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We are very pleased to be able to interview Ana Maria Castelo: economist and coordinator of construction and housing studies at the Fundação Getulio Vargas (one of Brazil’s leading universities).  Ana Maria is regularly featured and interviewed in the mainstream Brazilian press (including Globo, O Estado de São Paulo, Brasil Economico and Jornal do Brasil) on issues related to housing and provides some very valuable insights into the current market place.

1) The property market in Brazil is gaining an increasing amount of attention and remains one of the strongest in the world today – why you think this is? The Brazilian real estate market has been improving considerably for a number of years and it is widely expected to continue to do so.  There are a number of reasons for this, but I think the main ones are: firstly, that the institutional (both public and private) advances since 2003 have led to an increase in incomes and house purchasing power (particularly of the lower and lower-middle classes).  Secondly, the orthodox banking and lending system developed during the economic turmoil we experienced over 2 decades ago has meant that the real estate market was able to remain resilient in the face of the global economic turmoil.  Lastly, a number of changes with the way banks lend has meant that the volume of mortgages has increased more than tenfold – from just over $R 5 billion in 2002 to $R 57 billion in 2009.

2) What do you think are the main issues and challenges facing Brazilian real estate? Amongst the challenges which are emerging, the most important is to maintain the level of financial resources to enable the housing market to grow sustainably.  Unfortunately, housing credit is currently only available for a select few – with the major funding sources being via lending institutions who form part of the Associação Brasileira das Entidades de Crédito Imobiliário e Poupança (Brazilian Association of Real Estate Credit and Savings) and the Fundo de Garantia do Tempo de Serviço (broadly defined in English as the ‘guaranteed fund’).  Whilst overzealous credit lending should never be endorsed or recommended, the current system is far from adequately serving the needs of the Brazilian public.

3) How can they be overcome? It will be necessary to attract new investors to the real estate market; sustain the level of housing growth so that Brazilians themselves can continue to be able to get on the housing ladder – all whilst ensuring that affordability levels are kept in check.  As well as boosting the ability of those with good credit ratings to gain access to housing finance, other instruments such as Real Estate Investment Trusts (REITs) and Real Estate Receivables should be introduced to bolster growth.

4) Some parts of the Brazilian and international media have been speculating the risk of a bubble forming in  Brazil – how realistic do you think this is? With the doubling of house prices in the country’s major cities in a short space of time – it has become clear that house prices are reaching unrealistic levels.  However, it should be remembered that the Brazilian housing market is particularly different to many others in the world – mainly due to the facts that credit finance formulates a small percentage of the country’s GDP and there is a significant undersupply of housing for our rising middle classes.  The Banco do Brasil look set to continue to control the rising prices in the form of rising interest rates and, added to this, is the point I raised before with regards to the high regulatory standards of the banking system. Whilst increased housing finance should be encouraged, the common belief is that it should be allowed to grow in a sustainable manner, thereby preventing the excessive price rises from continuing.

5) What do you think should be undertaken at a national level, to ensure this does not happen? It is known that the degree of regulation of the housing finance system in Brazil is much larger and sterner than those observed in other countries such as in the US and throughout Europe.  Although it is often not reported, several large Brazilian financial agencies suffered as a result of the recent global economic crisis and have thus adjusted their lending criteria – many in line with the new standards which are currently being developed in the US.  So, I think the degree of regulation that exists today is enough to avoid major problems in the future – but as with most global housing markets, it is important to observe the housing activity in the short, medium and long term to mitigate the effects of bubbles.

6) What about the issue of supply – do you think that perhaps there are too many buildings being built at the moment? Visit any major city of Brazil and it would seem so!  However, it is important to remember that the housing market of Brazil still has a long way to go to meet its growing demand.  It is an unfortunate fact that a large percentage of the country’s housing needs remained satisfied by the informal sector (self-construction and small contractors).  The initiation of the Minha Casa, Minha Vida programme in 2007 combined with rising credit levels and interest rate drops are beginning to help this – what we are now witnessing, therefore, is the growth of the formal housing market that is taking the portion that was previously produced by the informal market.  This is a process that will not happen overnight but is well overdue in Brazil.

7) How can investors ensure that their long term interest in Brazilian property is protected? The changes prompted in the housing market from the early 2003 ensured a safer environment for both domestic and external investors.  In terms of suggestions, I would also make sure that the legal documents – such as the Certidão de Ônus Real (Registry Certificate) and the Ecritura Publica de Compra e Venda (Public Deed of Sale and Purchase) – are in place.  There was a case of a number of foreign investors in the North East losing large sums of money due essential paperwork, such as these, not being processed in the correct manner – remember our legal system is one of the most complicated in the world.  Also, research the local area in detail; whilst it is true that there are many opportunities available in the country there are also a number of risks, particularly for those buying form overseas.  Always get good advice, speak to local people and ensure that you are paying the same price as what any other Brazilian is (a common pitfall for foreign investors).

8)One of the many difficulties that many buyers are facing is to deduct the market value of real estate in Brazil. For example, in the UK, there is the Land Registry; in the U.S. there is NCREIF Property Index (NPI) and in Japan there is the MTB-Ikoma. Why is it that an index of this sort does not exist in Brazil? True, the country still lacks consolidated indicators of changes in property prices in the country.  However, the good news is that the Fundação Getulio Vargas / Instituto Brasileiro de Economia in conjunction with the Associação Brasileira de Entidades Fechadas de Previdência Privada (Brazilian Association of Closed Companies and Private Pensions) are in the testing phase of producing a detailed national index analysing all aspects of the Brazilian housing system past, present and future. I will be sure to inform you and your readers of its progress.

9) Today it is very difficult for foreign investors to obtain financing in Brazil. It is clear that the banking system in Brazil operates a strict policy of only lending to national residents – do you envisage a time when the market will be more open? And if so, when you think it will be? Although the growing interest of foreign investors coming to the country is being encouraged, it is difficult to predict when finance for their real estate activities will be introduced.  It is probably fair to say that when the housing finance market becomes more liberated for Brazilian residents and matures to a certain extent then it is likely to filter through for overseas investors.  It is also worth noting that there are financing packages offered to foreign investors directly from housebuilders and residential developers – a practice which has been common for many years in Brazil to counterract the difficulty in obtaining housing finance from our banking institutions.