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Brazil’s leading housing finance institution – the Caixa Econômica Federal – has recently announced that it will be reducing its interest rates under the Melhor Crédito (“Better Credit”) programme from 4^th May 2012.  For properties valued at up to R$ 500,000, the annual pay rate has dropped from 10 to 9 percent – with existing clients being able to access a reduced rate of 7.9 percent.  For properties above R$ 500,000, the rate will drop from 11 to 10 percent – with a client rate of 9 percent.

Whilst some are estimating that the revised rates should help the market prop itself up and somewhat curb the effects of rapid price declines, Miguel Ribeiro de Oliveira of the National Association of Finance and Accounting Executives (Associação Nacional dos Executivos de Finanças e Contabilidade, ANEFAC) – speaking to the Estadão news site – doubts that the other private banking institutions will follow suit: “with the SELIC [Brazil’s national interest rate] at 9 percent per annum and the banks lending at between 8 and 12 percent, the space for a reduction is restricted.” He believed that if there was to be a fall in private home lending rates, it would be owed to “special situations” such as for clients who have guarantees, lower credit risks or an established relationship with the bank.  He went on to state, however, that should the SELIC continue to drop there is a chance that the private home loan rate average will do the same.

Octavio de Lazari, president of the Brazilian Association of Housing Credit and Savings Entities (Associação Brasileira das Entidades de Crédito Imobiliário e Poupança, ABECIP) believes that the private banks will be forced to reduce their rates in order to grow their market share.  With the government keen to bring international competitiveness into the home loan market, Roberto Luis Troster of the University of São Paulo also stated that the banking system needs to introduce more cohesive and streamlined banking processes in addition to a comprehensive revision of fee structures.

Despite many of the leading agencies and developers already reporting drops in 2012 sales volumes, it is arguably still premature to affirm that the Brazilian house price crash is well underway considering the convoluted and inefficient data collection methodologies used to measure the market.  Nevertheless, there continues to remain some who are adamant that no such event is occurring nor will happen in the foreseeable future.  One of them is Claudio Bernandes, civil engineer and president of the São Paulo Housing Union (Secovi-SP) whose comments made in the Folha newspaper were compiled on the Capital Social site besides the contrasting views of William Eid Júnior, finance professor at the Getúlio Vargas Foundation (translated below):

Claudio Bernardes: There is no housing bubble in Brazil. The structural conditions of the country’s property market are very different to those that existed in the United States when the crisis broke in 2007. For a housing bubble to exist, prices need to be artificially inflated, which is not happening in our market.  It is important to understand the facts in order to be able to compare and draw the correct conclusions. The U.S. economic crisis originated from the so-called “subprime” lending mechanisms whereby home buyers refinanced their mortgages – backed by unrealistic market values.  The high leverage, based on the “paper” issued against over-priced real estate, led to the system’s collapse. What came after is well known: the world economy suffered a blow.  Recently, we were with representatives of the major U.S. financial groups who revealed some of the details of this disastrous situation.  With funding for purchase corresponding to 100% of the total open market value, homes were refinanced at 100%, and sometimes more.  High risk operations of this sort are not practiced here in Brazil where the scenario is quite different. The consistent growth of real estate can be attributed to a number of specific facts such as reduced interest rates, wider purchasing power ability and the expansion of the housing finance sector after what was a lag of almost 20 years.  These positive factors are owed to a new framework of guarantees to buyers, property developers and financiers.

William Eid Júnior: For some time we have seen an intense discussion about the existence of a housing bubble in Brazil, particularly in São Paulo.  Most people think it does not exist, which is easy to understand.  The media, when talking about any given topic, often approach the so-called “experts” – for example, if you are looking for advice on the stocks and shares market, a broker is spoken to.  Similarly, an article on real estate will speak directly to a developer or other specialist.  However, the problem is that these experts are usually involved on the “seller side” of the process and cannot review the facts in a neutral way.  A journalist friend always says to me that it’s always better to publish positive news such as a rising stock or real estate related factor – whether it is true or not does not matter.  Remember the author is just a public informer and does not deal with real estate, so great care needs to be taken. That said, let’s think about what causes a housing bubble: it happens by excess demand – i.e. a lot of people wanting to buy real estate. But just increasing the number of buyers does not lead to a bubble. If there are rising incomes or populations, then this demand can be absorbed and the market would be stable.  Is this what has happened in São Paulo?  The city’s population over the last ten years has increased by just over 10% (indeed, there was a decrease from 2010 to 2011). The national per capita income from 2005 to 2011 increased by 20%. During this period, the cost of construction – the INCC [Índice Nacional de Custo da Construção / National Index of Construction Costs] – rose by 35%.  Therefore, using this data, there is nothing to justify such a large increase in house prices – which have risen by 132% since 2008 (according to the FipeZap Index).

Claudio Bernardes: Brazilians, after many years staying clear of the real estate sector, “went shopping” and realised the dream of home ownership, made possible by these basic conditions. The market then endeavoured to achieve an adequate balance between supply and demand.  Production resumed, impacting the economic growth of the country including bringing employment at scale.  Financial agents, who previously did not have housing credit as a strategic part of their business, developed more of an interest.  Yet none of this resulted in relaxation of the requirements for loans.  In fact, 100% financed units are still rare.   On average, housing finance accounts for 60% of property value. The detailed monitoring procedures when granting credit, which may even be exaggerated, bring tremendous bureaucracy – although there have been improvements.  The number of documents required has fallen from 52 to 14, but nevertheless remain high – largely due to the lack of integration between the various government agencies.

William Junior Eid: Besides the increase in house prices, the gap in rents is also a very clear indicator of the real estate bubble. An investor expects a monthly rent of somewhere around 0.6% or 0.7% of property value. An apartment valued at R$ 1 million must therefore have a rent of around R$ 6,000 or R$ 7,000 – if not, it is better to invest in something else. The FipeZap index indicates that from 2008 until now rents have risen 70.5%.  Considering this, house prices have risen 90% more than the rent. What was the cause of the price increase?  The growth in credit: real estate loans in 2011 were 500% higher than in 2005. Is this sustainable? No – and it’s hard to see how credit can continue expanding the way it is. Besides being a utopian environment, there are several negative impacts on monetary policy – particularly inflation.

Claudio Bernardes: Real estate registries in Brazil are not yet fully computerised – unlike the banks that have invested heavily in technology. Moreover, we do not have a culture of mortgage refinancing (further secured loans used against property’s equity).  Brazilians generally want to pay off the debt immediately and have the deed to the property so it can be used as the family home and children’s inheritance can be assured.  In the current phase of our economy, there is still room for significant increases in real estate, but there is no risk of falling prices.

William Eid Junior: The problem is that with biased information provided by vendors, people come to believe that this time will be different and that prices will keep rising.  But one must wonder: can prices keep rising if incomes are not proportionately moving in the same direction?  How can Brazil already have real estate prices higher than those of developed countries?   The higher construction costs of property do not justify these increases. One last point: it is likely that the price drop will be smooth, because, unlike other real estate bubbles, (such as in Japan, Dubai, Ireland, England and USA) the banking system here is not as fragile.  But the worst thing to do at the current time is to buy real estate in Brazil.

Recent research undertaken by UOL Brasil demonstrated evidence of what have been termed as “political calculations” in the allocation of government funding for the affordable housing initiative Minha Casa, Minha Vida (“My House, My Life”) – based on the analysis of 2,582 Brazilian municipalities of less than 50,000 habitants.

The data was collated via the National Confederation of Municipalities (Confederação Nacional dos Municípios) and confirmed that parties that form part of the “allied base” (base aliada) of 22 national political parties have been receiving disproportionately higher amounts of funding for construction purposes under the initiative – raising questions as to whether the country’s housing shortage is being dealt with efficiently.

The Ministry of Cities stated that priority was solely allocated to regions with noticeably high deficit levels and Minister Aguinaldo Ribeiro also stated in a speech accompanied by President Dilma Rouseff that: “it matters little if municipalities are governed by this or that party. What’s really important in this whole process is that the government is committed to all Brazilians and their most pressing needs.”

Senator Álvaro Dias commented to the media that he was unsurprised with the research stating it is “generally easier for prefectures that form part of the allied base”.  Claudio Couto political scientist at the Getulio Vargas Foundation (FGV) also stated that public funding allocation of this sort happens “all the time, not just in election year.”  Federal deputy Jilmar Tatto, however, said that whilst it is “natural” that prefectures with a stronger political position are more likely to benefit – if proposals are not consistent, funding will simply not be allocated.

April 2012 Brazil Real Estate & Land Investor Factfile

Brazilian consumer rights programme “Proteste Já” recently investigated a real estate development project located in Campinas, São Paulo – supposed to be delivered in May 2012 that has seen no progress since its launch in 2009.  As demonstrated via an undercover camera filming a conversation at the local sales office, the construction company – PDG Developments – has continued to take holding payments and market the units, despite a number of issues related to authorisation by the local prefecture:

In another feature extracted from the Estadão news site series examining bureaucracy in Brazil (see part 1 by clicking here), it is indicated that the property transfer process generally has a tendency to be more complex depending on the location within the country.  In the central regions, for example, the majority of the necessary certifications are available via the internet and the property can be registered comfortably in an average of 15 days.  However, as indicated by Marina Maccabelli – lawyer at Demarest & Almeida – processes can be delayed due to extra demands being made for the registration of mandatory certificates and other documentation.

In the more remote regions – principally outside of the south and south east – the transfer procedures are generally recognised as being more of a headache largely owed to issues related to raising the necessary certificates combined with archaic systems and the absence of standardisation amongst the registry offices.  The states with high incidences of such problems were reported as Amazonas, Acre, Amapá, Rondônia, Roraíma, Mato Grosso, Pará, Maranhão and Tocantins.  According to Rodrigo Bicalho, president of the Secovi-SP’s legal counsel: “the growth of the property market has affected the whole of Brazil – but because cities like São Paulo charge higher registration costs, the margins are higher which can be passed on to improve systems”

Another issue indicated by Tánia Amorim, partner at the Homônima real estate agency, is that: “sometimes there is a need to investigate a certain process, which could take over a month, only to subsequently see that there was no problem at all” (referring to the example of waste disposal taxes which are often not notified in the correct manner).  Nelson Kojranki, specialist in property law at the Institute of Lawyers in São Paulo also commented that a number of unusual situations may occur in the contraction of housing insurance which delays the process.

The proposal to improve this situation – still awaiting approval at the Brazilian Senate since 2007 – is the legal digitalisation of all public and private documentation related to the registration of all real estate.  In addition, a 2010 launched initiative aims to have a separate enrolment register of all properties; the aim, according to Antônio Braga auxiliary judge at the National Justice Counsel (Conselho Nacional de Justiça), is to “create a central online database of information which all the registry offices will have to report to.”  However, with the initiative still at the outline stages (being developed with the University of São Paulo), the full process is expected to be completed within 10 years.

The highlighted case of Alexandre Jens Kotolak, an administrator from Campo Belo in São Paulo, demonstrated some of the risks of acquiring real estate via auction with ongoing legal action with the developer who is stating that he is obligated to pay R$ 250,000 incorporating the debt of the previous owner (and not the official sold price of R$ 130,000), resulting in him not being able to formally register the unit.  Whilst a judge in late 2011 ruled that Kotalak is solely responsible for the condominium management payments after the date he acquired the unit, the developer’s lawyers continue to argue his onus of responsibility under “propter rem” (which places a due obligation of debt clearance upon acquisition); it is being claimed that he was aware of this stipulation when making the purchase.

The Estadão news site recently published a number of feature articles and case studies examining the debilitating issue of bureaucracy in Brazil – addressing a range of sectors from customer services to health and inheritance.   Please see below an outline of the salient points made in relation to the granting and execution of credit finance:

In light of the unprecedented credit boom witnessed in the last decade (Caixa Econômica Federal, for example, has seen its lending volume increase from R$ 5.10 billion in 2003 to over R$ 90.0 billion in 2011), the banking system has not been able fully overcome some core obstacles prompted by a number of inherent inefficiencies amongst public organs, the banks and the borrowers themselves.

In extreme cases, between application and actual credit granting the consumer can be left waiting up to one year or even longer.  Antonio Carlos Silveira Pinheiro demonstrated how he applied for a mortgage in 2008 which was initially delayed due to a R$ 500 debt that subsequently was demonstrated by the Central Bank as being non-existent (at which point he was advised that he needed to start the whole process again).  His application was then hit by the Caixa Econômica Federal banker’s strike which also affected the chained sale he was undertaking.  Pinheiro admitted that his case has taken a lot longer than normal and processes are better than 20 years ago – but he warned that from his and his friend´s experiences, obtaining Brazilian housing finance is far from hassle free.

At a local government level, the prominent barrier is the non-integration of the various departments – meaning that processes become slow as information is invariably moved from pillar to post.  Octavio de Lazari Junior, president of the Association of Brazilian Housing Credit and Savings Entities (Associação Brasileira das Entidades de Crédito Imobiliário e Poupança, ABECIP) commented in the article that: “in order to demonstrate that a seller does not have debts, it is necessary to go through three registry offices: the “protest” (protesto), the Federal Justice (Justiça Federal) and the “civil distribution” (distribuição cível).  There is no centralised organ where all negative certificates and unpaid tax notifications are located.”

Flavio Prando, vice president of housing economics at Secovi-SP stated the problem is prominently concentrated within the public banking institutions – Caixa Econômica Federal and the Banco do Brasil – where there is often an “excess of rigour” as well as complications when finance is allocated to home buyers associations (as is often undertaken in relation to the Minha Casa, Minha Vida programme).

Whilst in recent years the number of required documents for housing credit approval has decreased from 52 to 14 (according to ABECIP), director of CRECI-SP Gilberto Yoghi affirmed that that buyers are also not accurately completing the necessary documentation – thereby slowing progress on their own applications: “it is important that everything is done correctly to avoid repetition as each new step can take between 10 and 15 days.”  There is, however, more front end assistance being offered via the lending institutions as well as a growing number of professional brokerage companies – including Financiar Casa and Canal do Crédito – that can help ensure that contraction is undertaken smoothly.

The issue of a lack of digitalisation in housing credit governance is also reportedly being addressed: in recent years, for example, the banks have been installing clear progress tracking systems which are now accessible to clients.  According to Cláudio Borges, director of housing credit at Bradesco: “we recently approved a mortgage application in 6 days; if all the documentation is in order, I believe that the average period is 15 days.”  The Banco do Brasil also stated that it is has been forming partnerships with construction companies in order to be able to further facilitate the credit contraction process.

A recent article in Brazil´s Exame magazine has indicated that favela (urban slum) communities located close to the luxury areas of Rio de Janeiro have been witnessing what has been termed an “explosion” of real estate values as a result of the removal of the drug cartels via pacification programmes (which continue throughout the city in the build up to the 2014 World Cup and 2016 Olympic Games).

Rocinha and Vidigal – favela communities located close to Leblon, Gávea and São Conrado (regions recognised as possessing the highest valued real estate in Latin America) – have seen some particularly noticeable patterns with the Brazilian Institute of Social Research demonstrating how local business sales have increased by 26 percent since the pacification police arrived.  Architect Hélio Pellegrino, spoken to by Exame, who bought a plot of land in Vidigial (and is planning to construct an 11-bed hotel with privileged sea and beach views) estimated that favela units that previously sold for R$ 50,000 now are reaching R$ 250,000.  According to Pellegrino, as a result of the noticeable decrease in narcotics trafficking, “the favelas are now the only locations where it is possible to create sustainable residential areas – the housing within these communities possess one of the most vibrant architectural organisms that I have ever seen.”

However, whilst relative calm has been achieved, it’s extremely difficult to truly picture Pellegrino’s description when visiting Rio de Janeiro’s favelas amongst self-constructed housing that barely reaches even the most basic of building standards, poor infrastructure (particularly sanitation and transport access), utility shortages, power cuts, rare adherence to health and safety standards to name a few of the issues (indeed, Rio de Janeiro favelas are comparably better than most in Brazil).

In fact, many are seeing these rapid price increases as a cover-up for what has already become a hugely speculative real estate sub-market – controlled and managed by unqualified brokers looking for fast cash, encouraged by increasingly biased media reporting.  Indeed, the growth being witnessed in Rio’s favelas is anything but sustainable and whilst initiatives such as the “Morar Carioca” look set to focus more on improving infrastructure facilities, progress has been slow and the recent evictions of favela residents residing on land to be used for the Olympic Games (with negligible compensation packages) demonstrated the real priorities of the Rio de Janeiro and national governments.

As was mentioned in a previous blog post, the rapid price rises have also been fuelled by a lack of supply of rental properties in the city as a whole which, in turn, has led to middle class residents moving into favela units to take advantage of the cheaper costs.  Affordability for existing favela residents has also become increasingly challenging – see, for example, a scanned newspaper clipping from late 2011 which demonstrated how a lady living in the Rocinha favela pays R$ 250 rent for just 9m² of space.  As a comparison, a 47.7 m² Fez Tá Pronto high quality housing unit in a well located area of the city has a monthly installment of a maximum of R$ 288 (using the Minha Casa, Minha Vida subsidy and mortgage finance via the Caixa Econômica Federal).

Whilst long term expectations continue to remain positive for Brazilian real estate companies, the globally leading banking institution Credit Suisse has recently recommended that investors take some caution – stating (in a client note published in São Paulo’s Estadão newspaper): “values appear attractive, but the lack of visibility over finances bring a cautionary vision towards the sector in the short term.”

The note went on to state that: “we are expecting turbulence in the short term due to profit and cash flow revisions which have proved deceptive in the first half of 2012.  Nevertheless, the long term fundamentals have not changed recently and there still are profitable market actors.”

The bank elevated the recommendation of the Cyrela Brazil Realty group from “neutral” to “outperform” citing a “clear visibility in the tendency of high margins in the short term.”  However, classifications were reversed for the Rossi Residencial, Brookfield Incorporações and Tecnisa developers from “outperform” to “uniform”.  Brookfield and Rossi were downgraded due to “weak results in the fourth quarter [of 2011] and low visibility with regards to aggregate gains in the improvement of margins and cash-flow generation.”  On Tecnisa it was stated that “in spite of favourable long term potential gains which should emerge from the Telefónica project [a 250,000m² small town currently under construction], we have lowered the company to ‘neutral’ as result margin corrections owed to rising costs.”

In early April, on the news that Gafisa had reported losses of R$ 1.093 million in 2012, Guilherme Rocha, Daniel Gasparete and Vanessa Quiroga – analysts at the bank also stated: “Looking ahead, we believe that short-term performance of the company remains uncertain. Faced with a record of high leverage and an uncertain impending scenario, we continue to recommend that investors are wary of action.”

BR Properties has recently announced the purchase of shares representing the social capital of the Ventura Brasil Real Estate Development company, valuing at R$ 746.25 million.  Ventura Brasil is the owner of a commercial property located in central Rio de Janeiro with a total area of 45,577 m².

The sale represents the ever-evolving face of the Brazilian real estate sector with other acquisitions including the Equity International purchase of a “significant share” of Paraná based developer Thá (see a recent comment I made on this transaction via the World Property Channel by clicking here).