The Globo newspaper, in mid-April, was the first to report how the scheme was mounted: ex-civil servants of the national Cities Ministry taking advantage of privileged information to create a number of brass plate companies that effectively captured and administered public finance.  At the centre of the story was RCA Assessoria em Controle de Obras e Serviços (referred to from now on as RCA) – a company with its head office in São Paulo and formed of three partners: Daniel Vital Nolasco (ex-director of housing production at the Cities Ministry until 2008 and affiliate of the Brazilian Communist Party); José Iran Alves dos Santos (former civil servant at the Cities Ministry) and Carlos Roberto de Luna.  Below is an infographic, extracted and translated from the Globo news site which provides an outline of the scheme:

Operating out of a modest headquarters, RCA managed to expand into 24 states and 1,000 municipalities in a short space of time (claims have been made of some 80,000 social housing units being planned / delivered).  The massive revenues became a target for a judicial dispute which led to the exposure of the alleged connections with the Brazilian Communist Party (PCdoB).

RCA also operated as a consultant to local prefectures and beneficiaries as well as a banking correspondent of seven small financial institutions authorised to transfer public finance in popular housing programs in cities of less than 50,000 habitants.  At the time, it was acting under the Social Housing Program (Programa Social de Habitação, PSH) – going on to operate within the auspices of its successor Minha Casa, Minha Vida.  RCA further acted as a financial agent, undertook construction projects whilst controlling and monitoring projects being executed – seemingly autonomous of the Caixa Econômica Federal.  For such purposes, a network of companies was created with the owners´ addresses based at the RCA headquarters or at relatives homes.

The Globo referred to an example on RCA´s site of the fraudulent selection process.  In Espírito Santo, for example, in order to contract a responsible construction company, a call notice was published in December 2012 whereby interested parties were invited.  However, the address of one of the companies “selected” to build 95 houses – JB Lar – turned out to be the same as RCA´s (when questioned about this occurrence by Globo, the link was deleted shortly afterwards by the company).

The finer details of how these brass plate companies were mounted have been chronicled via legal proceedings now underway in São Paulo, revealing Fernando Lopes Borges – another ex-civil servant from the Cities Ministry as well as the National Secretariat of Urban Programs (before being exonerated from the latter role in 2010) – as a silent partner of RCA.  He was introduced via his brother, Ivo, who has since passed away – shortly after which, a dispute initiated in relation to previously established revenues receipts.

In a prejudicial agreement, Lopes Borges received just over R$ 1 million from RCA.  Without solid proof being presented, he claims that the deviation of financial resources from the Minha Casa, Minha Vida was initiated by Erenice Guerra who executed the creation of the private banking interests operating in small municipalities.  Lopes Borges maintains that, should plans have been developed as desired, some R$ 12 million would have been raised.  He is also stating that, since 2005, the Brazilian Communist Party (PCdoB) has received siphoned capital intended for social housing purposes.  Lopes Borges maintained that RCA is involved in irregularities in the Federal programs from the Cities Ministry but did not want to confirm the denouncements against Erenice and the PCdoB.  However, he forwarded to the Globo an exchange of e-mails between Carlos Luna from RCA and the office of Trajano & Silva that was founded by Erenice.

The scheme also involved a company called Souza e Lima Engenharia – owned by the former engineer and general manager of RCA (Valdemar de Souza Júnior) – that executed the construction of houses in the state of Maranhão under the Minha Casa, Minha Vida, under contracts generated by RCA.  Another company, Martins MA Engenharia – owned by Daniel Vital Nolasco´s brother-in-law, also constructed houses for the group.

Lopes Borges reported that four accessory companies – Artifício, Setorial, Sigma and Marketplan – all form part of the RCA group, with the first three also having Daniel Vital Nolasco as the partner and José Iran as one of the owners of the fourth.  The RCA group also has interests in other companies.  Carlos Luna and José Iran are owners of Superdata and Luna is one of the partners at LL Engenharia. Lopes Borges also indicated that the company DJC/Naza Engenharia – responsible for the construction of 8,000 homes – was owned by Divaildo, brother of Celma Casado Silva, exonerated (by request) from the Brazilian Housing Secretariat at the National Cities Ministry.

In another cases that have emerged on the back of the exposure and ongoing investigations, the owner of KL Construções, Rubens Amaral, confirmed that R$ 400,000 was passed to RCA in order for capital to liberated to initiate a development of popular houses – also in the state of Maranhão.  This capital was transferred to the Luso Brasileiro bank (with RCA operating as the banking correspondent).  He claims that he suffered from reprisals when the money was not forwarded in advance.  Similarly, another company – Del Rey – has come forward stating that R$ 570,000 was also paid to Luso Brasileiro.  Between January and June 2011, Del Rey passed R$ 337,985 to the group.  In December 2011, as a result of construction chronogram-based payments not being transferred by RCA (claiming that the payments owed were not up to date), the company´s lawyer alerted that the charge had made the project unviable.   This development is currently paralysed.

Daniel Vital Nolasco has since gone on to deny the fact that fees were charged unjustifiably – being made for the “contraction of technical assistance for companies to initiate and execute projects” and that “the choice of responsible construction companies was undertaken by a beneficiary committee, of which RCA had no part”.  Nolasco also stated that Lopes Borges is looking to extort capital and that he has taken advantage of the moment at when contracts are being renewed as a form of blackmail.

According to news reports, in addition to a formal enquiry procedure and audit by the Office of the General Comptroller (Controladoria-Geral da União, CGU), cities minister Aguinaldo Ribeiro has formally requested a police investigation, authorised by the justice minister José Eduardo Cardozo.

For a full analysis of the reality of the Brazilian housing market – specifically for low income groups – please see the “Brazil without Favelas” report produced in conjunction with @feztapronto.

“The traffic chaos being witnessed in Natal, amongst other regional mobility and urban development deficiencies, has produced a range of direct impacts on off-plan and newly released property values.

Construction companies with a national presence that have, in recent years, pushed prices to unrealistic levels in the peripheral areas are now having difficulty commercialising their units and retaining off-plan property purchasing clients who previously signed contracts.

These developments that have been built outside the densely populated regions are now ready to be resided in, but remain empty. Whilst exact figures in relation to this issue are hard to find, the expressive rise in “promotions” is a testament to the market reality and indicative of noticeably reduced sales volumes.

According to brokers spoken to by the Jornal de Hoje, it is common to hear the frustration of clients who acquired properties 4 or 5 years ago – only to discover that, today, a unit on the same block is being negotiated for the original purchase price or even slightly lower.

At the start of the year, in an interview with the Jornal de Hoje, the vice presidente of the Construction Industry Union in Rio Grande do Norte, Larissa Dantas Gentile, commented on the conflicting patterns being witnessed and the need for the market to undergo a “common sense” based process of revision.

Caio Fernandes, one of the principle property traders in Natal also confirmed that problem is serious and directly related to the infrastructure bottlenecks in the metropolitan region of Natal, which has led to a considerable drop in the level of investment in the area.

“Those that acquired properties in Nova Parnamirim in the North Zone, for example, would have had good reasons to invest at the time under the expectation of appreciation.  But now, due to the daily congestion difficulties, people are losing out financially due to the difficulties of getting to work,” he commented.

Purchasing a property in Greater Natal, in fact, has become much more complicated than before, when transactions were happening at noticeably higher pace.  Today, we are seeing that the variety of developments and “offers” being launched are requiring consumers to be more cautious so as to not enter into the nightmare of a bad purchase.

“It is important to understand the factors that can appreciate or devalue a property; the relationship between the price per square metre being charged in relation to the local market; where the unit is located; the advantages offered in the common areas of the developments; sunlight and even the distribution of air conditioning points – all these factors need to be taken into account,” reminds Caio Fernandes.  “The problem is that not everyone considers these questions,” he concluded.

After the glory days of heavy capital injections from foreigners in the first five or six years of the last decade, when deals were closed on a daily basis due to borrowed Euros that, at the time, had a strong purchasing power against the Real, the market become the target of large national construction companies and incorporators.

Initially welcomed positively due to bringing a sense of modernisation to the market place – over time, more distant areas began to open up leading to price structures becoming incompatible with affordability.  With peripheral units being sold at prices equivalent to densely populated areas, appreciation was artificial which, in turn, created an inverse market reaction.

“The concern now, seeing that we are still witnessing a buyers´ market, is to reestablish credibility in what is being offered on the market,” commented the businessman.”

The examples referred to above clearly demonstrate not only the visible rise in complaints and dissatisfaction within all stages of the Minha Casa, Minha Vida program´s execution, but also a clear lack of will on the part of the Brazilian government to confront the more profound issues related national housing policy. The Caixa Econômica Federal´s response to the “Morro do Bumba” case, for example, whilst conceding to being responsible for what was deemed an “accidental failure”, arguably was merely an assertion of the technical professionalism of the state organisation.  Little response was made in relation to the real implications of the dominating single storey, inferior standard, distantly located housing models that evidently characterise construction models under program.

On this question, Dilma Rousseff, presumably conscious of her impending re-election campaign, was also recently seen affirming the right for the Brazilian public to have good quality: “I was not elected to provide low housing standards to the population.  I think that the people deserve the best and my obligation is to ensure this,” she recently commented to journalists.  Asserting that the Minha Casa, Minha Vida has been largest program of its kind in the country since the National Housing Bank (Banco Nacional de Habitação, BNH – abolished in 1986), she also admitted that Brazil possesses “some excellent traditions, but others that are not so good, inherited from the days of slavery, where mind sets of Brazilian low income populations deserving whatever standard prevail” (see the original comments in Portuguese here).

As seen on cost breakdown example on page 12 of the Brazil without Favelas report (demonstrating the lack of project viability due to excessive input values), even with government donated plots of land, engaging in Minha Casa, Minha Vida projects today has unsurprisingly become viewed with even more scepticism than ever before.  A government continually trumpeting quantitatively-based (and arguably dubiously collected) data will not be able to hide the inherent lack of synergy between the private construction sector and the program´s original objectives, commendable as they may be.  Indeed, Dilma Rousseff´s, the housing and cities ministries´ political rhetoric looks almost certain to run out of steam in the near future, if it hasn´t already.

“Caixa Econômica Federal [Caixa] is a state owned company that has a distinct position in the market place.  Amongst the many programs undertaken by the government, the Minha Casa, Minha Vida has become the most noticeable in terms of the reach achieved.  There have been over 2.5 million contracted units, with over 1.3 million already delivered – meeting the needs of various income groups across the country.

In order to bring these projects into fruition, Caixa relies on a wide group of professionals formed of qualified engineers and architects – many of whom are specialists in a range of areas.  Whilst continually keeping line with company ethics and other internal regulations, these professional also are attentive to the pertinent technical norms.

Financial viability of real estate development projects falls under these technical responsibilities in observance with the framework of parameters, whilst ensuring that core values are coherently abided to – particularly as public financial resources are involved.  Execution-related responsibilities, however, legally belong to the construction company.  The subsequent periodic accompaniment during the development project´s execution is aimed at confirming and verifying progress so that construction finance can be liberated accordingly. These operations, and all professionals involved, are tied and recognised by the market, by the population and the supervisory organs to ensure the correct application of public finances.

However, as with any human activity, the construction industry is not exempt to risks and errors.  In addition to a number of external factors, it should be noted that housing is not a unique neither an industrialised product and involves various execution phases that create the possibility of accidental failures. The majority of cases where problems occur are sufficiently identified by construction companies who seek to relieve the situation.

In the Rio de Janeiro case – where 2 buildings were demolished – even without a conclusive report yet to be published, the indications have led to conclusions that the problems were owed to a number of internal and external factors such as the abnormal level of rain amongst other local characteristics. The causes, of course, have yet to be fully identified.  However, it is worth distinguishing that the case was an exception.  Even adding the less serious cases, which are usually easily resolvable, the actual quantity of problem cases in relation to the total delivered under the Minha Casa, Minha Vida program is negligible.

Unfortunate in all senses of the word, but inherent to the industry itself, Caixa, concurrently with its professionals and partners, will be looking into bringing a solution to the problems and continually improving and evaluating internal process.  Conscious of the image being represented by the Minha Casa, Minha Vida, Caixa and its representative engineering and architect professionals, regret this course of events and reinforce the compromise with the population to maintain its operations within solid technical standards, continually searching to maintain the highest levels of quality and satisfaction for end-users.

Whilst the indicator that measures the operational capacity of companies in the sector remained stable at 70% – the same level in March 2012 – it was demonstrated that the level of employed people had reduced (48 points compared to 51.7 points in March 2012).

Profit margins (based on a quarterly measurement) were considered as unsatisfactory – at 44.7 points compared to 47 points in the first quarter of 2012.  According to the report, even taking into account the reliefs enacted by the government in late 2012, higher tax obligations were deemed as one of the main problems (indicated by 50.8% of business people in the sector) in addition to the lack of qualified labour (42.5%) and the high costs of staff contraction (34.5%).

There was some optimism worth noting in relation to impending perspectives, which reached 58.7 points (lower than the 60.3 points seen in March 2012 but still relatively strong).

For a full analysis of the reality of the Brazilian housing market – specifically for low income groups – please see the “Brazil without Favelas” report produced in conjunction with @feztapronto.

Whilst such desperation is being used as a government tool to demonstrate the success of the popular housing initiative, a closer look at the facts shows a completely opposite story.

For a full analysis of the reality of the Brazilian housing market – specifically for low income groups – please see the “Brazil without Favelas” report produced in conjunction with @feztapronto.

“It is no longer news that the Brazilian property market, in the majority of cases, is witness to absurdly high sales values that have, in turn, been driving buyers away.  As it would seem that the illusion of investing is no longer considered as viable, was it right to think that it was ever a secure strategic decision?

Real estate developer marketing became characterised by images of apartments and commercial units being extremely lucrative prospects – with little space for losses to be made.  The amateur investors, attracted to the presented profits, started placing capital into these projects – but shortly after realised that the returns promised were not always as they seemed, exacerbated by a number of difficulties and unexpected liabilities both during and after the transaction.

What is forgotten is that any investment requires one to be genuinely dedicated – and even then, there is no guarantee that profits will be ultimately achieved.  For this reason, an ill-prepared investor should always be cautious and understand that the chances of unsuccessful outcomes are high, regardless of market conditions.

In any event, after years of rising prices, it would appear that we are seeing wider patterns of deceleration.   According to data from the Regional Council of São Paulo State Real Estate Agents (CRECI-SP), sales volumes of resale properties dropped by 18% between 2011 and 2012 and the São Paulo Housing Union (SECOVI-SP) also recently reported a drop of 8.6% (in resale volumes also) when comparing February 2013 with the same period in 2012.

Brokers and construction companies have subsequently been feeling the bite and, in spite continuing to push launch values upwards, most have been forced to offer price drops and other forms of negotiation in order to secure sales.  In São Paulo, such discounts have been reaching up to 25% off the property´s original open market value.  Apartments launched at R$ 350,000 a few months back are being offered today at R$ 275,000.

Even with the decelerating prices, prior to directing capital into any property-related product, any amateur investor should evaluate various investment classes in order to ensure that the desired return will actually be achieved.

Ruban Selvanayagam´s comments: Whilst it should be remembered that Samy Dana´s research is predominantly based on the São Paulo real estate market – a region (along with Rio de Janeiro) that has seen the most accelerated prices rises in recent years (see the top graph of our latest factfile) – it is would be difficult to find many disagreeing with his opinions.  To draw to these conclusions, Dana is simply applying the relationship of a Brazilian family´s income with open market price levels – which, upon a very superficial analysis, is considerably out of sync (and has been for a long time).  With developers long ignoring this essential question, the point he makes in relation to whether investing in the sector has “ever been a secure decision” is an important one.  The market, particularly in the last boom phase from mid-2009 to late 2011, has been allowed to get carried away with itself – seemingly forgetting that without affordability there is no sustainability.  Perhaps the most notable sign of the times is demonstrated in the so-called low income housing sector – where the mainstream developers continue to saturate markets with over-priced and inferior quality stock.  Whilst claiming to attend “real housing needs” – such strategies are immediately defeated by looking at the many Brazilian families still living in favelas and insalubrious housing created under the Residential Leasing Program (PAR) under the Minha Casa, Minha Vida (see the see the “Brazil without Favelas” report for more insight into this debate).

Ignoring essential market demands will continue to fuel this stagnancy.  Developers will only be able to drop their prices to a certain level without taking on losses and, with the ongoing inflationary pressures on construction inputs amongst a range of inherent bureaucratic complications, the sector is moving ever-closer to stalemate.   The paradox here is that the demand for housing, the amount of subsidies and competitive real estate development financing has never been higher.

“The fact that Brazil has an immense housing deficit does not justify the construction of immensly impractical and risky favela communities under the Minha Casa, Minha Vida (“My House, My Life”) program.  In the case of the specific project in Santarém, the program could best be described as “My House, My Misery.”

If we are to believe the projects proponent´s rhetoric that these units have been built highly securely, the most appropriate name would be “My House, My Death”.  How is it possible for a government to invest billions into the construction of hydroelectric power stations and football stadiums but allocate so little to construct small houses that seem like chicken coops or dog houses for people to live in?  The two million houses in Santarém appear to be more like a concentration camp:

It is a shameful act for those that govern the state and the country to allow the construction of 2 or 3 thousand houses – mounted side-by-side (with little space for movement) – of 5m x 8m each, without foundations!  To call these homes is plain ignorance and a lack of respect for the lower social classes.

The financial administrator of this human humiliation is the Caixa Econômica Federal, representing the Federal Government.  Rumour has it that these houses are being built without security, underlying foundation and on a sandy land plot. If this is so, why has the management of Caixa not sent a competent surveyor to examine the situation?  If when the families occupy these cubicles and one or more is destroyed by rain, it will be the Caixa Econômica Federal that will be responsible for these crimes.

The queue of unsuspecting clients is large, but nobody knows when city´s newest favela will be completed and delivered.  What may seem like a solution to the housing problem is actually an absurd humiliation of the poor.