Should You Buy In Brazil?

Beachfront Property In Fortaleza, Brazil

Should you buy real estate in Brazil?

It depends why you’re shopping.

As a vacation, second, or retirement home destination, Brazil is hard to beat. All that sandy coastline…all that sunshine…

Plus a relaxed way of life and a super low cost of living.

But as an investment?

Brazil is holding its own in the current global crisis, faring better than much of the world. Projections are that its economy will grow this year by 1% or 1.5%.

Other economic indicators are also strong. Inflation, for example, is down from 16% in 2003 to about 5% today. And the country’s state-run oil company, Petrobras, is going ahead with a four-year, US$174-billion expansion plan.

Brazil has become “the” next place–for the World Cup, for tourism, for a growing middle class, and for beachfront investment.

Much of the interest is focused in the Fortaleza area, on the northeast coast (where games of the 2014 World Cup will be hosted).

Fundamentally, the appeal of this region is its beaches. Miles and miles of white sand.

As you read this, developers are carving up these beaches into small lots and lining them with high-rise apartment buildings.

They’re working furiously, they report, because they’ve got buyers lined up by the hundreds.

A new apartment tower of hundreds of units sold out in 45 minutes during a pre-launch reception…

Another building sold out, again pre-construction, leaving 200 would-be buyers on a waiting list…

Hearing these reports, I can’t help but wonder about the market fundamentals. The volume and the pace of current construction seem overwhelming. Who’s buying all these apartments? And why?

Maybe 20 years ago, I began writing about the risks of investing in real estate in foreign markets. I was early on in my career covering this beat, but already I’d noticed something: Emerging markets can get the better of you.

Specifically, back then, I observed that you couldn’t take anything for granted, as you might when buying real estate in, say, the United States. In the States, when a man offers to sell you his house, you take for granted that he owns it.

But I’ve learned that, in some of the markets I write about regularly, you can’t do that. In Nicaragua, Panama, Honduras, Belize, Costa Rica, Ecuador, et. al, before you get too far into a discussion about buying a piece of real estate, you’re wise to engage some third party to help make sure that the person on the other end of the discussion actually possesses clear title to the piece of real estate in play.

I began then and continue today recommending title insurance as a way of forcing the issue. The title insurance group’s attorney knows what questions to ask and what papers and registries to check to be sure that, if you follow through to purchase the piece of property in question, you will, in fact, in the end, own it.

After I’d been making this title insurance recommendation for a couple of years, a real estate agent in Nicaragua came up to me one day in a bar in Granada and said, “Kathleen, you’ve got to stop pushing this title insurance thing. It’s really interfering with sales.”

I’ve taken heat over the years from agents and developers in the countries I write about who don’t want me to promote title insurance, who object to me writing about net commissions, who don’t like me reminding readers not to leave their common sense at the border…

Today, we’re talking about Brazil. My concern here isn’t to do with title. It’s to do with the pace of the market.

I’ve seen booms over the past two-and-a-half decades I’ve been covering this beat–on the Costa del Sol, Spain…in Ireland…in Argentina…in Dubai…in the UK…

I’ve watched these booms…and I’ve participated in many of them.

I bought a house in Ireland in 1999, pre-construction on the Costa del Sol in 2000, an apartment in Buenos Aires in 2002, and an apartment in the UK in 2005.

In Ireland and the Costa del Sol, I sold on schedule, according to my exit strategy, and near the top. The returns were better than I’d hoped for.

In BA, we own the apartment still. The market there is softening, but we’re in no hurry to sell. We like having a connection in that city, and we enjoy a respectable cash flow from rental income.

My foray into pre-construction in the UK, on the other hand, amounts to the biggest mistake of my real estate investing career.

In fact, in this case, I made three mistakes:

First, I bought on the recommendation of someone who, it turned out, did not understand the market…and I made no real effort to understand the market myself.

Second, I bought too late. If I’d done more due diligence myself, I would have realized that this market cycle was too far along to make sense. We were too near the end of the run.

Then I held on too long.

Should you buy pre-construction now in Fortaleza, Brazil?

Not if the reason you’re buying amounts to: Because lots of other people are doing it.

Buy in Brazil if you want to own in Brazil. Buy a condo on the beach in Fortaleza because you want to spend time on the beach in Fortaleza. And maybe enjoy some cash flow from rental when you’re not using the place yourself.

However, before you buy for profit, understand the market. Do your due diligence.

The current offers are irresistible. They can make it easy to forget your common sense at the border.

Small lots are on offer really cheap, but there is a reason they’re so cheap. Typically, you’re buying a little bit of sand with limited road access and no promise of infrastructure…ever. Some lots I’ve seen advertised are too small to build on–as small as 400 square meters, or less than 1/10th of an acre. What good to you is a postage-stamp lot with no services or access? And, if it’s no good to you, what good is it to anyone else? That is…who’s going to be your greater fool?

The condo buildings, on the other hand, are more intriguing. Thanks to the generally strong economy and the current buoyancy of the market, developers are right now able to offer terms so attractive you nearly can’t afford not to buy. No down payment and no interest. You simply pay 1% of the purchase price a month for 100 months.

It’s an interest-free mortgage that doesn’t even require a visit to the bank.

You make payments for eight or nine years (of as little as US$1,000 a month…on a US$100,000 apartment). The building is delivered in two or three years, so you’re able to take possession after paying maybe 25% to 30% of the total cost.

Prices for beachfront units in Fortaleza proper are running US$2,000 to US$2,500 per square meter. Construction in the city is maxing out, and projects are under way now outside town. These are selling for around US$1,500 a square meter.

One more time: Does it make sense to buy one of them as an investment?

If you understand what you’re doing…and you’re clear in your exit strategy.

This isn’t so much investing as it is speculating. Nothing wrong with speculation. If you’ve got the stomach for it. And the portfolio to support it.

This is an unproven market. I’m speaking specifically of Fortaleza. Right now, there’s a shortage of inventory. But an enormous supply of new inventory is in the works. When it’s delivered, will the demand for rentals be enough to absorb it?

What kind of rental returns can you expect long-term? No one can say, because there’s not enough history. This isn’t Paris or even Buenos Aires.

If your exit strategy is not to rent but to flip…to whom will you be flipping?

People are buying now because of the terms being offered. Plain and simple. Take away the terms, and this market would fall by a substantial margin overnight.

What are your prospects, therefore, for selling on? Will you offer your would-be buyer the same terms you’re being offered today?

The market is attracting buyers right now because of the under-supply. Again, when the new inventory comes online…and the current under-supply is satisfied…will potential buyers continue to be attracted to the region in the same volume?

Looking ahead, maybe you’re ok as long as you own front-line on the beach. But a unit out back? When the demand no longer outstrips the supply? Who would you sell it to? What would you exit strategy be?

One more thing: Remember the currency exchange factor. The Brazilian real depreciated against the U.S. dollar by about 40% between June 2008 and December 2008, then began regaining ground. It stands today at 1.99 reals to the dollar, which is 20% weaker than the exchange rate in June 2008.

Real estate in Brazil is priced in reals, which means your monthly payments would be priced in reals. If you’d bought in June 2008, when the rate was 1.63 to the U.S. dollar, then your monthly payment in dollar terms today would be reduced.

If you’d bought in December 2008, then your payment in dollar terms today would be increased.

One way to address this risk would be to buy reals ahead, enough to cover, say, a year’s worth of payments in advance, through a foreign exchange company (for example, HIFX).

Do that, though, and you run the risk of being locked in if the currency moves in your favor. And, buying today, you have eight years of currency fluctuations to live through.

Kathleen Peddicord

P.S. Now that you understand the market fundamentals, you can decide for yourself whether or not you should think about buying in Brazil. All that white sand and sunshine are tempting, I agree. Later this week, particular current opportunities in this part of the world that could make sense…

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