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Please see a translation of another article we came across via one of Brazil’s most prominent financial and business magazines – Exame – the original of which can be read by clicking here (in Portuguese).

Constructors that compete in a new market formed of the Brazilian D and E classes believe that the sector remains ignored by the big players.

For decades, those who would build properties dedicated to low income consumers would not have labelled themselves as true ‘building constructors’.  This market – aimed at families earning in between zero and three times the national minimum wage – was largely built by those specialist in small scale construction, often on a very informal basis.  However in the last few years the reality has began to transform with the expansion of the Brazilian property market.  What started with higher end properties has filtered down into all sectors and where there were once shacks and informality has started to appear clean money being applied to what will be an investment of close to R$ 12 billion at the close of 2010.  As with most segments of the Brazilian housing industry, this encouraging growth has been the result in the increased movement of credit.  In the last three years, the volume of housing loans within the D & E house buyer market has grown by 360 percent.  The last frontier of Brazil’s property market is finally witnessing its long awaited change.

The growth of this market is being shared between almost 1,000 construction companies – but its origins are said to be as a result of the projects undertaken by the Minas Gerais based company Direcional, who have a present capital valuation of R$ 1.6 billion.  Founded in 1981, a formula was developed that can be used by the Brazilian construction industry to operate profitably in what is a segment that usually offers very low margins.  Buyers earn a maximum of R$ 1,395 and the monthly commitments could be as low as R$ 50 per month spread over 10 years.  In order to maintain low values, the company fixed the maximum price of a housing unit at R$ 52,000 – which was said to be a revolutionary concept in what remained a difficult market to operate in. The first stages were largely concentrated in regions where land was cheap – usually further out from the main towns and cities of Brazil.  In addition to the Minas Gerais region, the company has expanded to the central west and the north of Brazil in cities such as Manaus, Belém, Marabá and Porto Velho.  The scales need to be monumental in order for the development to be fully viable – a current project in Manaus, for example, will have 9,000 units and will see the adoption of a model commonly used in Mexico where localised regions are created with a full sewage system installation, a school, a health centre and other amenities – all created at minimal cost.  Finally the houses are constructed with evenly laid bricking using aluminium and concrete to build walls.

Until 2002, whilst having great ambitions, company profit levels were modest.  The events that swept across the Brazilian construction industry assisted the company come out of this pattern of stagnation and attracted the interest of private equity group Tarpon – who purchased a 25 percent stake in the company for R$ 250 million.  But what really excited the housing sector was the arrival of the ‘Minha Casa, Minha Vida’ programme in 2009 (creating incentives for families in the D and E sectors to get on to the housing ladder).  The objective of the programme was to subsidise the initial construction of 1.6 million new housing units.  The changes brought visible results and, in one year, Direcional doubled in size.

The strong presence of the government has also bought problems for those constructing in the low income category.  As it is the Caixa Econômica Federal (CEF) that is the sole responsible bank for the administration of the Minha Casa, Minha Vida credit line – housing executives are experiencing several bureaucracy related problems particularly with getting loans released.  At the time of writing (October 2010), the bank has approved just over 275,000 units whereas it has received double this amount of proposals.  Of these, just 3,600 units were delivered up until August – one and half years after the initiation of the programme.  The CEF have been hoping for a greater number to start entering the market but the weight of the issue has been particularly burdening on the country’s constructors who are resisting betting on a heavily regulated market filled with restrictions.  “The speed of doing business that we are accustomed to is different to that of the public powers,” affirms Eduardo Gorayeb, president of the Rodobens construction company.

But what is really putting off the large companies still is the difficulty to profit in such a complicated marketplace whilst other sectors offer phases of more lucrative expansion. The Jotanunes company from Sergipe with a revenue of R$ 200 million between 2009-10 and a growth of 180 percent for the last 2 years has been very active in the lower income market.  However, the company has recently announced that it will move into the Class C bracket stating: “today, to touch a low income project we have to consider twice, maybe three times.  The risk is far greater and, as a company, we do not want to tread this fine line.”