Wake up Gringos - Your US$ is now worth R$2.35 from R$ 1.70 two months ago!

[JMBroad]

I had been looking to invest in Brazil over the last few years, but like many, we just no longer have the money available to do so. With all that's going on in Europe, I find it hard to believe that the Brazilian real estate market hasn't been fazed by any of this. Even if I had money, I'd be on the sidelines for now, waiting to see some evidence of an improved economic situation in Europe and/or the US before buying an investment property in Brazil. Now, if I were looking for a primary residence, I'd probably jump on in. Better to be there and where I want to be than sitting here waiting to be able to begin the rest of my life.

It has, to some extent affected the sale of developments geared towards second homes for non-Brazilians however it hasn't affected the local market, which is the real driver for price and demand increases. Developments which cater to the local market have, if anything, seen an increase in interest from overseas investors looking to then resell to the local market on completion.

Two snippits from the local newspaper today which give a good idea of what I'm talking about: (The English text is mine - not a direct translation, however the content of the articles back up my text)


Interest rate lowest since 1997

While historically the interest rates in Brazil have been extremely high, with figures as high as 38% and 45% a mere ten years ago, these figures have consistently been dropping until late in 2008 as the global economic turmoil hit the rest of the world and the Brazilian economy took some cautious steps in anticipation of any ripple effects. In September 2008 the Selic increased from 11.75% , the lowest it had been since 1997 to 13.75%. Today, through the market research group Focus and with the Selic rate steady at 12.75%, the Central Bank of Brazil announced a drop of 1% in March with an estimated further cut of 0.75% in April, which will bring the Selic rate back down to 11%. This comes at a time when consumer confidence in Brazil is already high.

Mercado prevê corte da Selic em 1 ponto percentual - Tribuna do Norte

Loans at an all time high – Mortgage market expands

The total amount of money which has been made available to developers and to individuals looking to purchase homes in Brazil has surpassed R$ 30.000 billion, according to ABECIP. A noticeable jump when compared to the R$ 18.282 billion of the year before, which was already a growth of 64.4% compared to 2007.

In the state of Rio Grande do Norte in January and February of 2009 alone, through the bank Caixa Económica, 920 loans have been signed to private individuals, with a total of R$ 33 million. Developers likewise have received loans of R$ 32 million, with an additional R$ 52 million already under negotiation for a further four real estate developments in the region.

This year the bank Caixa Económica is going to focus on expanding their mortgage product in Brazil, as the construction industry is a good stimulator of job growth, income and wealth distribution. Their objective is to demystify the mortgage industry and simplify the process, decrease significantly the interest rates and extend the durations of the loans up to 30 years.

Crédito para construção civil no RN está em alta - Tribuna do Norte

So with the options at the moment in Europe being to keep the money in the bank at extremely low interest rates or to place the same money overseas in a market like Brazil, many investors are deciding it may well be safer to invest in something which there is a real demand for and which is likely to increase over the next 6-12 months. The chances of that money earning anywhere near the same amount in Europe sitting in a bank or in real estate there are, as far as I can see, very slim - wouldn't you agree?

 

[JMBroad]

By the way, tomorrow the Salao Imobiliario do Rio Grande do Norte starts here in Natal - the promotor has said that the fair will be larger than last years with 200 exhibitors already confirmed. They are expecting it to be a huge success with the local market. I'll be going most days so I'll let you all know what the feedback was from the participants and from the public I manage to speak to.

 

[debzor]

It has, to some extent affected the sale of developments geared towards second homes for non-Brazilians however it hasn't affected the local market, which is the real driver for price and demand increases. Developments which cater to the local market have, if anything, seen an increase in interest from overseas investors looking to then resell to the local market on completion.

Two snippits from the local newspaper today which give a good idea of what I'm talking about: (The English text is mine - not a direct translation, however the content of the articles back up my text)


Interest rate lowest since 1997

While historically the interest rates in Brazil have been extremely high, with figures as high as 38% and 45% a mere ten years ago, these figures have consistently been dropping until late in 2008 as the global economic turmoil hit the rest of the world and the Brazilian economy took some cautious steps in anticipation of any ripple effects. In September 2008 the Selic increased from 11.75% , the lowest it had been since 1997 to 13.75%. Today, through the market research group Focus and with the Selic rate steady at 12.75%, the Central Bank of Brazil announced a drop of 1% in March with an estimated further cut of 0.75% in April, which will bring the Selic rate back down to 11%. This comes at a time when consumer confidence in Brazil is already high.

Mercado prevê corte da Selic em 1 ponto percentual - Tribuna do Norte

Loans at an all time high – Mortgage market expands

The total amount of money which has been made available to developers and to individuals looking to purchase homes in Brazil has surpassed R$ 30.000 billion, according to ABECIP. A noticeable jump when compared to the R$ 18.282 billion of the year before, which was already a growth of 64.4% compared to 2007.

In the state of Rio Grande do Norte in January and February of 2009 alone, through the bank Caixa Económica, 920 loans have been signed to private individuals, with a total of R$ 33 million. Developers likewise have received loans of R$ 32 million, with an additional R$ 52 million already under negotiation for a further four real estate developments in the region.

This year the bank Caixa Económica is going to focus on expanding their mortgage product in Brazil, as the construction industry is a good stimulator of job growth, income and wealth distribution. Their objective is to demystify the mortgage industry and simplify the process, decrease significantly the interest rates and extend the durations of the loans up to 30 years.

Crédito para construção civil no RN está em alta - Tribuna do Norte

So with the options at the moment in Europe being to keep the money in the bank at extremely low interest rates or to place the same money overseas in a market like Brazil, many investors are deciding it may well be safer to invest in something which there is a real demand for and which is likely to increase over the next 6-12 months. The chances of that money earning anywhere near the same amount in Europe sitting in a bank or in real estate there are, as far as I can see, very slim - wouldn't you agree?

Absolutely right, JMB, why earn 0.5% or less pa when you can see better returns by investing in real estate here.

You mention mortgages from Caixa Economica Federal, (a government run federal bank, as opposed to a private enterprise which many others are),have you actually been involved in the process yet? I have - we have no choice on the island it is the only bank - and would you believe the application forms required 80signatures. Not joking - 80!

 

[JMBroad]

Haha no, not been involved in that yet but sounds like fun I just mentioned Caixa Económica as the article in the paper today was about them.

At the moment we aren't pushing sales to people who want local mortgages as they only get 70% of the money on completion. So for now we are selling to "cash buyers" with their resales going through people getting a local mortgage.

Are those 80 signatures required for locals? As far as I know there are still no mortgage product available to foreigners, regardless of the amount of signatures.

 

[debzor]

Haha no, not been involved in that yet but sounds like fun I just mentioned Caixa Económica as the article in the paper today was about them.

At the moment we aren't pushing sales to people who want local mortgages as they only get 70% of the money on completion. So for now we are selling to "cash buyers" with their resales going through people getting a local mortgage.

Are those 80 signatures required for locals? As far as I know there are still no mortgage product available to foreigners, regardless of the amount of signatures.

Yup - 80 slowly written, long named Brazilian signatures!!! (Actually initials will do on some pages, but these could make a separate word in some languages!) The contract I witnessed took nearly 2 hours just for the parties to sign; bring back Northern Rock...!

Still not available to non-Brazilians, and anyway the interest rates would scare off Gringoes, let alone many Brazilians!

 

[JMBroad]

You mention mortgages from Caixa Economica Federal, (a government run federal bank,

Is the Caixa Económica Federal actually run by the government though? Interesting, I'll have to check that - I thought it was a catchy name like the "Federal Reserve" which is only partially run by the government.

 

[debzor]

Is the Caixa Económica Federal actually run by the government though? Interesting, I'll have to check that - I thought it was a catchy name like the "Federal Reserve" which is only partially run by the government.

Try dealing with them, and then compare to any other bank in Brazil...! Let me know though.

 

[PeixeGato]

Still not available to non-Brazilians, and anyway the interest rates would scare off Gringoes, let alone many Brazilians!

I guess this depends on the non-Brazilian's reason for buying. For me, as a long term investor looking for cash flow, if the numbers work out and there is positive cash flow, then I'm in on the deal, even if the interest rate is higher than anything I've ever seen here in the US.

So I wouldn't be so quick to rule out foreigners being interested in procuring loans for property there. With those loans, you may find yourself with many more clients than you had before as people without all of that cash on hand could get into the real estate market.

 

[JMBroad]

I guess this depends on the non-Brazilian's reason for buying. For me, as a long term investor looking for cash flow, if the numbers work out and there is positive cash flow, then I'm in on the deal, even if the interest rate is higher than anything I've ever seen here in the US.

So I wouldn't be so quick to rule out foreigners being interested in procuring loans for property there. With those loans, you may find yourself with many more clients than you had before as people without all of that cash on hand could get into the real estate market.

Unfortunately as the mortgage market is so young here in Brazil, the interest rates are still astronomical - remember that the 30 year mortgage has only just started being offered here. Traditionally it's "Selic +1%" so in some months, the interest rates on the loan would equate to as high as 24% per year.

While property prices are increasing here at a healthy rate - having to pay 24% interest on your loan wipes out a very large chunk of your returns.

However... if you are a Brazilian family - you don't look at it that way. You look at it as: "I can buy a good house in a good neighbourhood for only R$ 350 per month over 25 years." Minimum wage per person is R$ 450 (+/-) so anyone earning a half decent salary can easily afford to buy a new house whereas to rent a similar property would cost you between R$ 900 and R$1.100. This kind of loan was unthinkable only 3 years ago... that's why locals are buying.

However I do totally agree with you that once loans become available to overseas investors the number of people buying in Brazil will go up exponentially. Mainly due to the same logic... To pay off your loan you are looking at around R$ 350 per month and you can rent it out for R$ 900 so the maths add up

 

[debzor]

I guess this depends on the non-Brazilian's reason for buying. For me, as a long term investor looking for cash flow, if the numbers work out and there is positive cash flow, then I'm in on the deal, even if the interest rate is higher than anything I've ever seen here in the US.

So I wouldn't be so quick to rule out foreigners being interested in procuring loans for property there. With those loans, you may find yourself with many more clients than you had before as people without all of that cash on hand could get into the real estate market.

I agree with your logic, but unfortunately loans are simply not available to foreigners, yet...

 

[debzor]

Unfortunately as the mortgage market is so young here in Brazil, the interest rates are still astronomical - remember that the 30 year mortgage has only just started being offered here. Traditionally it's "Selic +1%" so in some months, the interest rates on the loan would equate to as high as 24% per year.

While property prices are increasing here at a healthy rate - having to pay 24% interest on your loan wipes out a very large chunk of your returns.

However... if you are a Brazilian family - you don't look at it that way. You look at it as: "I can buy a good house in a good neighbourhood for only R$ 350 per month over 25 years." Minimum wage per person is R$ 450 (+/-) so anyone earning a half decent salary can easily afford to buy a new house whereas to rent a similar property would cost you between R$ 900 and R$1.100. This kind of loan was unthinkable only 3 years ago... that's why locals are buying.

However I do totally agree with you that once loans become available to overseas investors the number of people buying in Brazil will go up exponentially. Mainly due to the same logic... To pay off your loan you are looking at around R$ 350 per month and you can rent it out for R$ 900 so the maths add up

Minimum wage went up to last month to R$465.

I have a friend who is an electrician for a TV company in Recife and earns R$1500 per month. On your maths he could easily afford to buy such a property to keep as an investment, and give up his job.

Do you have any examples where he could buy a property for R$350 per month and rent it out for R$1000? Surely most Brazilians should be doing this if you can earn nearly three times your investment? There are certainly enough who can afford it.

 

[robh]

Minimum wage went up to last month to R$465.

I have a friend who is an electrician for a TV company in Recife and earns R$1500 per month. On your maths he could easily afford to buy such a property to keep as an investment, and give up his job.

Do you have any examples where he could buy a property for R$350 per month and rent it out for R$1000? Surely most Brazilians should be doing this if you can earn nearly three times your investment? There are certainly enough who can afford it.

Surely the rental market would collapse.

I can see something like that being done with subsidised mortgages, but they have restrictions on what you can do with the house.

 

[JMBroad]

Minimum wage went up to last month to R$465.

I have a friend who is an electrician for a TV company in Recife and earns R$1500 per month. On your maths he could easily afford to buy such a property to keep as an investment, and give up his job.

Do you have any examples where he could buy a property for R$350 per month and rent it out for R$1000? Surely most Brazilians should be doing this if you can earn nearly three times your investment? There are certainly enough who can afford it.

I know - I couldn't remember if it was R$ 465 or R$ 456 so I said "+/-"

Here in Natal I pay R$ 600 (long term) rent for a very basic, 40 m2 1 bedroom apartment in a typically Brazillian low income area. Taps are cold only, not hot and cold and the fridge was used in North American nuclear tests back in 1950. There is no freezer. There is no mosquito netting on the windows and no Air conditioning so I share the apartment with a very large, hungry family of mosquitoes. The build qualities are below average. As for location, it's not exactly in a favela, but it's pretty damn close to one. Obviously it was one I organised before moving over and I'm moving into a new place at the end of this week. Although I never really felt worried regarding safety there, I'll feel more comfortable having moved.

I've been looking around for something else and rents which I've found for average two bedrooms are between R$ 800 and R$ 1.100 for a two bedroom, small flat in an average location.

So as for your question - yes, I know of properties which are expected to easily rent out for R$ 900 a month and can be bought with financing for R$ 330 per month. Any more information than that and I'd have to moderate myself for advertising

 

[JMBroad]

Surely the rental market would collapse.

I can see something like that being done with subsidised mortgages, but they have restrictions on what you can do with the house.

Eventually people will have to buy instead of renting - also keep in mind it is a small development - total of 48 units on the development which is already almost sold out...

 

[robh]

Eventually people will have to buy instead of renting - also keep in mind it is a small development - total of 48 units on the development which is already almost sold out...

Where is the development?

 

[JMBroad]

Where is the development?

Come on Rob, I'm trying to answer the questions without advertising it but you aren't making it easy on me...

It's in Piúm, just passed the Fruit Market in town, about 10 minutes from Natal heading south and a couple of minutes from Cotovelo beach.

I sent you the information on it when I first arrived out here. Those houses can be financed through Bradesco for R$ 350 per month, more or less.

 

[robh]

Come on Rob, I'm trying to answer the questions without advertising it but you aren't making it easy on me...

It's in Piúm, just passed the Fruit Market in town, about 10 minutes from Natal heading south and a couple of minutes from Cotovelo beach.

I sent you the information on it when I first arrived out here. Those houses can be financed through Bradesco for R$ 350 per month, more or less.

I know it well, I spent a whole day around there and surrounds looking at land, which is a subject I will discuss with you next time I am out there.

 

[JMBroad]

I know it well, I spent a whole day around there and surrounds looking at land, which is a subject I will discuss with you next time I am out there.

Sounds good