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The Brazilian Public Finance Ministry has published full information on the fraudulent activity of the Fruits of the Earth Association (Associação Frutos da Terra Brasil, AFTB) under false operations as a Civil Society Public Interest Organisation (Organização da Sociedade Civil de Interesse Público, OSCIP).  AFTB are being accused of operating as a financial institution without authority and unauthorised usage of a public federal organ accreditation.

Founded in 2007, AFTB’s stated objectives were focused on Brazil’s social and economic development and assisting on combating the country’s housing deficit via raffles which would enable its associates to access interest free housing finance without any down payment or proof of income required.  Associates were effectively paying to be able to partake in the effectively non-existent draws.

The initial inquiry was initiated in February 2010 when president of the organisation Carlos Alberto Lilienthal Rotermund admitted to operating a “pyramid” system whereby contributions of over 12,000 associates were leveraged into other financial applications such as Banking Deposit Certficates (Certificados de Depósito Bancários, CDBs).  During the investigation, AFTB announced the suspension of the multi-level marketing programme whereby those already in the association were able to bring new members on board.

According to the São Paulo  Attorney General’s Office, the Brazilian Central Bank published an official note stating that the AFTB is “not included in the list of institutions authorised to act as a financial institution nor management consortium and has neither made ​​an agreement to be an associated company [classified as a Civil Society Public Interest Organisation].”  If condemned, Rotermund faces up to four years imprisonment and a fine.

Whilst government officials were keen to fanfare the progress of the Minha Casa, Minha Vida (”My House, My Life”) programme this week – representatives of Brazil´s real estate sector at a public-private gathering in São Paulo took the opportunity to speak out against the realities of the initiative, with calls for the authorities to raise the maximum price limit once again (a request that was subsequently declined by Inês Magalhães, secretary of Brazil´s housing ministry).

According to Eduardi Aroeira Almeida, partner at the Apex construction company, the inflated real estate market has made constructing under the programme more unviable than ever: “an apartment that I used to sell for R$ 90,000 has grown in value to R$ 170,000,” he stated.  It was widely commented that with the rapid rises in land valuations and difficulties in legalising plots under the programme, it has also become close impossible to construct for the 1-3 minimum salary groups (earning between R$ 622 and R$ 1,688).

The president of the Construction Industry Chamber of Commerc e (Câmara Brasileira da Indústria da Construção, CBIC) Paulo Safady Simão agreed with many of the comments made but argued that there are still some regions that are potentially workable.  He indicated that more involvement is required at both state and municipality levels – as with what has occurred in São Paulo where governor Geraldo Alckmin and Dilma Rousseff recently signed an agreement for a R$ 8 billion construction plan to build 97,000 housing units for those earning up to R$ 1,600 per month.

From my own point of view – calculating at a cost of R$ 82,474 per unit (often excluding land), government decisions such as above demonstrate the massively growing market mismatches fuelled by the effects of speculation.  It can be clearly demonstrated, for example, how such units do not comfortably fit within consumer affordability levels and also adopt inefficient management practices and unproductive production methodologies which ultimately lead to a bad quality of end product.  Feel free to contact us with regards to how the Fez Tá Pronto Construction System© builds luxury quality apartment units for Brazil´s low income demographic at a maximum cost of R$ 34,000 (including well localised land costs, infrastructure, materials, labour and all associated disbursements).

Perhaps more so over the last year, it has become increasingly acknowledged and accepted by all involved in the Brazilian property sector that a period of cooling off is impending – whether this would be via the early 2012 statements of the country´s leading developers slowing down their launch / operational plans; the inefficiencies of the Minha Casa, Minha Vida programme; issues related to the contraction of labour or a number of other contributory factors. Whilst the question as to if Brazil´s bubble burst will be as impactful as what occurred in Europe and the USA is another debate, it is worth looking a few of latest circulating arguments related to housing accessibility in order to understand the realities.

One graph that was recently produced by the FIPE / Zap property index (based on asking prices via the Zap property portal) demonstrates the number of working months (earning an average wage) needed to be able to buy one squared metre of real estate in the country´s predominant economic regions: São Paulo and Rio de Janeiro.  In January 2008, it was necessary to work 2.9 months in order to be able to purchase 1m² in São Paulo and 3.8 months in Rio de Janeiro. As at November 2011, this grew to 5.99 months in São Paulo and 7.49 months in Rio de Janeiro.  According to Luciano D´Agostini illustrating the issue on the INVA Capital blog, despite what has been an increase in income over the last 4 years, the purchasing ability for the majority in relation to the price of properties has decreased by a half.

In the video below, Samy Dani from the Getúlio Vargas Foundation indicates how acquiring property in central São Paulo is currently not yielding greatly and investors would be better off placing their funds in savings accounts:

In another INVA Capital blog post, D’Agostini applies a comparison between the real estate markets of Brazil and USA – demonstrating that the nominal per capita income level in Brazilian reais over 11 years increased 2.8 times up until a drop was seen between 2010 and 2011.  Over the same period in the USA, the rise was 1.4 times (in dollars) before stagnating in 2007 upon the onset of the property bubble, followed by a slight rise in 2009.

Looking at the evolution of price comparisons over the 11 years, D’Agostini uses the Shiller 20 index to examine the prices of properties in the USA and the General Index of the Commercial Property Market Index (Índice Geral do Mercado Imobiliário Comercial- IGMI-C) published by the Getúlio Vargas Foundation and the Bovespa stock exchange for Brazil.  With the bursting of the USA’s property bubble occurring in 2007 (the culmination of its peak which began in 2004), Brazil was still witnessing a period of price growth which began to move at rates much higher than what was seen between 2000 and 2007. Between 2000 and 2008, the growth of Brazilian per capita income was above the growth in property price which formed the basis of how the market was judged (income rises determining price movements).

From 2008 onwards the indicators demonstrated an inversion of this process – with what is described as the initiation of a period of “hyper-inflation” largely fuelled by the growth of the housing credit market which significantly outpaced earnings levels.  In the USA, from 2000 to 2007, the growth of per capita income was broadly in line with the inflation of real estate prices. However, as the growth of income slowed in pace in line with the property prices, the relationship stopped meaning that the prices in USA inflated strongly due to the rapid expansion of credit between 2000 and 2006.

As prices in the USA have fallen heavily since 2007 and per capita incomes have grown lightly, today the relationship between the two is almost identical to what was the case in 2000 when the bubble started to form (yet at the current time it would be difficult to purchase in the USA without direct cash investment due to the limit availability of housing credit).

It is D’Agostini’s belief that with what he sees as forthcoming drops of between 15 to 35 percent in Brazil – to purchase real estate and resell in 2-3 years does not represent an excellent opportunity as the period has already past of strong growth in prices (the time to have done this was 2007/08 to resell in 2010/11).

One commentator to the D’Agostini blog post has argued that Brazil cannot be compared with the USA due to very different fundamentals (interest rates, taxes, banking systems and policy); another pointed to the significantly advanced housing production capacity of the USA compared to Brazil (which led to an over-supply in the former) whilst others – as is increasingly becoming the case – see more chances of the bubble bursting in Brazil as a result of indicators such as these.

The Brazilian Association of Real Estate Credit and Savings (Associação Brasileira de Crédito Imobiliário e Poupança, ABECIP) recently published lending statistics for 2011 as well as its expectations for 2012:

Financed Volume

The volume of credit used for the finance and construction of properties grew 42 percent in 2011 – a new historical record for the Brazilian System of Savings and Loans (Sistema Brasileiro de Poupança e Empréstimo, SBPE).  In 2011, R$ 79.9 billion was lent for the finance of construction and purchase of real estate – R$ 23.7 billion more than in 2010.

Financed Units

From January to December 2011, 493,000 units were financed – representing a 17 percent growth in relation to the number registered in 2010.  In December, 49,600 units were financed (a new record).  Compared with November the figure grew 27 percent and, in relation to December 2010, the rise was 14 percent.

Balance and National Savings

In December 2011, deposits exceeded withdrawals by over R$ 1.2 billion – and in 2011 net inflow levels totaled R$ 9.4 billion. The balance of savings accounts in the SBPE increased by more than R$ 30 billion in 2011 (from R$ 299.9 billion in December 2010 to R$ 330.6 billion in December 2011).

Perspectives

For 2012, ABECIP believes that the volume of finance using the national savings will grow by 30 percent reaching R$ 103.9 billion.  According to president of the organisation, Octavio de Lazari Junior the relative slowdown is owed to the greater caution being taken by the country’s real estate developers who will be reducing their launch levels.  This is viewed by the organisation as a positive step in the right direction in order for the sector to remain consistent and sustainable.  Sector wide concerns have formed around the depletion of wholesale funding – with definitive alternatives still not being in place, the rapid expansion of the housing credit system is likely to be stifled.

Economic Scenario

The ABECIP estimates that Brazil’s GDP will grow by 3.3 percent, the level of unemployment will continue downwards and general salary levels will continue to rise.

This week saw the mass eviction of thousands of families residing in favelas (slums) in the Pinheirinho district of São José dos Campos, São Paulo state.  Behind a smokescreen of bringing “security” as a result of the resistance, the heavy handedness of Brazil’s military police was well documented and can be viewed all over news sites and YouTube with residents being forcibly removed using tear gas bombs and rubber bullets in addition to regular beatings, police brutality and little opportunity to collect belongings prior to the swift commencement of demolitions – leaving huge senses of loss, irrationality and injustice.

Located 87 km from São Paulo city on a plot of land of 1 million square metres (valued at R$ 84 million), since 2004 the favela’s population has grown from 1,600 to an estimated 7,000.  The event was a result of the land foreclosure and bankruptcy of Selecta S/A, owned by Naji Nahas – a Lebanese businessman often referred to as a “mega-speculator” who arrived in Brazil during the 1970s building companies, small scale lending institutions, an insurance brokerage amongst other activities and now owing over R$ 16 million in unpaid tax debts.

Commentators have referred to the events as an example of the wide inequalities Brazil, a country run by an elite who largely place their wealth in land – implicitly supported by socio-political double standards.  Cláudio Mota of the Vermelho website pointed to how upper-class economic groups regularly breach regulations related to the ownership of public land and legal processes often taking many years without any effective results – this is contrasted with Pinheirinho which saw helicopters, 2,000 riot police, 200 cars, 100 horses and 40 dogs to “resolve” the issue.

Whilst Dilma Rousseff, this week at the World Social Forum, condemned the behaviour of the authorities as “barbaric”, nothing was discussed with regards to who should be held responsible nor what needs to be undertaken at a policy level moving forward.  On the basis of discussions with São Paulo Governor Gerald Alckmin, Housing Secretary Ines Magalhães , Human Rights Secretary Paulo Maldos and the Cities Ministry technical specialists, up to R$ 500 will be given to ex- Pinheirinho residents – a subsidy that will have a 6 month duration, but can be renewed until the families receive a definitive housing solution.  Alckmin also announced on Thursday 26^th January: “we are going to accelerate the construction of housing units in São José dos Campos – with families having secure accommodation, in accordance with municipal legislation and title ownership.”  Yet, it has since been reported that in the eight years that the favela community has been established, not one cohesive housing programme has been presented and it is only now that international attention has been attracted that potential solutions are being discussed.

With a housing waiting list stated at 11,000 units, an initial target of 1,100 units has been aimed to be delivered in eighteen months time under the Minha Casa, Minha Vida (“My House, My Life”) lease to own programme.  However, the slow pace of initial progress on these units, a very poor track record, no definitive plans of action and a lack of solutions for the thousands of others who have effectively been left stranded is placing serious doubts on what will happen next.

Recent data released by the Getúlio Vargas Foundation (FGV) and the São Paulo Construction Industry Union (SindusCon-SP) demonstrated a drop in the number of labourers being contracted in the Brazilian real estate sector.  With a 0.62 percent reduction of new positions in the marketplace, the sector had 3.124 million employed workers nationally at the close of November 2011.

The north east was the only region to register an increase with 1,638 new employment positions created (a 0.25 percent rise) – central west Brazil’s statistic fell the highest (-2.41 with 5,990 jobs lost in the month) followed by the north (-0.88 percent), the south east (-0.77 percent) and the south (-0.27 percent)

According to Sergio Watanabe of SindusCon-SP: “the drop was higher than what was registered in November 2010 (-0.07 percent) but less than that of November 2008, during the initial stages of the crisis (-0.90 percent).  This serves to demonstrate that the market is moving back to a more normal rhythm, far from the overheating that was seen in 2009 when the November employment rate increased by 0.94 percent.”  The union also commented that the reduction has occurred due to the termination of many developments.

The news comes on the back on the growing amount dissatisfaction on building sites across Brazil mainly related to low wages, poor working conditions, a lack of transport facilities and respect for health & safety.  In the third week of January 2012 alone, developments have needed to be halted in Piauí (where 10,000 workers went on strike); Salvador (reigniting tensions after previous strikes in March 2011); Suzano in São Paulo (see this YouTube video link) and on an Odebrecht hydro-electric plant project in Paranaíta, Mato Grosso.  Please also see the news bulletin below exposing salary payment delays and poor working conditions of a social housing project in Itaquaquecetuba (São Paulo), recorded in November 2011:

As a result of Brazil´s hugely negligent construction industry practices related to environmental respect, should statistics indicated by the Institute of Geography and Statistics (IBGE) be understood, based on 2010´s practices (when real estate activity was particularly high), from the waste created as a result of the construction of three buildings in Brazil there would be enough to construct an entirely new one.

Due to the legislation that exists very rarely being respected, the National Environmental Council  (Conselho Nacional do Meio Ambiente, Conama) has published resolution number 448 to provide guidelines, criteria and procedures which, it is hoping, will counteract this ever-present phenomenon.  The new resolution stipulates that  all Brazilian municipalities will have 12 months to produce a management of building site waste plan which will implemented within up to 6 months of publication.

Conoma stated the plans: “should include technical guidelines and procedures which outline the due responsibilities of both small and large operators in relation to urban cleanliness and the management of building site waste.”  The plan will also establish licensing processes related to the creation and expansion of disposal areas (see the resolution in Portuguese by clicking here).

Readers may also be interested in viewing the various environmental benefits of the Fez Tá Pronto Construction System© (including zero building site waste) by clicking here.

As 2012 will mark the 5^th year anniversary of the launch of the Brazilian government led Growth Acceleration Programme (Programa de Aceleração do Crescimento, PAC), specialists speaking to Brazil’s “IG Economia” newspaper recently expressed their concerns related to the low economic growth directly related to the various infrastructure projects happening around the country.

After over 30 years where little investment was applied into the country’s railroads, highways, airports, energy generation and housing, the PAC (phased in two stages) was welcomed by all sectors of the economy and viewed from an international perspective as a positive step in the right direction.

However, the slow pace of financial resource allocation has meant that the programme’s advancement is falling short of the original objectives.  According to economist Mansueto Almeida: “The PAC has failed in its attempt to provide greater agility in the execution of infrastructure development due to the disadvantageous licensing processes which end up getting contested by the controlling organs.  In addition, the government continues to engage in contingency planning in line with the public investment which is delaying project execution.”  Last year the Globo newspaper highlighted the favourable contractual allocations and concessions being granted to a group of companies collectively known as the “four sisters” (Queiroz Galvão, Andrade Gutierrez, Camargo Corrêa and Odebrecht) – despite the fact that they may not be the best to undertake the works.

Carlos Campos, coordinator of Economic Infrastructure at the Institute of Applied Economics (IPEA) also commented that, whilst there have been notable advances, development is moving slowly.  He referred to the transport sector where some R$ 304 billion had been deemed to be the necessary investment requirement but “with the PAC 1 and PAC 2 put together, the volume has reached 35 percent of this amount – it’s an improvement but very much under the real necessities.”

Whilst the modest pace of investment growth was attributed to public spending cuts, largely fuelled by concerns over inflation levels being above targets, the Brazilian government has stated its intention to invest a previously held-back R$ 50 billion to bring what is aimed at being a minimum 4-5 percent growth rate for 2012.  Campos stressed the importance of the PAC being the driving force of infrastructure development that will enable Brazil to comfortably reach this target annual GDP growth rate – but highlighted that not all the investments have the same potential to be able to influence economic progress stating: “energy investments undertaken by private groups have more positive impacts.”   He also pointed to the fact that in other areas, investments that are more dependent on fiscal financial resources are likely to have a lesser effect on economic growth due to the dynamics of how funding is applied.  Almeida further brought attention to the concern that the government is arriving at its limit on the amount that can be invested in new projects: “[the government] is not planning to increase resources through broadening the tax burden nor reducing the resources within social programs to be able direct them to the PAC.  To maintain or accelerate the pace, it would be necessary to cut the cost of funding and improve the management of public administration, freeing up resources to increase investments in infrastructure.”

The IPEA research also revealed the 81 percent of the PAC disbursements have been allocated to Petrobras, the Brazilian Bank for Economic and Social Development (BNDES) and the Minha Casa, Minha Vida (“My House, My Life”) programme.  Almeida also bought attention to the fact that the PAC in 2011 had become more dependent on social housing – which this year should see investments in line with 2010 values.  However, as demonstrated in a recent blog post / video on a Minha Casa, Minha Vida project in Paraná – there is a growing amount of evidence of budgeting anomalies, dubious public-private partnerships and bad quality produced housing being delivered.

The two press clippings below (extracted in December 2011 from Brazil´s Folha newspaper) demonstrate how the rapid growth of property prices in Brazil has filtered through to the country’s favela communities – with rental figures that are very arguably beyond feasible affordability levels of the country´s low income groups.  Due to the existence of very few other housing options, most residents do not have any choice but to pay such sums for what are plainly appalling and sub-humane living conditions:

Please click here to see how the Fez Tá Pronto Construction System© produces luxury quality apartment units in Brazil of 47.7m² constructed area space (approximately 41m² of useful area) – where the monthly financial commitment never exceeds R$ 288 (using housing finance via the Caixa Econômica Federal).  Units  have a living room, 2 bedrooms, a bathroom, a kitchen, a service / laundry area, solar energy panels, a dual network water hydraulic system and rain water reserve units as well as being located within a closed apartment condominium (with  full infrastructure) in an area that is close to all essential infrastructure / utilities.

The Regional Council of Real Estate Agents in São Paulo (Creci-SP) has recently pointed out that rising rental figures are having a proportionate effect on the number of contracts not being renewed.  According to José Augusto Viana from Creci-SP speaking to the Diário Comércio Industria: “when contracts expire, owners are asking for absurd prices which are beyond the means of the renter.”

The research demonstrated that between August and October 2011, over 60 percent of new contracts were closed based on the fact that the previous renter had decided not to renew.  According to Viana, 5 years ago monthly rent represented 0.5 percent of the property value which today, depending on the location, is reaching up to 1.2 percent.  These figures were complemented by those of the São Paulo Housing Syndicate (Secovi-SP) which indicated that rental figures in the city had increased by 19.77 in the twelve months up to November 2011 (compared to the General Index of Market Prices – Índice Geral de Preços de Mercado, IGP-M – which had just grown by 5.09 percent over the same period).

According to Cícero Tajo of Secovi-SP, the rents have been increasing as a result of owners looking to take advantage of the rising incomes as well as the overall rising demand for leased accommodation.  He expects prices to continue to increase above the level of national inflation in the immediate future, although at a slower pace.

Viana further pointed to the fact that speculative landlords are also contributing to the issue with many empty units that are not being placed on the market – a factor supported by the 2010 Census which indicated that there were 1,112,000 empty housing units in São Paulo alone.

Nevertheless, a report just released by Secovi São Paulo indicated that the level of rental delinquencies had fallen, reaching 18,655 cases in 2011 – the lowest figure since records began in 1993.  Of the cases reported, 78.6 percent were prompted by missed payments (falling 11.96 percent in relation to 2010).