Debt Levels of Brazil´s Mainstream Property Developers
A recent report produced by Fernando Ferreira de Araujo Souza – research specialist and engineer at the Real Estate Research Group at the Polytechnic School, University of São Paulo – pointed to the fact that Brazilian construction companies listed on the BM&F Bovespa have reached unprecedented levels of debt since being established on the capital markets; whilst they have grown eight in terms of gross operating revenue and six times in equity balances since 2006, the average debt burden has multiplied 21 times.
In 2006, the aggregate net equity levels of companies totaled R$ 5.9 billion with 54 percent of investment being financed from the companies own capital stocks and 46 percent from third parties. Via debentures and finance using the Housing Finance System (Sistema Financeiro de Habitação, SFH), the companies ended the year with a debt burden of R$ 1.4 billion – representing gross and liquid debt levels of 25 percent and -15 percent of net equity respectively (the companies had sufficient cash resources for payment of the debt).
In the 12 months up to quarter 3 in 2011, net equity levels had grown to R$ 36 billion with the percentage of own capital resources falling to 30 percent and those of third parties growing to 61 percent. The gross and liquid debt levels as a proportion of net equity grew to 87 percent and 59 percent respectively – 3.7 times more than the capacity to generate operational cash flow as measured under the ebitda concept (earnings before interest, taxes, depreciation and amortisation). These statistics essentially mean that it would take almost four years of cash flow generation to pay debts owed.
Understanding that construction finance taken under the scope of the SFH is settled at the end of the development project whereas other loan forms may have more flexibility in terms of usage, grace periods and maturity – the graph below demonstrates the impending expirations of real estate development debts:
It can be seen from the second graph above that in the next two years, the majority of obligations will be more directed to the SFH. However from 2013 this will reduce and the level of debenture debts owed will increase. Considering that approximately 40 percent of resources have been used for the payment of debts; 30 percent for working capital and another 30 percent for land acquisition – market success will be dependent on the performance of the developments launched in 2011 and 2012 and the ability generate sufficient revenues to meet both SFH and other obligations (whose results will be seen from 2013 onwards).
Souza also compares the companies collective debt accumulations with those of other sectors – namely water / sanitation, electrical energy and petroleum, gas & bio-combustibles via the 2011 Valor 1,000 (based on the 2010 performance of the 5 largest companies in each sector):
It can be seen that the level of gross debt of the predominant Brazilian real estate companies relative to net assets is at a higher level than the other sectors. Out of the 17 construction companies that Souza analysed at quarter 3 2011, debt burdens averaged a 30 percent of net equity. Just four companies stated their intention to reduce their debt levels – three of which possess debt levels above 60 percent (in relation to net equity). Souza’s belief is that 2012 will be a year where companies will be able to focus on internal restructuring – however, the slower pace of market growth will impede abilities to be able to generate cash and subsequently maintain and/or reduce this indebtedness.