the country, believes this is the time to sell. "Prices are very high, and due to a lack of labor and materials, many constructors are launching bad, poorly planned developments, which have little chance for appreciation in a more normal market," says Nice Sampaio, responsible for managing Antunes' nearly 100 properties. It is highly improbable that the relative pessimism of these investors will stifle the excitement of millions of Brazilians who begin to have real conditions to own their own home for the very first time. Exaggerations are inevitable, as in any market. Regardless, specialists agree there is no real estate bubble forming in the country - at least for now. It is true that the stories of investors who earned thousands of reais in a matter of days and of properties that sold out in a few hours are very similar to those that became common in the stock market between 2006 and 2007, when there were dozens of IPOs and appreciations that exceeded 100%. The stock market has since fallen and gone back up. In the case of real estate, price oscillations tend to be less abrupt, but they do occur. Risks exist, but that's part of the game. What is new is the fact Brazil's real estate market has finally entered the group of those that really count in the world. And - all turbulence aside - that is something to celebrate.