BRASILIAN REAL ESTATE MARKET OVERVIEW

BRASILIAN REAL ESTATE MARKET OVERVIEW ltemple@secovi.com.br Laerte Temple Opportunities and pit falls The RE industry creted its rules, habits and the current culture in the traditional markets with stable economies, hight purchasing power and low increments. the future of the real estate industry is globalization Globalization created new markets with completely different conditions, dynamics, rules (?) : the so-called emerging economies (BRIC) Emerging countries RE boom Extraordinary GNP growth rates made China , India and Russia being the target and investment desire of an expanding globalized RE investment trend these emerging countries experienced a never heard of Real Estate boom. ? watch out: high GNP growth rates do not always tell the whole story .....and Real Estate is a long term business ! what happened with Brazil ? Brazil is being evaluated to offer excellent and sustainable RE conditions but … it is not yet on the RADAR of most players Many Real Estate developers seem to ignore the risk of questionable sustainability in other BRIC countries Brazil – the country Area Currency Population Population density Urban population Pop. growth rate Unemployment → → → → → → → • • • • • • • 8.5 million sq km R$ - Real 188 million (2008) 22 inhabitants/ sq km 81.3% 1.2% (2006 – 07) 8.1% (July/2008) •5 Brazil as an option for foreign investment • The country is a democracy • Stable instituions • Independent and respected Judiciary • Mild climate with no risk of earthquakes, hurricanes and tsunamis • Foreign capital is welcome, with almost no restrictions • 400 of the Fortune 500’s biggest world companies have branches in Brazil •6 What are the facts indicating Brazil to be the place for RE to go ? Brazil ► backlog of 8 million homes ► increasing purchase power ► tax incentives for the RE industry ► sudden availability of long term finance ► stable economic situation in steady growth ► qualified local constructors and a well greezed RE industry is Brazil in risk of a RE – TSUNAMI ? A pivotal moment Brazil´s principal industries are in a strong competitive position because of lower costs and efficiency Stable economic conditions growth in domestic market and export - increasing peoples purchasing power and lowering poverty Confidence in the economy rises. Investment-grade status. Access to international capital markets. The R$ will become more comparable to developed financial markets in cost, terms and maturities Source: Bradesco Econ. Dep. August 2008 Global influences on the local RE market High liquidity on the financial global market is increasing investors' appetite for real estate: good results and profit margins. Continuous fear about the USA sub-prime situation. Increasing concerns about the China, India, other RE booms. Not much more fabulous gains in Eastern Europe and (B)RICs. RE prices have reached unsustainable peaks and do not pay the expected yields. Good opportunities are becoming scarcer in the global RE market places but they still exist in Brazil. Source: Bradesco Econ. Dep. August 2008 Economy outlook (1) Brasil age pyramid - 2005 70 ou mais 60 a 64 50 a 54 40 a 44 30 a 34 20 a 24 10 a 14 0a4 -6% 300% 250% 200% 150% 100% 50% 0% 111% 166% Homens Mulheres Economists anticipate that Brazil will grow to be the world’s 8th largest economy by 2020 and the 5th largest by 2050. This growth is largely due to favorable demographic trends. Based on various economic reports, the risk profile of Brazil’s economy has improved dramatically in recent years and is expected to improve further as the economy continues to stabilize and expand. 37% -4% 249% -2% 0% 2% 4% 6% % of RE credit/GNP :: total credit/GNP 156% 137% 73% 65% 125% 141% 63% 53% 46% 46% Source: The Economist Dez 2007 2% 35% 33% 20% 13% 10% 9% 17% 8% 6% 28% 2% Coefiiente Crédito Imoboliário / PIB Coeficiente crédittotal / PIB Economy outlook (2) Based on various economic reports, the risk profile of Brazil’s economy has improved dramatically in recent years and is expected to improve further as the economy continues to stabilize and expand These improvements, coupled with Brazil’s thriving international trade and growing public markets, have integrated the country into the global economy and stimulated the rapid growth of a middle class population. Source: The Economist Dez 2007 Source: Bradesco Econ. Dep. August 2008 Financial outlook Global exposure to enormous amounts of floating money. Where are we going to ? Financial assets versus GNP Is Brazil a safe place to invest ? Source: McKinsey (September 08) Innumerous renewal opportunities Operational platform Real estate investments have been a traditional financial hedging alternative to prevent from high inflation and financial volatility. Legal protection for buyers and secure property registration. Sales on plan with direct developer's finance is usual Recently changed regulations have drastically improved finance conditions. Tax incentives for real estate buyers, regulatory improvements and public infrastructure investments are creating sustainable impulses for the real estate industry. New development areas offering ideal investment opportunities Legal scenario for real estate finance Brazil´s RE industry counts on an appropriate legislations and regulatory structures to mitigating investment risks and turning. Brazil into an attractive destination for investors:  Securitization companies act as liquidity agents for the secondary market.  Commercial papers backed by real estate receivables are similar to mortgage securities and represent the typical medium and long term finance vehicle.  Fiduciary regime for RE receivables, which allows for a complete segregation of the transactions and represents an important protection for RE.  RE fiduciary sales regime, an essential instrument – rarely existing in other countries - that allows to effectively secure real estate financing transactions and enhance the quality of the credits on the transaction Main Brazilian Real Estate market places > 60 % of the market N 14 cities with more then 1 million inhabitants represent the potential of RE opportunities The Brazilian Real Estate market potential 1 The Brazilian Real Estate market potential 2 Real Estate investments are fleeing the major capital´s centers Degraded central areas become high potential opportunities for the R E industry A large sub-utilized central area is in process of increasing deterioration. The site is equipped with complete infrastructure and could be transformed in an attractive new city, where people could live and work in ideal conditions. SP´s real estate industry is experiencing a fatal lack of adequate sites in the metropolitan area. The actual trend is to look for cheaper sites outside the municipal area. Residential market Residential development - history and future A substantial amount of low cost dwellings (3.2 million units) were generated in the 70 s and history early 80 s, with long term subsidized government finance (SFH Sistema Financeiro Habitacional of the Banco Nacional de Habitação BNH The extinction of the SFH left no alternative for lower income class population and accrued a backlog of present 8million units. The medium income and upper class demand was tapped with typical “home made” financial systems future The recent availability of long term finance with lower interest rates will enable the supply of the retrieved demand for housing and generate new market opportunities for investors Lower finance cost and more cost efficient developments will enhance urban renewals and stimulate modernization of urban development Performance of the residential market  86% of the Brazilian population lives in own, not rented property  the increasing purchasing power enables 45% of the population today to buy their home - against 25% in year 2000  accumulated demand is estimated with 8million units Office market Office market • São Paulo – 80 million sq feet office, the largest in South America. – No new developments 2005 – 2007. – No vacancy since 2006. • Rio – 50 million sq feet office, second in Brazil. – Less than 4% vacancy rate. – Retrofit trend downtown area. – Most S. Paulo and foreign developers are investing in Rio. Commercial market, retail, shopping There are 346 shopping centers nationwide 20 years ago, only 15% of the existing centers were located in the interior, far away from the large urban centers, today it became 50% These 346 centers totalize an “ABL” (Área Bruta Locável) of 7.3 million m², with 52.000 shops, 1.300 anchor stores and 1.315 cinemas. Total sales generated in 2007 is R$ 52 billion (30 US$ b) Greater São Paulo locates 3.1 million m2 of ABL, which represents 40% of the national ABL Shopping center sales represent 18% of total retail sales (except cars and fuel) Special retail consultants identified still lack of sales areas and see prosperous development potential Source : ADVB Industrial market situation and outlook São Paulo´s metropolitan region is victim of unplanned and disorganized industrial growth during the past 50 years. Environmental restriction, union fights for higher labor, logistics and growth requirements led to several “waves” of industrial exodus.  In the late 70 s, municipal and state government granted tax incentives to migrate to neighbor cities in a 50 to 150 km range from SP.  In the late 90 s occurred the phenomenon of Brazil´s growth expectation , induced by the automotive industry. Previewing to maintain spectacular growth rates (2m cars per year to 3m in 4 years  Global competitive pressure obliges more than 5.000 industries to find new suitable locations, because they remain still installed inadequately in often downgraded metropolitan region, Market potential - new industrial and logistic centers Typical situation in several metropolitan regions: industrial cluster imbedded in residential area 3.200 industries operating in SP metro region Thank you! www.secovi.com.br Tanks to Mr. Bernd Rieger Rieger Reurbanização bernd.rieger@rieger.eng.br www.rieger.eng.br