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Towards the end of 2011, the committee from the NRE-Poli Real Estate Research Group at the University of São Paulo spent a day debating the current state of Brazil’s residential and commercial real estate sector.  The PINI Web magazine provided an outline of the discussions – view the original in Portuguese here – and some of the salient points are highlighted below:

Residential Brazilian Property

• Property prices in the larger Brazilian metropolitan regions have grown significantly above market income levels;
• The majority of the panel believe that 2012 prices should grow at the same pace of the national construction cost inflation index as produced by the Getúlio Vargas Foundation (INCC-FGV) and there will not be evidence of the speculative patterns that have been witnessed over the last 2 years;
• Referring to the larger central urban areas, some members believed that prices will continue to lower in order to bring them in line with the purchasing ability of the target market (a growing amount of people are finding affordability difficult) and others thought that that prices will remain broadly the same in line with the levels of the second half of 2011.  For the larger municipalities, there will be a tendency for prices to replicate those of the larger urban areas;
• In determinate segments of the market (dependent on geography and type of housing product) existing or “leftover” stock from 2011 may be exposed to the market and could induce a growth in prices in line with income levels, which usually tends to be located at some points below the variations of the INCC-FGV;
• Outside the central regions, prices in the larger municipalities should behave in the same way – apart from within niche markets where it can be seen that there is high price speculation and/or over-supply pressures (as what can be seen in Salvador, for example);
• In 2012, the larger companies who have made some focus in the low income (affordable) sector under the Minha Casa, Minha Vida (“My House, My Life”) programme are expected to decrease their presence – incorporating between 15 to 20 percent of activity.  There is expected to be more involvement principally of small and medium sized developers as well as the larger more specialised companies in this marketplace;
• As a result of the complexities mentioned above (companies working to tight margins requiring strict cost control and a high level of housing credit concessions to be able to secure sales) – it is likely that the results of the larger companies could well be inferior to those of 2011;
• The majority of the CM-NRE-Poli members believe that the velocity of sales of residential real estate in 2012 will be lower than 2011 – due to a larger equilibrium existing between supply and demand;
• The demand for residential property in 2012, relative to 2011, should grow organically in line with population growth.  A few of the members believed that there could be a contraction in demand due to the uncertainties surrounding the state of the economy.  Others believe that demand will grow due to the introduction of new financial mechanisms (as a result of the depletion of national savings levels);
• The supply volume of developments in 2012, in relation to 2011, is expected to contract – it has already been confirmed in late 2011 by the majority of the larger companies that sales targets in 2012 have been dropped by between 20-30 percent;
• The performance of the large companies listed on the Bovespa in 2012 will be marked by developments for the mid-high class Brazilians, with (as mentioned above) lesser attention being paid to the low income groups (excluding the involvement of specialist companies).  Recent results presented by some companies operating in the Brazilian affordable housing sector have been weak with significant losses also being reported.  The medium income focused companies are therefore said to be better equipped and knowledgeable in order to produce comfortable results;
• On construction credit, it was deemed that developers will need to demonstrate solid levels of sales absorption – should there be a slow down, credit granting for new projects is likely to be limited.  The supply of consumer housing credit should stay stable supported by the traditional routes of the Housing Finance System (Sistema Financeiro de Habitação);
• In 2012, the access to capital markets for companies in the housing sector via debentures,  credit receivables and share placements is estimated at being between equivalent to more difficult than 2011 – depending on the reaction of institutional investors and the degree of Brazil´s economic contraction;
• It is predicted that the level of foreign investment in Brazilian real estate will be less in 2012 compared to 2011.  Some members stated, however, that in light of the growing security of foreign investment opportunities in Brazil, there could well be a rise (although it was concurrently pointed out that there was a lack of solid and comfortable options).

Commercial Brazilian Real Estate

• The prevalent opinion of the members was that commercial property transactions (considering large corporate buildings) for 2012 will be equivalent to 2011 with perhaps some slight downward and upward adjustments.  The main drive for investment will be the lack of supply of office space, particularly in the larger Brazilian cities such as São Paulo and Rio de Janeiro.  It was also stated that São Paulo has a major lack in good quality commercial units and that this type of asset class has a long maturation cycle (project design, approval and construction) with a long investment payback;
• 2012 leasing levels in the large Brazilian urban centres are likely to remain equivalent or slide moderately.  Should there be a strong economic contraction, this perspective could reverse – but should not do so excessively in such a situation.  An eventual contraction is a problem that will need be considered further in the future;
• The level of investment in buildings incorporating small shared office space in the large urban centres in 2012 was estimated at being between less and considerably less to that of 2011.  A large level of approved projects in 2011 that will enter the marketplace between 2014 and 2015 and as well as the insecure economic climate is bringing some concerns within this segment;
• 2012 leasing levels for small shared office spaces in larger urban centres will be relatively level to 2011 with some slight drops probable – supply pressures are only likely to be felt in 2014-15 which, in turn, will affect open market values;
• Even with a contraction in the economy, shopping centre performance in 2012 will be relatively similar to what was seen in 2011 with some possibility of slight drops.  The sector will be protected by the fact that leasing contracts are firmly in place.  In the last few months of 2011, a drop in shopping centre sales was seen and retailer expectations are conservative;
• Available information related to the launch of new shopping centres is indicating that 2012 will see a similar scenario to that of 2011, provided that there is not a contraction of the economy which would inhibit credit levels.  The investment companies specifically focused in the sector are likely to take a more defensive approach, taking into account longer maturation (3-5 years) and payback (approximately 15 years) periods;
• 2011 saw very positive performance result s for urban hotels due to the fact that the sectors´ development had been slow in previous years.  The perception remains that the demand today is above that of supply and it is expected that the sector will continue to grow in 2012.  It was pointed out that Brazilian hotel investment return rates are generally lower;
• Whilst there has been a notable number of hotel launches in preparation for the World Cup 2014 and the Olympics 2016, concerns have risen with regards to adequate supply that reflects the growing occupation rates that Brazil has been witnessing over the last few years.