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In December 2014, Brazil was enjoying a record low unemployment rate: it stood at a mere 4.3% according to official figures. However, just seven months later, by July 2015, unemployment had risen to 8.6%, the highest rate since 2012.

At the same time as employment has been falling, consumer prices have been rising. According to Trading Economics, consumer prices were up 10.48% year on year, as at November 2015, the largest rise since inflation hit 11.02% back in 2003, according to the Instituto Brasileiro de Geografia e Estatística.

So, what happened? The reasons are many and varied. The Brazilian government imposed a number of taxes designed to balance the country’s budget. The real began to lose value, snowballing to decrease by 42% in the year to 17 November 2015. At the same time, China (Brazil’s biggest trading partner) was experiencing its own difficulties, which had a knock on effect on many countries around the world, including Brazil. Political scandal and allegations of corruption relating to President Dilma Rousseff were the icing on the cake.

But the story hasn’t been one of woe for everyone. Luiz Fernandez, CEO of leading developer Ritz-G5, which operates in the North East region of Brazil, explains,

“Every situation can present an opportunity, depending on your viewpoint. The Brazilian economy may be struggling right now but it won’t do so forever. In the meantime, the faltering real means that buyers from overseas can achieve excellent value when investing in Brazil’s real estate sector.”

This is certainly true of Majestic Village. With the real dropping 42% against the pound over the past 12 months, buyers paying in sterling are suddenly paying a whole lot less for their luxury Brazilian land plots. With a build density of just 34%, Majestic Village has been developed in harmony with the surrounding landscape, offering condominium living in a beautiful, friendly neighbourhood environment. A central square surrounded by cafés, restaurants and landscaped gardens will provide a focal meeting point, while the development will also enjoy such varied resources as a school, kindergarten, supermarket, clinics, swimming pools, tennis courts and club, volleyball courts, football pitches, children’s play area, gym, stunning feature river and club house.

Brazil’s economic moon is certainly waning right now. By September, Standard & Poor’s had seen enough – they downgraded Brazil’s economy to junk. Barclays has projected an economic contraction of 4% in 2015 and one of 3.3% in 2016.

However, though the short-term outlook may be somewhat gloomy, the cyclical nature of economies means that Brazil is bound to pick up the pace again in the not too distant future. It means that those who want to be part of Brazil’s property market had better start taking a long, hard look at it right now.

For further details, contact the Ritz-G5 team on +44 207 183 7565 or visit www.ritz-g5.com.

I had the opportunity to attend an outstanding presentation and panel discussion on Brazil’s competetiveness and entrepreneurship – [or lack thereof].

Held on November 10th,  the event was sponsored by the Brazilian-American Chamber of Commerce, Inc. NY and hosted by  The World Economic Forum in Manhattan.

The panel was moderated by Fernanda Bak, a New York-based Brazilian journalist.  The panelists included Monica Baumgarten de Bolle, a macroeconomist and Partner at Galanto Consultants, Cesar Cunha Campos, Director of FGV Projetos, the technical advisory unit of Getulio Vargas Foundation, and Michael Drexler, Senior Director and Head of Investors Industries at the World Economic Forum.

L-R: James Rosenstein, Exec. Dir. Brazilian-American Chamber,   Fernanda Bak,   Monica Baumgarten De Bolle,   Michael Drexler,   Cesar Cunha Campos

L-R: James Rosenstein, Exec. Dir. Brazilian-American Chamber, Fernanda Bak,
Monica Baumgarten De Bolle, Michael Drexler, Cesar Cunha Campos

Ms. Bak opened the spirited two-hour presentation and Q&A with an auspicious preface; that any discussion on competitiveness and entrepreneurship typically cannot be disassociated from [the role of] government and politics – especially Brazil’s.   Duly noted.

Here are some of the more salient takeaways on this topic and what needs to happen to to make Brazil more competitive and entrepreneurial.

National Competitiveness and Entrepreneurship: an Inverse Relationship

 A recent study by the World Economic Forum (WEF)  places in  doubt  the simple competitiveness-entrepreneurship relationship.

The more competitive an economy i.e. developed countries, the smaller the percentage of the working-age population starting or running new businesses. The inverse is true as shown in the WEF graph below:

photo brazil 2

The WEF report explains this incongruity, “In highly competitive economies, there are a larger number of attractive existing employment opportunities than in less competitive economies, which raises the opportunity costs of starting a business in these highly competitive economies.”  Paraphrasing, in less competitive economies more people start businesses because better employment alternatives are most likely unavailable to them i.e. Brazil (such businesses also include black/grey market enterprises).

Where does Brazil fit in on a global basis?  It ranks 4th out of the top ten   in Latin America  and 4th out of the BRIC countries.

And the role of government and politics?  The take-away here is that government inspires to scale back business enterprises and development.  In other words, it’s like you are punished for trying to grow!  The most problematic factors (in order of severity) for doing business in Brazil are:

  • Tax regulations
  • Restrictive labor regulations
  • Inadequate supply of infrastructure
  • Tax rates
  • Inefficient government bureaucracy
  • Corruption

The complete WEF Report (all 565 pages) on global competitiveness can be accessed with this link (Brazil’s competitive index is on pages 134/135):

http://www.weforum.org/reports/global-competitiveness-report-2014-2015

The Role of Infrastructure

Question on the role of infrastructure - John Dean Markunas

Question on the role of infrastructure – John Dean Markunas

With absolutely no doubt,  Brazil’s infrastructure bottlenecks have been identified as a key obstacle to growth affecting competitiveness, entrepreneurialsm, productivity and market efficiency, and hindering domestic integration and export performance.  That’s nothing new.

You can’t be serious! All of Brazil’s infrastructure is decrepit. The World Economic Forum ranks it at 114th out of 148 countries.  Just 1.5% of Brazil’s GDP goes to infrastructure investment from all sources, both public and private. The long-run global average is 3.8%. The McKinsey Global Institute estimates the total value of Brazil’s infrastructure at 16% of GDP.

Obviously infrastructure investment needs to increase. It’s also suggested  that The Brazilian Development Bank (BNDES) needs to come under more scrutiny. It needs to re-focus and re-start  an infrastructure investment track.

Private Investment  This is part of the solution; however, given government regulatory and execution risks, it’s no surprise that would-be investors are scared away. Government must either reduce the risks for private investors or raise their returns.

Macro Economic Framework

As the Brazilian economy struggles for its reorganization, it is urgent to establish policies which will make the country attractive to foreign investors. The success of these potential investments, moreover, fully depends on a deep knowledge of the country’s diversity, of its idiosyncrasies, and of its specific and local productivity potentials.

FGV Projetos

Another valuable resource to help understand Brazil, its competitiveness and business environment is a robust report produced by FGV Projetos. It provides sectoral indicators depicting Brazil’s competitive profile in detail, examining regions and sectors.

It aims at contributing to an improved understanding of the economic sectors in the country.  If you are considering entering the Brazilian marketplace, this  is a must read.

Here is the link to access this report: http://fgvprojetos.fgv.br/en/node/1027

If you have any questions, comments or feedback on this article please feel free to contact me at:  johndeanmarkunas@gmail.com.

Brazil is home to the Amazon Rainforest, with flora covering some 60% of the Latin American nation’s land. The Amazon Rainforest is the planet’s largest and most biodiverse tropical rainforest, containing around 390 billion trees and 16,000 species, according to the Field Museum.

With such an incredible natural bounty covering so much of its country, it is no wonder that Brazil is making a concerted effort to protect the environment from the effects of climate change. Even Bill Clinton has spoken out in recognition of the country’s work and its leading role in preserving the world’s natural resources.

Speaking to an audience of businessmen, Clinton was discussing the importance of the relationship between Brazil and the United States and how the success of Brazil’s economy is of interest around the globe. He praised the nation’s economic potential and expressed his confidence in its ability to blossom over the years ahead, following the significant progress made over the past quarter century.

This summer, a joint initiative between the US and Brazil was launched in order to enhance cooperation on sustainable land use, clean energy and climate adaptation.

To the real estate development team at Ritz-G5 the initiative was incredibly welcome news. Ritz-G5 CEO, Luiz Fernandez, comments,

“We’ve long been passionate about promoting the natural landscape of our country and of building in harmony with it. Contemporary living should integrate with nature, not seek to tame or destroy it – it’s all about balance. Blending natural habitats with careful planning is the way to achieve a sense of calm and serenity in a development, which is so important.”

Eco living is set to flourish in 2016 and beyond. The Brazilian government is reported to have given the go-ahead for the construction of 29 new clean energy power plants across the country, including windmills, hydroelectric plants, biomass and gas installations. It’s a commitment to going green that should have a strong influence on the residential housing marketing, as Brazil continues to innovate in its protection of the environment.

Hopefully the result will be more development that celebrates the natural environment in the way that Ritz-G5’s own mixed-use development Majestic Village, located in the north-eastern state of Rio Grande do Norte, does.

Luiz continues,

“During construction we ensured that the flow of the nearby river was maintained and that some 2.5 acres of land was protected as it is home to the rare ‘Mata Atlantica’ plant. We also built in a host of eco friendly features. Majestic Village boasts Natal’s first energy efficient LED street lighting, along with solar panel technology and recycled water collection to allow residents to partake in Brazil’s strategy to preserve its natural resources against climate change.”

For further details, contact the Ritz-G5 team on +44 207 183 7565 or visit www.ritz-g5.com.

Please see a chapter from “The Essential Guide to Land Investment in Brazil for 2015 and Beyond” – kindly donated to this blog by Brazilian real estate consultant and author Mike Smith.  Scroll down to the bottom of the post for Mike´s full contact details and social media links.

Avoiding Common Mistakes when Investing in Brazilian Real Estate

Brazil is a challenging but ultimately very rewarding country to do business in.  But things can go wrong. Investors will try to take short cuts by failing to have paperwork checked thoroughly and miss out on basic procedures, checks that can prove very costly and stressful in the long run so let me just tell you about some of the things I have seen that can go wrong with property investment in Brazil.

First and foremost, documentation,you need to check that the land you are buying has all the required paperwork,straight off..the land should have a public deed that is registered in the local notary office, in the name of the person / company you are buying from.

The property also needs to be registered with the local municipality and the land dimensions.location, owner need to match up between the two departments.

This is absolutely fundamental in ensuring that you have a safe and prosperous investment. If the documents to the property are faulty in anyway,any subsequent development will be put in jeapordy and you stand the chance of losing your money.

If you go ahead and purchase the land because it seems like a great deal and have not carried out these checks it could prove to be a very costly mistake right at the get go.

For example many of the properties in this region do not have ownership rights but rights of possession, or ‘posse”. This means that the property does not exist legally / publicly but was purchased with a private agreement between buyer and seller and passed on through the generations. If you enter into this type of purchase you open yourself up to potential land disputes as anyone can come along and claim that they have a purchasing agreement for the same property. You cannot legally build on this type of land and therefore are unable to sell. There is a process (usucapião) where you can apply for legal title to the property after a certain amount of years but this route can be agonizingly slow taking years to finalize by which time you’ll have missed out on market growth and potential profit.

I would therefore advise you straight off to only consider purchasing property that has the correct paperwork. This period of due diligence may take a week or so to establish with a good lawyer  or licensed real estate agent. They can do a thorough check on additional aspects of the property, tax liens, existing legal suits.

Next comes planning permission

I would advise you to get an architect involved pre-purchase to put a project together for the parcel based on the local building codes of the municipality aligned with your investment model and then get a basic consultation with the local planning department  and the relevant environmental agency to check if it is viable.

This will give peace of mind and prevent any nasty suprises further into planning, construction phases.

So you’re going to buy a property that is legally registered with a definite blueprint of what can be built on it, according your specifications.

You also need to establish the topographical status of the land. One of my fellow investors purchased a large area of land in the interior of the state and licensed a project for 300 homes. It was only when they started to lay the house foundations that they discovered the solid rock under the top soil. This meant they had to drill deeper foundations and added over 1 million dollars to construction costs.

Alternatively land that is below sea level can appear to be perfectly fine for development purposes during the summer months but turns into a lagoon as soon as the rains come. This means additional costs as you need to dump truckloads of dirt to level up. Make sure you have an engineer look at the lay of the land  so you can at least factor these realities into your development budget.

When you buy land here please ensure that you secure it with a perimeter fence or wall depending on your development plans. There are cases where local residents have invaded open land areas, built shacks and claimed ownership.This can prove a headache as you will probably need to file a legal suit  to get them evicted and this can be a long drawn out process. If the land is clearly marked it sends a message to any would be opportunists so make sure you establish your ownership of the property and secure it.

Going into partnership. This is a problem that often arises.  A foreign investor comes to Brazil, strikes up friendship with a local Brazilian / foreign resident and decides to go into business together. The friend speaks Portuguese fluently and seems to know their way around so it makes sense to have this kind of local know how and support but with no capital or a disproportionate amount. This can be a blessing but is more often a fatal mistake. Once the friend becomes a company partner with equity in your business they have a part controlling share and should the friendship sour you could have a major problem extracting this person from the company.

Make sure that you run a check on anyone you are going into business with as a partner. It is fairly easy to research through social media channels and by finding out if the partner has had experience with property investment and perhaps some references from people you can gently reach out to.

It’s very important to find out this type of information as best you can before entrusting company equity and decision making powers to the potential partner.

Overstretching your resources. Don’t go too big too soon.

This applies to all the development investment options mentioned in the previous chapters. With the subdivision, break up the project and develop in phases, for the gated community, try to minimize your initial development costs, build one showroom and get your orders in off plan before proceeding with the more costly infrastructure and with social homes, try to make make sure you are not dependent on the funds due from the last batch of homes to complete the next batch otherwise you run the risk of defaulting.

The development needs to be of a manageable size that you can afford so you are not overstretched. There is always the possibility that you won’t be able to sell all of your plots / homes in the anticipated time so it is prudent to have a capital reserve to account for any delays / downturns in sales.

Last but not least is the need to delegate..don’t try to do everything yourself.There are big opportunities here but the business is challenging especially if your Portuguese skills are not up to scratch. This is a team effort so you need to employ the right professionals to get the job done.

When you are purchasing the land you’ll need a real estate agent to guide you through the process,for the project you need an architect, a lawyer to oversee paperwork, an accountant to run the books, possibly an administrator to organize the operation and a builder to deliver the infrastructure and homes. This structure is fundamental to doing good business here.

You can sub-contract this team of professionals or hire full-time depending on the size of your investment operations here.

I know of other investors who want to be more hands on and start getting involved in buying, delivering building materials or attempting to train the labour force, try to take on the due diligence when purchasing property.This is all well and good if you specialize in one of these business aspects and can add genuine value and improve efficiency. However more often than not micro-managing turns into mini-migranes!  It creates problems for the investor as you can become frustrated by the Brazilian methods and general work culture. Pick the right team and then leave it up to the professionals to do their job and supervise operations.The job will get done alot more smoothly and you will able to sleep at night and make money in the process.

If you follow the guideline set out in this chapter and avoid the common mistakes that investors make you will have a much better chance of profiting from your investment and multiplying your returns.

Mike Smith
Cel: +55 (84) 99993-8936 / Office: +55 (84) 3345-4406
Email: mikesmithbrazil@gmail
Skype ID: mikebrazilbeachhouse

​My Professional Background: br.linkedin.com/in/mikesmithinbrazil
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Brazilian Investment Blog: http://investnatalbrazil.com/
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With Brazil’s recession, political disarray and justifiably anxious and muddled market outlook by foreign investors, I thought it was a perfect time to take a closer look at Brazil’s real estate investment climate – as seen by both Brazilian and foreign real estate players.

With this in mind, I helped organize and moderate an industry panel and presentation for an an event, co-sponsored by the Brazilian-American Chamber of Commerce, Inc. – NY and the NYC Chapter of FIABCI.  Held on November 3rd, the presentation was hosted by the prestigious law firm of Chadbourne & Parke.

John Dean Markunas - Brazil Real Estate Consultant

The panelists included;  Brazilian economist Paulo Vieira da Cunha, Head of Macroeconomic Research, Ice Canyon LLC, Miguel Jerónimo, a Portuguese national, Director  of EMBRATUR (Brazilian Tourism Institute) in charge of promoting Brazil as a tourism destination, American Josh Pristaw, co-founder and Senior Managing Director of GTIS, a global real estate investment firm headquartered in New York with offices in Sao Paulo and myself, a Brazil real estate industry consultant.

Indeed and not surprisingly, insights and reflections from the speakers (and many in the audience) suggest a fragile and pessimistic outlook on Brazil.

Current Distress

  • Unemployment continues to rise;
  • Banks are not financing deals easily or cheaply;
  • Shrinking mortgage market;
  • Federal government has a negative budget for 2016;
  • Political scene is in deep and real chaos;
  • President doesn’t have support of Congress;
  • Middle class deteriorating;
  • Elevated household debt burden;
  • High corporate leverage;
  • Rising inflation, interest rates, corruption, etc, etc.

Brazil’s real estate market (like other domestic markets) has been in absolute decline during 2015.  We can easily predict how difficult 2016 will be.  Some say Brazil’s recovery will be slow and only truly start a comeback  in 2018.  As such, the sentiment that a perfect storm is brewing.  These are conditions for investors who have  or who are developing short-term tactics to purchase real estate i.e.  distressed assets  – with an accompanying  long-term vision.  Foreign investors with purchasing power and the ability to re-position assets will be in excellent condition to take advantage of Brazil’s market disequilibrium.

The question is whether a foreign investor will want or have the incentive to enter the market to take advantage of the devaluation of the Brazilian real against the dollar or euro, looking for distressed assets.  Why?

First, there are uncertainties as to expectations that there will be any returns on investment during the crisis.    With the probability of zero or depreciating returns during 2016 and most probably during 2017,  cold-blooded decisions must be made whether to risk investing in Brazil.  Secondly, and it’s worth repeating, investors must be in it for the long-term considering the uncertainly of how or when, market rate returns make a comeback.

The Real Estate Market Calendar and  Clock

Perfect storms pass. The clock is ticking. So what’s on the horizon? How should investors generally perceive asset values and time-frames?

It’s considered that retail and middle-income residential markets are still in  free-fall while hospitality, office and industrial/logistics are already hitting the bottom of the market.  Buying, holding and re-deploying assets from 2016 through 2018 seems to be a plausible time frame.

Thoughts on Minha Casa Minha Vida/Social Housing

The low-income housing program Minha Casa Minha Vida (MCMV) “My House My Life”  remains a government priority.  However, with a budget deficit, the government made it clear that MCMV will not have the same velocity of growth as forecasted.

As such, MCMV will also suffer from the crisis, despite being a strategically important housing program for the federal governmentInvestor discretion and caution are mandates in MCMV investments  – now through at least 2017.

Another asset class (land) and strategy  (land banking) should be considered by long-term investors There are tremendous opportunities to buy raw or currently unproductive land at tremendous discounts to appraised values,  located near existing industrial hubs, urban centers or close to major transportation corridors. With this investment model undeveloped land can be purchased and returned to productive use or held and sold later at a significant return. Pockets of valuable land for sale located near urban areas with exceptional upside potential have been identified outside the capital city of Sao Paulo in the State of Sao Paulo  and near the capital city of Salvador in the State of Bahia.

The Outlook  

It is generally agreed that 1) assets will be inexpensive with formidable upside potential, 2) market dynamics will create forced asset sales and bankruptcies, 3) currently there is finite investor competition with limited  capital available to take advantage of the current opportunity, and 4) there exists favorable long-term fundamentals in Brazil.  That is to say;  near-term distress with long-term growth.

If you have any questions, comments or feedback on this article please feel free to contact me at:  johndeanmarkunas@gmail.com.

There is a saying that every dark cloud has a silver lining. The current situation in Brazil is just like one of those dark clouds. It won’t be too long before they move away and the bright sunlight shines through. For foreigners, the Brazilian real estate market presents a great opportunity, but it may not last long.

While many investors are worried about investing in Brazil, people who really know how to invest are having other thoughts. It’s true that the best investment opportunities are in markets that are temporarily in a down phase and this is exactly what Brazil is going through at present.

Brazil’s Problems Are Mostly Self-made

The currency is down, growth is down and the political situation is not at its best. Except for the fall in commodities prices, all the major problems that the country is currently facing are internally generated.

The problems started during the first year of President Dilma Rousseff’s second term. A corruption scandal, a drop in popularity and a non-cooperative congress has meant the president has a tough job on her hands. It has also strengthened the opposition’s hands, which is trying to get her impeached.

According to experts, some tough fiscal policies are required, which include cost cutting, trimming the red tape and encouraging small and medium size businesses. The problem is that the current political situation is making it difficult for the government to take these corrective measures.

Fundamentals Of The Brazilian Economy Continue To Be As Strong As Ever

Despite its current economic and political difficulties, the fundamentals of the Brazilian economy continue to be strong. The country has plenty of foreign exchange reserves and a robust industrial base. It continues to attract large foreign investments, which is an endorsement of its strong fundamentals.

Brazil is also a member of the BRIC group, which is an association of some of the fastest growing large developing economies of the world. Brazil being the seventh largest economy in the world continues to be a giant in Latin America and is set to join the ranks of the developed nations in the future.

Brazil has a large consumer market with a young population. It is the world leader in production of iron ore, coffee and sugar cane. It is also the largest exporter of several agro and livestock based products. The country has huge oil reserves, meets 40% of its electricity requirements from hydroelectric power plants and has no energy shortage.

Investment, Trade And International Interest Continue To Be Optimistic

For a country with so much potential, it is unfortunate that Brazil is going through this unnecessary crisis. Despite the current political scenario, there is no major dip in trade or international interest.

The trade between Sweden and Brazil saw a 45% growth in the last ten years and there is still scope for much more. A $4.7 billion fighter aircraft deal is on the cards with Swedish aircraft maker Saab, which includes purchase of 36 aircraft and technology transfer. Discussions are going on between Saab and a number of Brazilian companies for locally manufacturing the components for these fighters and its systems.

During the previous year, significant trade agreements were signed with the US, China, Russia and Mexico. Discussions with other countries in Europe, South America and Africa are in progress. Although there was a 4% dip in foreign direct investment in 2014, Brazil moved up two places to the fifth place in the world rankings for FDI.

For The Knowledgeable Investor, Brazil Presents An Attractive Opportunity

While the market sentiment may not be great, wise investors know that this is probably the best time to buy. It will take some searching to find those great investments, but they are definitely available.

Mark Mobius, the chairman who is in charge of emerging markets at Franklin Templeton Investments, has no doubts that the Brazilian equity market presents many investment opportunities, despite the current problems. For those who have the holding power, this is the time to pick up the best investments, be it in stocks or real estate.

Foreign investors looking to invest in real estate have a combination of factors working in their favor. The prices are down and the Brazilian Real is now 50% cheaper than it was before. Compared to the days before the crisis, foreigners can currently buy the same property at much lower prices in their home currency. The other advantage is that currently, the Brazilian real estate market is a buyer’s market, which means that buyers can bargain hard and there is a large selection of real estate to choose from.

The current pain in Brazil is definitely a setback for the country, but considering that it is mostly a self-made problem, the turnaround will be quick once the political machinery gets their act together. Meanwhile, this gives investors, especially foreign investors, a wonderful opportunity to pick up some cheap investments. For those who are looking to buy a holiday home or retirement home in coastal areas, things are unlikely to get better than this. Although a further dip can’t be ruled out, a big turnaround is on the cards. Those who wait on the sidelines to find the absolute bottom may just remain mere spectators when that happens.

This post was written exclusively for this blog by Luisa Sofia of Brazil Bahia Property.

According to a recent business survey, Natal has been ranked as the 5th best city to invest in real estate in Brazil whilst the first four places were taken by selected municipalities of São Paulo. This is an extraordinary finding for Natal, considering that nearly all Brazilian municipalities were studied, out of which the 100 best were shortlisted and ranked.

In the list published by a leading Brazilian fortnightly business magazine – Exame, based on the survey conducted by consulting firm Prospecta Inteligência Imobiliária (Prospects Intelligence Real Estate), Natal was defined as a great place for investment in all types of real estate (residential, hotel and commercial).

Rather than considering the valuation of real estate by taking into account the average price per square metre, which only reflects sold property values, the analysts chose to investigate the demand by tracing future trends. The study used several variables for each municipality which measured per capita income, education levels, employment, a number of operating companies and the housing deficit in each of the cities.

Following the survey, the findings selected 100 municipalities across Brazil which showed the greatest potential for real estate investment. Natal ranked the 5th best city in the whole country well ahead of Maceió (8th) and João Pessoa (10th), which are also the cities from the same Northeast region.

These study findings have already started to spark the attention of investor groups as to the advantages of investing in Natal. Known as the “City of the Sun”, Natal boasts great climate characteristics and lifestyle attractions, and although it does draw in tourists and holidaymakers, it has a very strong domestic migratory pull too. This is because it offers a superior quality of life in Brazil – a faster and shorter commute to work, stunning beaches which are easily accessible from the CBD and a far better standard of housing found at much cheaper prices than in the largest cities of the Southeast.

According to data collected by Prospecta Inteligência Imobiliária, Natal has experienced a large increase in purchasing power of the average citizen. The average income of the economically active population (EAP) in Natal is six times the minimum wage (nearly R$ 5,000). The increased purchasing power of the population nearly always translates into growing real estate demand and for prime assets.

In addition, the survey also revealed an interesting fact about Natal; of the top 5 best cities to invest in real estate in Brazil, Natal has the largest housing deficit, standing at 34.18%.

Top 5 Cities in Brazil to invest in real estate 2015

Moreover, due to the current fall of the real, now is a unique time for savvy overseas investors to purchase property in Natal at heavily discounted prices. In fact the Brazilian real’s fall has resulted in a historic low against the US dollar, previously set in 2003, 12 years ago.

Natal, in comparison to other cities in the Northeast, currently presents superb value for money, offering the lowest local average property prices and yet being defined as the best city in the Northeast region to invest in real estate.

In fact, according to Ritz-G5 sales data, the average house price in Natal currently stands at R$ 3,470 per m² which is the lowest average value of all large cities in the region. Hence, Natal is better priced than Recife whose average value amounts to R$4,888 per m², Fortaleza R$4,876 per m², Salvador R$ 4,277 per m², João Pessoa R$ 4,675 per m², Maceió 3,774 per m² and Sergipe R$ 3,927 per m².

Furthermore, Brazil is one of the eight largest economies in the world with abundant growth potential. Thus, despite the current, temporary economic crisis in the country, Brazil will most certainly see its currency appreciate in a relatively near future, offering investors who purchase now fantastic returns over the medium and long-term.

For more information about investing in Natal, the “City of the Sun”, contact local developer Ritz-G5 on +44 (0) 207 183 7565 or visit www.ritz-g5.com.

Whilst the bottom of Brazil´s real estate market is arguably some distance away, more investors have begun to examine when this turning point will actually arrive to potentially benefit from future capital gains.  Yet even during such boom times, particularly for the foreigner, the risks of buying into this asset class often outweigh the positives – a phenomenon largely caused by lack of clear knowledge of mitigating the myriad of pitfalls.  In an attempt to kick-start more rational analyses of doing property business in Brazil, below are some highly informative comments recently made by tax adviser David Soares da Silva.   Having operated as legal counsel, tax advisor and member of board of directors of foreign funds and companies with investments in Brazil since 1993, David is well versed in a range of tax planning and international business transactions and can be contacted directly via dsilva@blslaw.com.br:

(1)   The subheading of your book Brazil Tax Guide for Foreigners (available on Amazon) describes its content as being “the comprehensive guide to investing and surviving in one of the most complex tax systems in the world”.  For those who perhaps do not run off scared after reading this – are things really that bad in Brazil, in comparison to Europe and the US for example?

Brazil’s tax system is indeed very complex and difficult to understand. For a foreigner, the situation is worsened because of the lack of comprehensive literature in the English language. The complexity of Brazil’s legal and tax system is almost unique and simple things that work in other countries may not work in Brazil. An example: setting up a trading company requires the leasing of appropriate and licensed warehouse space, but you can only lease property if you have the company registered first. This is a catch-22 situation and the solution is to first set up a service company (no licence required) and only then lease the warehouse and convert the company into a trading. Needless to say that this increases the time and cost to have a business setup in Brazil.

(2)   Perhaps a more general question: despite the current difficult economic climate, would you say Brazil is becoming more open to foreign investment particularly in the real estate market?  Are there any tax concessions or other incentives in the pipeline?

For urban property, the answer is yes because there is no restriction for foreign ownership. Also, the depreciation of the BRL is making Brazilian real estate cheaper for foreigners and, consequently, more attractive. However, investors must consider tax planning opportunities before sending down their money. Let me explain: if a foreign buys real estate directly from abroad for investment, future capital gains on the sale of such property will be taxed at 15% or 25% (if the investor is domiciled in a tax haven). But if the investment is made through a Brazilian (real estate) company owned by the investor, the sale of the property is subject to taxation at approximately 6.7% of the sales price. Further remittance of the proceeds abroad can be made as dividends, which are tax-free even when remitted abroad. As for rented property, the same 15%/25% withholding tax applies, while the lease out of a Brazilian company is taxed at approximately 11%.  There are severe legal restrictions for foreigners to buy rural land in Brazil and intention for such investments must be preceded by careful legal review.  Note that taxes on real estate lease or capital gains are federal and do not vary according to the state/municipality where the investor is located.

(3) What are the most important taxes that a foreign real estate investors should be aware of?

If investment in real estate is made directly, the most important tax is the withholding tax: 15% or 25% (for those domiciled in tax havens) for both lease and capital gains.  If the investment is made through a local real estate company, then the withholding tax does not apply. Instead, local taxes apply, namely: corporate income tax, the social contribution on net income, welfare taxes on gross revenues (P.I.S. and COFINS). The rates and basis vary according to the tax regime adopted by the local company: the actual regime (lucro real), where expenses are deductible for tax purposes and tax rates are higher, or the presumed regime (lucro presumido), where no deduction is allowed, but tax rates are lower. The lucro presumido is permitted for company with annual gross income up to BRL 78 million.

(4) Should someone acquire property or land in Brazil directly, what are the principal holding tax costs that he/she should be aware of?

Acquisition of property is taxed by the municipal real estate transfer tax, which rate is usually 2% or 3% of the transaction’s value (ITBI). However, local governments may arbitrate the transaction’s value if it is significantly lower than market value.  Holding real estate triggers annual property tax: for urban property, we have the municipal real estate ownership tax (IPTU). Calculation depends on the property’s area and constructions and rates vary from municipality to municipality.  Rural property is not subject to IPTU, but to a federal rural property ownership tax (ITR). ITR is determined according to a complex formula that takes into account the land area and also rural production carried out on the land. My book Brazil Tax Guide for Foreigners has a table with the variables taken into account for ITR calculation.

(5) Could you explain the double taxation treaty; which countries form part of the convention and how foreign property investors can benefit if they are resident of a partner country?  Are there any offsetting rules that can be of benefit of an investor bringing foreign capital into Brazil as part of these regulations?

Brazil has signed many tax treaties, but except for Japan, the treaties do not provide for any special tax relief concerning real estate income or capital gains. The standard tax rate for non-treaty countries is 15%, which is the rate also established in the treaties. The exception is Japan for which capital gain tax under the treaty for sales of real estate is 12.5% instead of the standard 15%.

(6) What if a investor interested in Brazilian real estate is not resident of a partner country (for example someone from the UK) – are there any potential mitigation strategies?

As mentioned in the preceding question, there is no difference, except for Japan. UK residents are subject to the same taxation as a resident in a treaty country, such as France and Italy.

(7) Could an investment company based in a country like the US create some kind of subsidiary to invest in real estate projects?  How complex would this be from a legal and an accounting perspective?

That’s not complicated, but the local subsidiary needs to have a resident local manager. The foreign investor – a company or an individual – needs also to appoint a local legal representative, who can be the same person as the local manager. In terms of accounting, that’s not complicated. For a simple structure, accounting services should not exceed £ 150/Mo.

(8) When in engaging in a property investment investing directly with a developer – most commonly in an “off-plan” construction project – what would you say is the most tax efficient way of repatriating capital gains to the country of origin?  Are there any ways that foreign investors could fix exchange rates (to mitigate volatility in the currency markets)?

This would require a deeper analysis of the goals of the investor. If she plans to continue investing in real estate in Brazil, then it might be a good idea to create a local company to receive the foreign investment and redirect it to real estate investments. Depending on the structure, it is possible to repatriate the amounts received tax-free. If it is a one off investment, then the costs associated with keeping a local company active might not be advantageous. Again, it depends on certain variables that go beyond the scope of this interview. As for protection against currency volatility, the only protection is hedge, but that may be costly.

Brazil has always been, and remains, a beautiful and exotic location with a high demand for beach front property and vacation homes. The vacation rental market in Brazil has a good reputation with with AirBnB and similar services offering high end vacation homes for rent.

Why These Homes Are A Good Investment

There are a number of elements that have come together to make now the ideal time to invest in Brazilian real estate:

  1. The upcoming 2016 Olympics in Rio de Janeiro.
  2. The increasing number of tourists.
  3. The current low value of the Brazilian Real, the past few years has seen the Brazilian Real (R$) lose more than half its value against the US Dollar. The current exchange rate for investors paying in US Dollars is exceptional at USD/BRL 3.9 (Oct ’15).

These are just a few but taking these together they present an excellent argument for those considering investing in real estate in Brazil.

Add to this the turbulent political and economic climate and you have an undervalued real estate market. House prices in Sao Paulo have declined by 20% in some areas and this could continue with yet further drops still to come.

The 2014 World Cup had a huge impact on overseas investment, visitor numbers, International exposure and local real estate investment. The increasing excitement building around the upcoming Olympic Games suggests that it will have a similar, if not larger, positive effect on the real estate market and the economy as a whole.

It Gets Better

Tourism in Brazil in 2014 was up to 6.4 million, up 10.6% on 2013. 2016 tourism numbers are expected to rise still further above these figures.

A few further positive market conditions add to the value of seizing the opportunity to invest in Brazilian real estate now. An over supplied housing market has seen prices drop in most Brazilian markets. The demand for rental property is expected to be high because of the 2016 Olympics. Demand for rentals also usually rises after a housing bubble burst.

The major draw for International investors to Brazil right now are the rental returns. Investors purchasing property in Brazil are able to rent to a market of 7 million people. Investors are also able to target the tourist market, offering holiday makers a place to stay during Brazil’s busy holiday periods.

Beyond the residential and tourist markets there are also opportunities in the commercial sector, with investors pinpointing commercial property in urban centres as offering lucrative rental returns.

The weak Real is a major positive factor right now which is encouraging overseas investment. The currency fell 22% against the dollar and 29% against the pound this year (2015). Not only does this mean that investors from the US and UK can purchase property at a much lower cost than just a few years ago but there is also widespread belief that the Real is currently undervalued.

The huge, recent investment and trade agreement deals with Russia, China and India would suggest that they see a very positive future for the Brazilian economy. With this in mind the Real is certainly set to increase in value in the very soon. If this truly is the case then the time is right for overseas investors to invest in Brazilian property now.

Under these ideal conditions investors can expect to get much more property for their money, profit from rental incomes and profit again in a few years when the market recovers and they sell their asset. Get in now to take advantage of this rare opportunity but make sure to be patient with sales and deal with an agent on the ground that knows the market. You should also be prepared to hang on to your new investment should the economy drop a little more before getting better.

This post was written exclusively for this blog by Luisa Sofia of Brazil Bahia Property.

Despite the economic and governmental issues currently weighing heavily on Brazil, real estate investment still presents a very real opportunity for those willing to consider the bigger picture and the long term.

Brazil is not really fully understood and there’s a lot going for it; huge commodity exporter, favourable government policy changes for real estate investors, new international trade agreements, heavy investment from abroad, foreign interest in their huge oil reserves and mineral deposits, a booming and expanding middle class, the leading South American country, the upcoming Olympics in 2016 etc. Massive investment in Brazil from China the US and India is already under way with more to come.

Real estate prices have dropped, but this represents an opportunity as new developments are still under construction. Overall, there is a housing shortage in Brazil and the increasing demand from young middle class Brazilians will keep it that way for some time.

A number of prominent real estate websites are also now quoting international investors as showing significant interest in the Brazilian real estate market as a means of taking advantage of the current short-term, less then ideal, political and economic position.

The Economy

Many US companies are still optimistic about Brazil’s long-term growth prospects given the huge potential for a country with a population of 195 million. Brazil clearly has a large domestic market and exports contribute only about 10% of the GDP. This provides good insulation from global financial problems.

Brazil is the fifth largest country in the world with a middle class of 36 million which continues to grow and many of them have a significant disposable income. This is a leading factor in the prediction that the Brazilian economy will not slow down too much in the short to medium term. The long-term situation is even brighter, if you also factor in the numerous trading agreements and investments entered in to by the BRICS countries.

The economic growth was only 1% last year(2014) but it is accelerating. If the Brazilian Central Bank raises interest rates soon it may be a reflection of an economy that is accelerating.

Property Boom & Demand

Despite the current economic climate a little known residential property boom is continuing on the north east coast of Brazil, historically the poorest region of the country. The region of Bahia is seeing lots of coastal real estate development and investment by the growing middle class in luxury second homes or tourist rentals.

In countries with a strong population base like Brazil, there is also a strong and genuine demand for property from buyers who intend to live in their homes.

Foreign Investment, The BRICS & Trade

For the country as a whole and on the wider political front serious effort is being made by president Dilam Rousseff to bring in further investment from both the West and the East. Rousseff met with Putin on 8th July in Siberia where the BRICS summit is taking place. Sergei Katinin, president of BRICS Business Council and the head of Russia’s Chamber of Commerce and Industry, stated “the five country-members support Brazil’s railway infrastructure project, which could be funded by the BRICS Development Bank”.

The BRICS summit is expected to address multiple billion dollar initiatives and current broader world challenges.

“Expectations include supporting Russia’s long-standing view of the need to deepen BRICS cooperation with practicalities of… enhancing ties in all areas of social, economic and political life through outreach with involvement of different stakeholders.”

“Priority social issues on the agenda, like healthcare, education and labour would certainly take their proper place with a number of concrete proposals,”

In May 2015, Russia’s upper house of Parliament sanctioned a proposal to establish a reserve pool of $100 billion for BRICS members.

This would be dedicated to protecting national currencies meaning members would no longer be reliant on the International Monetary Fund. This opens up a whole new world of currency stability and control to Brazil and the other BRICS members. The creation of the Development Bank will serve as an alternative to the IMF. The bank will be located in Shanghai and headed by K.V. Kamath, an Indian private banker. Five year terms of governance each for Brazil and Russia would then follow.

Rousseff has also recently met with President Obama at the White House and then flew west to Silicon Valley to visit Google and meet top executives of other companies such as Apple and Facebook. Brazil represents the second largest market by users for Apple and Facebook.

Brazil has huge oil reserves which is peeking interest from the US and India. US oil companies are keen to get a crack at these huge off-shore deposits. An Indian consumer electronics company Videocon Industries Ltd plan to invest $2.5 billion in Brazilian oil and gas over the next 3 years as they change the focus of their business. “It is just the beginning” said the chairman Venugopal Dhoot.

South Americas first ever Olympics will be held in Brazil in 2016. China is investing $50 Billion to improve the countries infrastructure partly for the Olympics. Rousseff and Li Keqiang, the Chinese premier, also signed a range of deals designed to further cooperation on trade, investment, energy, transport and agriculture between the two countries.

Conclusion

While the current economic and governmental issues make the headlines in the short term, investor confidence is hit and real estate prices have dropped, it seems apparent that with the massive investment flowing in to Brazil and the booming middle class now could be a prime time to take advantage of a long-term investment in Brazilian real estate.

As with any investment, if you’re looking to move money overseas you should wherever possible get the opinion of those on the ground.

This post was written exclusively for this blog by Luisa Sofia of Brazil Bahia Property.

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Ruban Selvanayagam