Latin Finance - September/October 2009 - 36

Brazil real estate Back from Near Death by John Rumsey J ust two years ago, Brazilian real estate was flying high on the back of lower rates, a buoyant stock market and the old chestnut of how an emerging middle class would want to start climbing the property ladder. That allowed a wave of IPOs, which swept up even relative tiddlers. There were 21 Brazilian IPOs related to construction and real estate in 2007 compared to seven in 2006 and none last year. The average size in 2007 was 632.3 million reais. Among them, Trisul launched a 330 million reais deal in October 2007, with 91% of the shares sold to foreigners. It had a brief moment in the sun, peaking at 12.70 reais per share in November 2007. Hikes in rates – the benchmark Selic went from 11.25% in April 2008 to 13.75% at the end of the year – and the recession put paid to the feel-good factor. Trisul shares headed all the way down to 1.80 in March this year. Since then, shares across the sector have picked back up. Trisul, for example closed at 4.60 July 30. Good results emerged from homebuilders in the second quarter, with Gafisa reporting profit of 57.8 million reais, substantially up from the 42.8 million reported in the same quarter of 2008. Low income housing specialist Tenda, a subsidiary of Gafisa, saw contracted sales increase to 367 million reais, a 45% leap over the first quarter. “Brazilian real estate is one of the few growth stories in the world, and one that has good margins,” claims Luis Largman, CEO at Cyrela, Brazil’s largest real estate developer. The country has a huge housing deficit, now offers abundant mortgages at lower rates and has a new government program to stimulate low-income housing, he notes. Brazil needs 14 million dwellings overall for its population of 190 million and some 1.2 million houses need to be built per year to help make up that shortfall, estimates Largman. Last year, just 340,000 homes were constructed, he notes. Furthermore, unlike much of the rest of the world, Brazilian real estate remains affordable with a ratio of house prices to salary of two to three times, at least at managerial level, he says. The first effect of declining interest rates is greater affordability in housing, Largman notes. With rates in single digits, mortgages become available at 10, 20 and even 30 years, he adds. After a dizzying plunge in real estate shares, some Brazilian homebuilders are gingerly testing the market. Strong foundations come from single-digit rates and a low income-housing program. to 10 times minimum salary. The government is working hard to get the program up to speed over the next 6-12 months, says Marcelo Vainstein, a real estate banker at JPMorgan in São Paulo. Caixa Econômica Federal is meanwhile keen to accelerate the approval process by outsourcing documents, checking and pre-approval, adds Vainstein. Critics have often lambasted the institution as bureaucratic and slow. But with the current financing difficulties, developers are likely to progress cautiously, meaning that Caixa is unlikely to be the biggest obstacle to developing the market, Vainstein notes. The subsidized program means that the low-income segment is likely to be key for real estate firms looking for the next leg up, reckons Vainstein. Geographical diversification outside markets of São Paulo and Rio de Janeiro will also be vital. Of the envisaged 1 million new homes, approximately 35% will be located in the Northeast, 37% in the Southeast (home to São Paulo and Rio), 10%-12% in the south, with the remainder in the North and Center West, he predicts. Large firms have made leaps in broadening their mix of offerings. At the time of its IPO in 2005, Cyrela was concentrated in two cities and was working only in three, says Largman. Today the company is in 55 cities and the company has grown fivefold in the period 2005-2008, he says. The diversification process is nearly complete, he says. “We began low income operations only in 2006. Last year, that segment was responsible for 30% of our operations,” he adds. Despite the hoop-la, there are unlikely to be many new deals from the sector. “Basically, we don’t expect a lot of new activity as real estate companies are coming from a near-death experience,” says Claudio Andrade, one of the founders of Rio-based hedge fund Polo Capital, which manages around $1 billion, which has built sizeable shares in real estate including owning more than 5% of listed firms Inpar and Even. LF Low Income Key UPDATE For more on this story, see www.latinfinance.com > The state-run Minha Casa Minha Vida program promises 34 billion reais in spending on 1 million homes for families with up 36 LatinFinance September/October 2009

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Latin Finance - September/October 2009

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