Brazil–A Strategic Market for Business Expansion in Construction and Property

Neil Shaw, FRICS, puts forward the case for Brazil’s rise among major world economies — and advises investors to engage with qualified, local property specialists.


© Celso Diniz

Brazil, with a population of nearly 200 million, is considered by many European and North American investors as the last emergent market for business expansion, principally because Russia, India and China have different business cultures that are confusing to many investors. The business and social environment in Brazil is sophisticated, however the first rule is not to understand Portuguese but the underlying business culture of the country, and the whole South American continent.

And “Let the buyer beware.” If you don’t know the market it is important to get credible advice from professionals on the ground. “There are unscrupulous people in business here who are prepared to take advantage of ill-advised international investors.

But don’t be put off. This is a nation of stability. It is an election year in Brazil, which typically creates doubts in the business and financial communities. In this election cycle, though, it isn’t an issue. The two main candidates (according to recent opinion polls) appear to be palatable to most in the electorate: José Serra of the Brazilian Social Democratic Party (PSDB) and Dilma Vana Rousseff Linhares of the Labor Party (PT).

A recent survey conducted by KPMG noted that the Brazilian business community is the most optimistic in the world regarding the global economy. Also, I’m happy to note that RICS research has indicated that the investor activity rising across 70 percent of the world’s markets is being led by Brazil.

Most of the principal banks, investment companies, asset managers and private equity companies have a presence in Brazil or are in the process of establishing representation. In terms of project finance the risk is medium. Brazilian property developers and contractors are experienced. Many of the major developers and contractors, such as Cyrella, Rossi, Rodobens Negócios Imobiliários, have carried out IPOs and some have already raised additional funds through further offerings and debentures, although many more require financing.

The overall economic forecast for 2010 is positive. According to the Federation of Industries of the State of São Paulo (FIESP) there will be an expansion of about 6.2 percent in the general Brazilian economy during the year, assuming a growth of wages and credit plus a less adverse international scenario. Industry should resume its growth after the significant effects of the global crisis these last two years. The industry sector’s GDP is estimated to rise 8.5 percent, driven primarily by manufacturing (9.5 percent) and construction (9.3 percent). The projection for the agriculture GDP is 3.9 percent and 4.8 percent for the services sector. These positive indicators should be bolstered by higher domestic demand and improving exports. Brazilian industrial production should resume at pre-crisis levels, closing the year with an estimated increase of 12 percent. FIESP is projecting a 24 percent growth in credit, returning to the levels of the global pre-crisis period.

There are also many government initiatives intended to generate growth in the construction and property sectors

Programa de Aceleração de Crescimento (Growth Acceleration Program), or PAC:

This is a major initiative to incentivize infrastructure investments for economic and social expansion. The planned investments are in the region of R$1.59 trillion, with more than R$600 billion after 2014. R$1 trillion is expected to be put toward the energy sector with almost R$900 billion for Petrobras. For transport, the forecast is R$109 billion on highways and the expansion of the railway network.

Typical “Rodobens” semi-detached 3 bed house for middle class occupation Strategic Plan & Participation in R$485 million IPO.

“Mina Casa Minha Vida” (My Home, My Life):

The housing market is buoyant at present due to major developers receiving stimulus from the federal government, which allocated R$34 billion for low/middle income Brazilians to have access to affordable housing. This project is carried out in partnership with the Brazilian states, local municipalities and the private sector. Unfortunately, there has been a slight setback as the government’s 2010 target of building two million units was below the market expectation of three million units. Furthermore, 60 percent of all new units will be targeted to families with incomes of up to three times the minimum wage. The original program had only 40 percent going to this segment. Developers and contractors, such as Cyrella, Rossi and Rodobens Negócios Imobiliários are very active in this sector.

PND or Programa Nacional de Dragagem (Port Dredging Program):

The federal government is planning to invest R$1.6 billion in this sector to allow the entry of larger water vessels, thereby increasing overall operating capacity by 30 percent. The government’s goal is to complete the dredging of seven of the seventeen targeted strategic ports by the end of 2010 with the expectation that the dredging sector should attract investments of R$800 million this year.

There are other factors driving optimism in the Brazilian market, such as:

• Funding - Lower interest rates, greater access to credit and government incentives should result in significant growth rates in the volume of funding in future years.
• The 2014 Football World Cup is heading to Brazil.
• The 2016 Summer Olympics will be hosted by the city of Rio de Janeiro.
• There have been new deep water oil discoveries and it is estimated that Brazilian oil exploration output will grow by 70 percent of present levels by 2017.

The infrastructure and housing sectors are being stimulated by government programs, which clearly have impacted companies within the supply chain. For example the construction materials sector is booming. Sales of building materials grew 25.87 percent in March 2010 compared to the same period last year, according to industry association Abramat. Abramat is forecasting a continued recovery of the materials industry in the coming months.

The office development market is showing very positive trends. According to Jones Lang LaSalle, São Paulo and Rio de Janeiro finished 2009 on a positive note. The total stock of quality office space in São Paulo grew by 7 percent during the year, with approximately 200,000 square meters of new space. Of this total, 62 percent came from five buildings that were completed in the last quarter of the year. In Rio de Janeiro the total stock grew by 6 percent in 2009 with the addition of roughly 90,000 square meters of high-end space, setting a record for new stock in a single year.

In relation to residential development Secovi SP (the Commercial and Residential Property Syndicate of the State of São Paulo) predicts 2010 will be a record year with an estimate that 38,000 new homes will be sold in São Paulo, the highest level in 30 years. This is being driven by abundant credit, the government housing program and the overall positive conditions in the market. To meet the increased market demand since the start of the year, especially for smaller properties, developers have accelerated their activities. The volume of residential launches during the first quarter of this year was the highest of the decade in the São Paulo metropolitan region.

Most major Brazilian contractors and developers are actively exploiting the new opportunities, generating favorable conditions for future expansion in construction and property development.•