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Brazil real estate: High rise(Business Latin America Via Thomson Dialog NewsEdge) The Brazilian property market is undergoing a strong recovery, attracting the attention of some big guns A range of new financial investors are being drawn to Brazils real estate market as it experiences a period of robust demand growth. A decline in interest rates and new regulations is favouring the development of the residential sector, while tax breaks for the construction sector have also been included in the governments flagship growth acceleration programme. The recovery has so far benefited companies targeting the upper middle class, but the outlook for the lower-income residential sector now looks more promising. The commercial and office markets, too, are expected to register strong growth. So Paulo is the most expensive city in terms of A-class office space in Latin America, according to a recent survey issued by Cushman & Wakefield (UK), a real estate consultancy. The city ranked 18th in the world in 2006, and rental rates increased by 13% compared with 2005, a bit above the global average of 12% (the annual average for top quality office space, which is required by large companies and foreign investors, amounted to 510.8 euros per square metre). This put So Paulo ahead of Buenos Aires (31st with a cost of 342.5 euros per square metre) and Mexico City (33rd with 336.6 euros per square metres). So Paulo is still almost four times cheaper than London, but is now more expensive than Frankfurt and Shanghai, according to the survey. By comparison, Indias business centre, Mumbai, and Moscow are respectively ranked 5th and 7th in the world, according to Cushman & Wakefield. So Paulo is the only Brazilian city among the worlds top 50. So Paulo and Rio de Janeiro account for 80% of the top quality office space market in Brazil, with some 15m square kilometres in total. Vacancy rates dip Following several years of excess capacity and falling prices in the first half of the decade, the market has experienced a period of recovery since 2005. Vacancy rates, which had reached 24% in 2004, fell to 13.3% last year in So Paulo, according to Jones Lang LaSalle (US). More than 200,000 square metres were traded last year, up 61% compared with 2005, and the best performance since 2000. The upturn in the market may be the result of cyclical factors, as only 50,000 square metres of new office space were offered to the market last year. However, both Cushman & Wakefield and Jones Lang LaSalle are expecting a further decline in vacancy rates this year in spite of an increase in new stock, against a background of sustained economic growth and a positive business atmosphere. Both So Paulo and Rio registered double-digit growth last year, according to Jones Lang LaSalle. Net absorption amounted to 66,500 square metres of A-class office space, up 22% compared with 2005. Vacancy rates are much lower in Rio (around 5%) and are expected to decline further in 2007 to below 4%, as demand outstrips supply. This despite there being no shortage of buidling land. Large investors step in The return to macroeconomic stability in Brazil, coupled with high levels of liquidity in international capital markets, has finally attracted large foreign investors into the market. Sam Zell, a billionaire US real estate entrepreneur, has turned his attention to Brazil after investing in Mexico. He first acquired a minority stake in Gafisa, a local, predominantly residential, construction company, which later launched a successful initial public offering. He has since acquired a stake in Ecisa, a company that invests in shopping malls and launched a 50% joint venture, Bracor, to enter the commercial real estate market. Mr Zell had already invested in a retailing chain in the Northeast (G. Barbosa) several years ago, and now says that the time is ripe to invest in real estate in So Paulo. Other large financial investors have recently declared their interest in the market, including the Carlyle Group, Morgan Stanley Real Estate and Merrill Lynch (all US). Several companies in the sector have also launched initial public offerings (IPOs) during the past year, including So Carlos, a private-equity firm, and more are expected to do so in the coming months. The market is awash with money, says Paul Weeks, head of capital markets at Cushman & Wakefield. He says that large mortgage companies such as EuroHypo (Germany) and Capital Trust (US) will also start operating in Brazil by the end of the year. This year will act as a litmus test for investors. A large amount of new office space is expected to come onto the market. How well demand and prices hold up in 2007 will thus determine whether or not real estate investor confidence is justified. So Paulos property market(000s sq metres; unless otherwise indicated)CompletedAbsorbedVacant (%)20001922226.820011104011.02002133- 2018.020032298622.0200420411224.020058012521.020065020513.32007(a)13413112.0(a)S ource: Jones Lang LaSalle.SOURCE: Business Latin America Copyright 2007 Economist Intelligence Unit |