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Please see an interview with Bruno Franco, a real estate investment analysis from Banco Votorantim – one of the top 10 banking institutions in Brazil with assets amounting to over US$ 48.7 billion.  We discuss his experience; the various stages of analysing real estate; sensitivity analysis and how it is applied to the Brazilian property and land; current risks (and their minimisation) and the future of the market:

1) Can you outline your experience as a real estate investment analyst? Majoring in Engineering,I started my career in the financial markets, specifically focused on investment fund analyst.  This experience taught me a lot about pricing and detailed examinations of a range of financial scenarios which proved subsequently to be very helpful when I entered the area of real estate investments at Banco Votorantim.

2) Can you give us some examples of previous projects you have been involved with? I have been involved in various types of real estate related projects both in the residential (apartments, houses and lots) and commercial sectors (established premises for sale, the construction corporate buildings, warehouses, industrial units, shopping malls and hotels).

3) What are the essential steps that you take when analysing a piece real estate? There are three broad variables that affect the return on a project: the sale price; the rental figures (short, medium and long term) and the cost of work – within which a range of detailed analyses is required (examples of which include examinations of cash flow, auxiliary costs, taxation, staff, marketing to name a few).  The amount and quality of information available varies according to the time when we analyze entry into the project – this is particularly true in a market like Brazil which is ever-evolving.  We always are certain to account for such uncertainties and potential changes.

4) Many foreign investors have demonstrated their difficulty in finding comparable solid data (eg. real estate prices that have been sold, rental values etc) – what would your advice be the best way to get around this issue? A very true point and, in this respect, the Brazilian real estate market is still very informal.  My work often involves me exploring other property markets in the world for which there are several sources of detailed information on everything a real estate investor wants to know about residential and commercial markets including the supply of new properties, selling prices, indices of consumer confidence, rental rates, vacancy, absorption, etc.  The closest I see in Brazil are the quarterly reports on the market for corporate buildings, produced by large consultancies and some investment banks.  For the residential market, information is usually compiled by the sales companies (brokerages) and is available to business customers and not publically.  I believe the best way, for the time being, is to invest in partnership with a local investor who can provide an impartial research.

5) You specialize in undertaking sensitivity analysis – can explain what this means and how it is applied to the market in Brazil? Sensitivity analysis is used to check how a variety of key performance indicators function under a range of different assumptions, fairly similar to a process of ‘stress-testing’ used by banking supervisory bodies.  In its simplest form, it is applied with various amendments to the cost of building and the end selling price.  Note such analysis will vary according to the type of asset that is being examined – for example with shopping centres, we would vary the vacancy levels and with commercial buildings the cap-rate will be changed and tested.

6) What are the main risks / volatilities that exist in Brazilian real estate market? As of today, I believe there are three main risks in the housing market: inflation of construction costs and how this will impact the viability of projects; the bottlenecks and slow movements of projects to come into fruition and, lastly, a scarcity of sufficient labour.

7) How can these risks be minimized in the best way possible? Recent changes in monetary policy, including rises in the national rate of interest have had a knock-on effect of reducing inflationary pressures which has, in turn, bought down costs of construction.  With regards to the low skills pool, the country is visibly witnessing bettering education levels – whilst this will take some time to filter through into the wider economy, such improvements should be viewed as a step in the right direction.  Finally, I believe that further alliances between the government and the private sector are needed – there are is currently very little communication occurring which is something that needs to change to solidify long-term growth.  Local governments also need to revise their frameworks and processes to suit a new level of volume of projects.

8)What are the main encouraging signs for property investment in Brazil? After a GDP growth rate of close to zero in 2009, Brazil began to grow again due to being less affected by the global recession than many other countries – this trend is pointing to continuity in future years. This growth will keep demand high within the housing market: growing companies need new offices; more people will be taking out mortgages and existing homeowners will be looking for bigger and better places to live (as well as second homes).  Rises in income will also boost the demand for other types of commercial property such as shopping centres and hotels.