Chambers and Partners | Real Estate 2020 – Brazil
14 / 04 / 2020
Authors: Fabio P. Campos Mello and Ivandro Trevelim
Source: Chambers and Partners
Trends and Developments
Since 2019, the Brazilian real estate market has improved significantly, overcoming the previous slow-down in business, and also becoming a factor of improvement in the Brazilian economy and economic production.
Through the situation of the real estate market in São Paulo and other regions in central-west Brazil, where Brazilian agribusiness has its origins, it is possible to see that real estate regrowth has also reached other regions of the country, leading to a novel cycle of new projects and expansion in the real estate market, which is expected to endure and match the economic development of other areas of the country.
Brazil’s economic recovery follows structural reforms by the federal government and the national congress considered by economists to be essential for unlocking economic production in the country. Very important economic and social reforms have recently been approved, namely, the reform of labour laws and the reform of the social security system, which enhanced financial contributions made by citizens to control deficit.
Also as part of the strategy to promote business, the national congress has approved the Economic Freedom Bill. This was originally proposed by the federal government to promote, improve and develop the private business environment in the country, encompassing several legal modifications concerning companies, enterprises and the de-bureaucratisation and simplification of entrepreneurial activity, fostering entrepreneurial spirit.
Additional reforms are still being structured by the executive and legislative powers, namely, reforms of the public administration and Brazilian tax system, seeking better productivity, reduction of unnecessary costs, greater rationality and the organisation of taxes collected by the public authorities.
Besides these aspects, which have resulted in the reform and organisation of public administration, other factors have also contributed to the economic and real estate market upswing, including:
• the recent and very drastic reduction of the Basic Interest Rate (SELIC), benefiting especially investment in real estate and stimulating the directing of resources to real estate investment funds, which also attract investors due to the existing tax benefits;
• the Brazilian Central Bank has had great success in the strict control of inflation, which has continuously been even lower than the annual target set by economic policy;
• real estate credit is once again becoming more attractive as banks are offering lower annual interest rates, promoting the financing and acquisition of real estate at a lower cost; to this factor is also added the historically repressed demand for new real estate, both residential and commercial, plus the fact that the demographic in Brazil is still quite young and there is a lack of houses throughout the country; and
• assets and especially real estate assets are still undervalued, especially in terms of the exchange rate of the Brazilian currency when compared to other currencies, leading to additional appeal in cases where the purchaser has a foreign currency such as dollars or euros.
In view of this scenario, it is also possible to distinguish some trends in investment and legislative changes in Brazil, including the issue of investment in rural properties and the project for the regulation of foreign investment; multi-ownership; and real estate ventures in co-working, co-living, and studios. We will discuss these trends further here.
Acquisition of Rural Properties in Brazil by Foreign Capital
A very important and prominent issue that is being discussed and debated is whether the acquisition and lease of rural properties and farms through foreign capital should be allowed again, notably by Brazilian companies controlled by foreign shareholders (individuals or legal entities), which were incorporated in Brazil under Brazilian law. In 2010, the then-government restricted this and created difficulties that have prevented this type of investment ever since.
Given the new political scenario and greater clarification on the subject, the national congress initiated Process of Bill No 2963/19, already at an advanced stage in the federal senate, which proposes, in short, the removal of restrictions and impediments for Brazilian companies controlled by foreign capital to make investments in farmlands through acquisition or lease, except for in the Legal Amazon, coastal and border areas, thus also respecting national security. The Bill would still maintain the restrictions on all foreign individuals or legal entities, and also restrictions in the case of acquisition or lease by certain entities such as non-government organisations (NGOs), foundations, sovereign funds, entities and companies controlled at any level by states, which will need to request prior authorisation from the National Security Council.
This will be an important change which, if carried out, will certainly contribute to the desired rise in investment in the Brazilian economy and agribusiness.
In addition, this Bill would bring two other important changes that would also contribute to unlocking important investments. The first is the expected regulation of the possible occupation and use of rural areas by foreign investors in the energy and energy distribution sectors, since the current scenario prevents such companies from acquiring real rights and possession for permission, concession and authorisation to support the generation, transmission and distribution of electrical power.
The second amendment also seeks to clarify once and for all the possibility of such rural properties being offered as guarantee (eg, in obtaining financing and loans) to financial institutions and banks controlled by foreign capital, which would wrap up the awkward situation created in 2010 when the use of rural properties for this purpose was prevented, for no apparent rational reason.
The proposals contained in the Bill have certainly encouraged Brazilian society to debate how new investments could be made to the benefit of society as a whole, generating wealth, economic development and new workplaces and jobs, as the Bill would also enable such investments in a more rational and organised manner in farms and rural areas.
New Property Ownership Structure – Multi-ownership
Another new legislative factor that is increasing the possibility of acquiring real estate in Brazil, notably in the field of leisure and hospitality/holidays, is the legal concept of multi-ownership.
This new form of condominium was created by Federal Law No 13777, also known as the multi-ownership condominium, which allows several owners to own the same real estate in such a way that the ownership of each of them is associated with a certain period of time, during which that owner can exclusively enjoy the property. Each period is a minimum of seven days a year and the duration can be modified from one year to the next, as long as previously agreed by the owners.
This new mechanism seeks to implement the traditional “time-sharing” system in Brazil that exists worldwide, fragmenting the domain of the owner in time periods.
It is already possible to verify an increase in investment in the hospitality market, with families who previously had no means or economic possibility of acquiring their own holiday property, now able acquire a share of it. Also, in traditional residential real estate developments, this legal concept is being used especially in large urban centres.
Hot Spots in the Real Estate Development Industry
After a long period of economic stagnation, Brazil is beginning to show signs of recovery and one of the main sectors that is enjoying growth is civil construction and the real estate development market, which figure as protagonists of the new economic expansion, and which are also expected to contribute to the growth of gross domestic product.
This recovery, together with the fact that there is still a large housing deficit in the country of around seven million homes, underlines the huge potential of the Brazilian real estate market and the opportunities it holds for investors.
The resurgence of the real estate market also enables real estate developers to create and develop new products aimed at meeting the new ways of living and residing in modern cities, namely:
Studios with a small private area but with several possibilities of shared use in common areas, such as laundries, cafes, rooftops, home theatres and meeting rooms, among others, make up a large part of new developments in big urban centres, especially in São Paulo. This city also has the advantage of a local zoning plan for large skyscrapers, which allows for more effective use of build footage.
In this sense, there has already been extensive growth in the order of 20% in the medium and high-standard residential segments of São Paulo, and it is expected that this growth will spread to other regions of the country. As an example, in the year 2019, there was a growth of approximately 50% compared to the previous year in the development of new projects solely in São Paulo. Sales have also increased, reaching the highest numbers since 2004.
Co-living and co-working projects
Co-living and co-working projects also focused on sharing spaces and experiences proliferate, counting on the individual use of bedrooms and living rooms, but with services for the benefit of all.
Renovating, refitting and restyling projects
A new modality of business is also beginning to consolidate in the market, and this is the acquisition of used high-profile residential real properties by companies specialised in renovating, refitting and restyling them, to later put them on sale in the market, all through internet platforms and mobile applications. This new sector has also led to the creation of a Brazilian unicorn, with a real estate start-up being valued at USD1 billion, further promoting the real estate industry. This activity has already spread into the country and seems set to spread abroad.
Also, other sectors and segments of the local real estate market have performed remarkably well:
- the corporate building market has increased occupation in Rio de Janeiro and São Paulo, offering signs of recovery in this sector, with vacancy rates falling to below 20% in São Paulo. These rates have also declined in Rio de Janeiro, especially in the central region and across Porto Maravilha, a recovered and reurbanised region overlooking Guanabara Bay;
- the development of logistics centres has also grown, due to the increase in online purchases by consumers;
- given the drastic reduction in interest rates paid by the federal government, there has been a sharp rise in demand for investment in real estate investment funds, leading to growth in the number of investors holding shares in the over 390 currently existing funds, which rose from 200,000 to over one million in 2019; and
- it is also important to note that the federal government has started a process of selling several properties under its ownership, which may also foster new business and revenues.
Further to the positive fundamentals of the Brazilian economy and real estate sector mentioned here, it will be important to observe the development of the global COVID-19 crisis, considering that in Brazil, early preventative sanitary measures were taken by government authorities, including municipal, estate and federal bodies, which could therefore restrict its impact in the country.
Given all the evidence, the search for new business in the sector has intensified, with good opportunities for local and foreign investors, due to the fact that the local currency has depreciated in comparison to other strong currencies, making foreign investment even more attractive.
The structural reforms which have been undertaken and the new laws which have been passed, in association with low inflation and a greater supply of credit under lower interest rates, have led to positive expectations regarding the Brazilian real estate market.