Latin Finance - April 2008 - 14

brazilian real estate High Speed Growth for Low Income B razil has a deficit of eight million homes, according to the most frequently quoted statistic in Brazilian real estate circles. Few know exactly what this means, or how government statistics bureau Fundação João Pinheiro arrived at the figure. In the end, however, it does not really matter. Appetite for affordable housing in Brazil today is huge, thanks to an alignment of seemingly irreversible secular trends. With low inflation and currency stability, income for the average citizen is rising. Emboldened by this, private sector banks are beginning to extend mortgage credit at long tenors with historically low installments. Several are crafting strategies to compete with Caixa Economica Federal (CEF), the state-owned bank that has traditionally been the only source of housing credit for low and middle income families. When Leo Correa, CFO of Brazilian housing developer MRV, talks about his business, he is far more excited about the increasing availability of credit to them than he is about the real estate deficit. His company, after all, has been building low-income houses in Brazil for 29 years, giving it plenty of insight. MRV is among Wall Better credit analysis needed: Correa Street’s favorite LatAm real estate plays. Merrill Lynch is among the shops touting its stock, predicting 130% growth in pre-sales of homes this year on the tails of a 248% surge in 2007. Goldman Sachs initiated coverage of Brazil’s real estate sector in late February and named MRV as its top pick alongside Cyrela. “We see both as excellent vehicles to capture the sector’s growth especially since we believe they stand ahead of the competition in . . . low income housing development, scale and diversification and a presales culture,” adds the shop. Private sector banks need to set up operational infrastructure for this business, according to Correa, who says financial institutions need resources to conduct proper credit analysis for low income borrowers. “ABN [AMRO] is well ahead of the pack on this,” he adds. Recently ABN’s real estate credit unit, headed by Antonio Barbosa in São Paulo, won a mandate to provide financing for one of Brazil’s hallmark low-income projects, Bairro Novo. The project is jointly led by Gafisa and Odebrecht and in its first run, will look to build 2,386 homes that will cost up to 100,000 reais each. “In 2007 the portion of our mortgage portfolio dedicated to lowincome borrowers grew 90%,” says Barbosa. Some 40% of the bank’s newly underwritten mortgages last year went to this segment. Today, someone who earns the real equivalent of up to $14,500 a year can take out a mortgage with the CEF or private sector banks at 6.17% over the Taxa Referencial (TR) per year for up to 25 years, says Barbosa. The rate, which is calculated monthly, stood at around 1.70% at the end of February. The spread over TR rises for higher incomes and more expensive homes. Brazil’s mortgage market is still in its infancy and the country has a long way to go before it catches up with Chile and Mexico, let alone the US. At the same time, its simplicity – very little mortgage-backed paper and certainly no CDOs backed by low-rated borrowers – makes it incomparable to anything resembling subprime. Banks are only now getting comfortable with long term lending and will demonstrate caution as they move down the income pyramid. A nascent MBS market will also continue to be similarly simple in structure, with clear linkages between the security and the asset it is tied to, says Fabio Nogueira, director at Brazilian Securities, a securitization shop. Homebuilders Move Downmarket While lenders hone their low-income product, homebuilders are following. Gafisa, which has traditionally focused on high-end apartment buildings, has a low-income business that represents 5% of its total property portfolio by revenue. “That could rise to maybe 50% of our portfolio in five yeas,” says Duílio Carciolari, CFO of Gafisa. Cyrela, Brazil’s first major homebuilder to IPO and a Wall Street favorite, has also begun to slide down the income chain, as have Rossi Residencial, Tecnisa and Abyara, a real estate brokerage company. Meanwhile, more traditional mid and low-income players such as Rodobens and Tenda are well positioned to capture this strong growth, say analysts. Many Brazilian real estate executives and mortgage bankers point to the Mexican model as the example that Brazil should have followed. “In Mexico, there was a big push by the state to provide financing through Infonavit to fuel growth in low-income housing,” says Barbosa. That, he says, has been largely absent in Brazil. The Brazilian government’s equivalent vehicle for mortgage lending, FGTS, provides CEF with funds to generate low-rate mortgages. Until recently, in stark contrast to Mexico, it has serviced only a small portion of the population. Granted, that is largely due to the lack of long term visibility the country has suffered until recently. “In Mexico, this cycle of moving down to low income started 10 years ago,” says Carciolari, who notes that 750,000 Mexican units a year are financed through state-sponsored architecture, which includes SHF. “In Brazil, we’re not even at 200,000 financings a year,” he adds. Considering Brazil’s population is 70% larger than Mexico’s, that is an especially low figure. However, Mexico’s mortgage market is now stuck with what the private sector sees as an unnecessary dependence on the state. “In Brazil, it’s more of a spontaneous process that’s being driven by market participants and less by the government,” says Correa. “In some cases, it’s better to let the private sector figure things out.” — Dan Shirai 14 LATINFINANCE April 2008
Latin Finance - April 2008

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