How To Invest In Brazil: Commercial Property And Land

With its rising industry growth, escalating consumer confidence

, larger middle class, strong currency, increased foreign investment, high M&A activity, abundance of natural resources, improving investment grade classifications amongst several other factors there are many reasons that commercial real estate investors are feeling confident about Brazil. Whilst some are questioning the formation of a bubble in real estate (which can often be statistically warranted), it cannot be doubted that some genuine opportunities exist in a country that continues to grab the international investment spotlight.

The Brazilian commercial property industry was hugely effected when the so-called miracle exponential growth rates witnessed during 1970s and 80s were replaced by the lost decade of hyper- inflation. Whilst some commercial buildings were constructed during this period such as the Royal Garden (Maring) in 1991, the Curitiba Trade Center and the Plaza Centenrio (So Paulo), both in 1995 it was largely public buildings that dominated the development of the sector (funded by the Banco Nacional de Desenvolvimento Economico e Social, BNDES). This low period of economic activity had the knock on effect of diverting domestic and international investors largely due to inadequate financing and the risks of developing in an inflationary environment.

The solid growth that Brazil began to experience after 1997 was largely prompted by a large number of privatisations as well as a telecommunications boom. Global investors capitalised on this and, by 2000, the market had grown by 14% with net absorption levels being higher than new supply. The market for office space was slightly affected by the South American economic crisis which was largely caused by sustained deficit spending by the Argentinian economy (which, at the time was one of Brazil's main trading partners). During the same period, insufficient water levels within the country's hydroelectric plants and a low level of adequate energy security led the government to enforce a rationing program which negatively affected the country's economic performance. Whilst many large scale commercial developments were underway across the country, the effects of this temporary downturn led to negative absorption up until 2002. The market subsequently recovered quickly and, by 2004, vacancy rates were peaking again.

A strong recovery was witnessed from 2005 until the onset of the global financial crisis which saw the high office market vacancy rates dipping by the end of 2008 (with medium levels of supply). This period was widely viewed as a blip due to the fact that the country's recessionary period was relatively short lived. At the end of 2009, average vacancy rates had risen by 15% but the office space market remained in equilibrium. It was also reported that, although net absorption decreased during 2007 and 2008, this was due to a reduction of space available for rent as opposed to a reduction in demand. Many companies in the major cities of Brazil were in need of more space which led to more pre-lease contracts being signed during the construction period of several new major developments, a practice that continues to remain commonplace. A number of the country's development companies have also, in recent years, floated shares in the capital markets (including Cyrela, Multiplan, General Shopping Brasil, Iguatemi). Despite all the economic changes that have occurred both domestically and internationally, the combined average growth rate of Jones Lang LaSalle and Cushman & Wakefield demonstrates an increase of 7.5% per year since 1997.

Today, the main factors negatively effecting the commercial property industry from a foreign investor perspective are the country's over slow and often overly bureaucratic processes (which are often institutionalised); buying at realistic prices (in line with what Brazilians are paying); exchange rate issues; cohesive indices of property and lease values; as well as the inability to leverage and obtain debt financing. Yet at the same time, according to Jones Lang LaSalle, in 2009, Brazil overtook Mexico in terms of real estate transparency. Furthermore, there have been some significant investments undertaken since the onset of the global downturn including an US$ 243 million commercial property investment fund from the United Arab Emirates; the acquisition of the Magnlias building in So Paulo for R$ 642 million by a Spanish investor and the sale of the Torre Almirante in Rio for R$ 206 million, not to mention the widescale purchasing of land for future commercial developments across the country.

The majority of the office market - which is estimated at over 25 million square meters (a figure that is said to be relatively small in relation to the size of the country and economy) - is located in So Paulo (60%) and Rio de Janeiro (20%) and these cities also account for the large majority of high-end office properties. Other notable office real estate markets include Belo Horizonte, Salvador, Braslia, Fortaleza, Belo Horizonte, Curitiba, Porto Alegre, Recife, Manaus, Natal, Florianpolis, Palmas and Vitria).

by: Ruban Selvanayagam

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