The road to Rio

Posted by By at 9 July, at 11 : 59 AM Print

5When thinking of overseas investment properties, it is easy to get stuck on US and European regions. However, if you expand your mind to the emerging markets, you might be surprised at the opportunities.

As Josh Kennedy nudged the ball past the Iraqi goalkeeper in early June, the Socceroos officially qualified for the World Cup and the thoughts of a nation shifted to Rio.

Of course, for many people around the world, Brazil has been front and centre for some time. It is an emerging nation – one of the few to come out of the GFC in better shape than it went in – and is poised to make a major statement on the world scene.

It has been reported by many analysts that Brazil’s residential markets are on the rise. Recent oil discoveries have provided stability, while the FIFA World Cup, as well as the forthcoming Summer Olympic Games are providing an injection into the nation’s infrastructure.

These developments in infrastructure should not be underestimated. With improved roads, railways and ports, the country will increase its efficiency, making it more attractive for business. It will help the country take positive steps towards modernisation, become more efficient and, hopefully, lure increased foreign investment.

At a localised level, the biggest cities are being cleaned up and improved access to credit and a rapidly expanding middle class has enabled an increasing number of people to buy their own home, putting an upward pressure on prices.

This, in turn, makes the country very appealing to international investors. It is relatively easy for foreigners to buy real estate in Brazil and overseas nationals can buy Freehold without restriction – except for very large farms and islands and coastal land tracts.

New analysis on Brazil’s property market by Savills World Research has shown some very interesting information – particularly for foreign investors. It suggests that economic growth and wealth creation has resulted in a booming housing market in Brazil, but warns that overseas investors need to act fast as Brazilians and other South Americans are recognising value and buying up schemes before they get to market in Europe and other global markets.

As such, it states that Brazil is “an investable proposition which has the capacity to add value while not becoming as overheated as other real estate markets in some fast growing new world economies”.

The report says that Brazil has a relatively high level of owner occupation in its urban areas particularly in relation to developed, old-world economies such as France, the UK, the US and Australia. Higher levels of urban owner occupation are characteristic of many of the new economies and tend to reflect less mature rental investment or subsidised markets.

It points out that as the Brazilian market develops and more international and domestic investors are attracted to the market, particularly in urban areas like Rio, it may be that rates of owner occupation will fall as rental alternatives become
more numerous.

In actual fact, the rate of house price growth in Rio has slowed in the last 18 months, having peaked at an annual rate of 45% in October 2011. According to the FIPE ZAP index, by April 2013 annual growth stood at 13% in Rio, the lowest rate since 2009, but still substantial by world standards and significantly higher than Brazilian consumer price inflation.

The report also says that affordable housing is a new sector for Brazil, but offers significant investment opportunity, and several private equity funds are already operating in this sector of the market.

Although house price growth over the last five years has averaged 23% per annum in Rio and 17% per annum in São Paulo, residential rental yields are on par with many of the troubled old-world economies with house price to income ratios much lower than many of the Asian tiger economies.

“Despite this spectacular price growth, Brazilian residential property appears good value when compared to the top tier of the world cities,” said Savills World Research director Yolande Barnes.

“This suggests sound fundamental reasons for income investment in the country’s lead cities, Rio and São Paulo. The country’s relative accessibility to foreign investment is expected to make the country a target for international investors beyond North America,”
she explained.

To help put this is in better context,
it is worthwhile comparing the market to other emerging nations. A like-for-like comparison of the capital and rental costs of residential real estate shows that despite having nearly three times the GDP per head of India, Brazil’s premiere cities still have cheaper real estate than Mumbai.

The economy in Brazil is a similar size
to that of France and Britain, and far bigger than Australia, Hong Kong and Singapore, yet it doesn’t seem to have been channelled into its real estate in
the same way.

Annual yields are a useful sign of how overheated capital values are in relation to underlying occupier demand and the report shows that in cities where large quantities of investment capital have been pressing on real estate markets, these yields are often very low by global standards. Not so in Brazil.

Gross residential property yields for the SEU in Rio and São Paulo are higher than in any other of the new world cites in recently emerged economies and are on par with London, New York, Sydney, Tokyo and Paris.

São Paulo and Rio are two cites leading the way. Prices in São Paulo have risen by 127% since the beginning of 2008, and by 189% in Rio. Rental growth is up by 86% in São Paulo and by 129% in Rio over the same period.

“We expect to see substantial, yet lower than recent, capital growth and sound income returns,” said Yolande.

“Overseas investors will need to have an eye on exchange rates and beware the prospect of rising interest rates and/or inflation. However, they may well find Brazil more rewarding than some of the other new world markets, especially in Asia. Assuming they can get to the product before the locals do.”

Tim Cahill, Sally Pearson, Anna Mears and … maybe you … all on the road to Brazil.

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