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Property Investment Strategies – Brazil

Below is an account of how and why Brazil provides an excellent property investment arena. Various investment strategies are available in Brazil and it is important to be fully aware of all the options prior to making an informed decision.

General Factors

Predictions by leading financiers, Goldman Sachs, are ranking Brazil amongst the top 5 world economies by the year 2050. As one of the world’s largest countries, with a current population of over 180 million, Brazil’s economic potential is enormous. The current availability of cheap labour and materials, coupled with comparatively low real estate prices, means the conditions for growth are quite outstanding.

Major investment is ongoing to improve Brazil’s infrastructure and create purpose-built eco-friendly tourist facilities. Due to increased government efforts, Brazil’s tourism market continues to grow steadily, with visitor arrivals rising by 9.6% in the first quarter of 2007, when compared with the previous year. Furthermore, Wilma Faria’s PSB government estimates that in eight years Rio Grande do Norte, currently with 45 thousand beds, will see an additional 140 thousand beds, clearly indicating the vast proportions of tourism growth this particular State is set to undergo.

Growth is being centred on the coastal destinations of Fortaleza, Salvador and Natal in particular, the location of a new airport which will be the eighth largest in the world and the largest in South America upon its completion in June 2009. Easy access from North America and Europe is on the increase, while costs of travel are dropping each year, giving Brazil a truly global investment and tourism appeal.

With a tropical climate, world-famous, beautiful beaches and a year-round tourist season, Brazil is set to benefit purchasers with buy-to-let investment strategies as well as those looking for above average returns on their overseas holiday properties. The low cost of living (now approximately 20% of that in the UK) also appeals to investors and tourists looking for a lower cost alternative to the peaking Caribbean market.

There are no complications regarding property ownership in Brazil and investments can be purchased as 100% Freehold.

Economic Factors

Inflation has been drastically reduced over recent years and currently stands at around 5.7% with good signs that this trend will continue. This, along with a favorable exchange rate, has encouraged many major international businesses to produce their goods in Brazil at a fraction of former costs.

Brazil already has the tenth largest GDP in the world, being the largest global exporter of coffee, oranges and sugarcane. Since the country’s new administration took office in 2003, the government has succeeded in creating an economy ripe for foreign investors and actively promotes a fiscal and political environment conducive to further growth.

Brazil is counted as one of the four largest developing economies in the world today, along with China, India and Russia. Indeed, Goldman Sachs predicts the Brazilian economy will be of a similar size to that of Japan in 2050 if current initiatives and trends continue successfully.

Political Factors

Brazil is a Federal Republic with an elected President serving a 4 year term in office. Luiz Inacio Lula da Silva, who was elected in January 2003, is widely considered to be a reformist.

Since the election in 2003, tourism has been a top priority in the government’s agenda and the creation of the Ministry of Tourism in 2003 underlines this commitment. During 2005 alone, 210,000 jobs were created in the tourism sector and in excess of $736 million was invested by the government to upgrade the infrastructure around all major tourist resorts.

The Brazilian government has also launched a National Tourism Plan, with clear objectives as follows:

  • Attract over 9 million foreign tourists per annum
  • Generate 1,200,000 new jobs
  • Receive 8 billion dollars in foreign currency
  • Develop at least three quality resorts in every Brazilian state
  • Increase the number of domestic travelers to 65 million per annum

Finally, the present government has instigated numerous fiscal reforms, aimed at boosting Brazil’s economy throughout every industrial sector, including tourism. Many new eco-tourism projects are being strongly supported by the government, bringing with them foreign investors, jobs and tourists; all vital components to Brazil’s ongoing economic success.

Natural Factors

With over 8,000km of virtually unspoilt beaches, the Brazilian coastline is possibly the most impressive in the world and many beautiful lagoons can be found bordering the coast. The coastline is blessed with fertile lands which are home to a multitude of palm trees and plantations, offering visitors a truly Tropical environment. Brazil is also home to the great Rain Forests and the Amazon River.

Compared with other Tropical destinations, Brazil does not suffer from extreme weather such as hurricanes, flooding or tropical storms, nor is it ever affected by earthquakes. Temperatures remain almost constant throughout the year, with averages in the north east of 27ºC.

According to NASA, north east Brazil has the second cleanest air in the world, second only to Antarctica!

Logistical Factors

Brazil is approximately 10 hours flight away from Central Europe, and closer still to North America. Tour Operators such as Thompson Holidays already operate competitively priced direct services into Natal. It is a trend of the European travel industry that where one tour operator goes, the others soon follow. Therefore, the frequency and number of routes available to travelers can safely be expected to increase dramatically, precipitated by the opening of Natal’s vast new airport facilities at São Gonçalo do Amarante, due to open in 2009.

Accessibility is to be a major factor in boosting Brazil’s so-far untapped potential, particularly in developments within easy travel distance of international airports. Road and rail improvements are also taking place to compliment the new airport and encourage more visitors to the area.

Meanwhile, construction is now underway to accommodate the huge influx of tourists and investors to Brazil, while timely buyers are anticipating lucrative returns once projects come nearer to completion. Major entry points include Rio de Janeiro, Sao Paolo, Salvador, Natal, Fortaleza, Brasilia and Belo Horizonte. However, it must not be forgotten that Brazil is a vast country (the 5th largest in the world), so these entry points may not necessarily be close to your particular destination. Investors must of course check journey times when assessing travel options.

Short Term Investment Strategy

Key Opportunity

Brazil is widely considered to be one of the brightest emerging property markets of the world. Massive tourist potential for the near future encourages property investment. Brazil has great appeal amongst North Americans and Europeans, including Scandinavian investors who are particularly enthusiastic about capitalizing on Brazil as a tourist and investment location.

Real estate prices are still low in Brazil, giving many investors a strong opportunity to profit in the short term from Brazil’s burgeoning property investment market. Early projects are being constructed in beautiful, eco-friendly beachfront locations. Discerning investors are making sure they act now while prices remain at current levels, safe in the knowledge that they will be seeing potentially reliable returns on their investment.

Timescale

Average construction time on Brazilian projects is 18 months. If investors are looking at the short term, the average term of the investment should be between 12-18 months from reservation to resale.

Payment terms for most projects at this time are 30% upon signing a purchase contract, followed by one or several stage payments prior to completion. The remaining balance will be payable upon full completion and purchase of the property, although buy-to-flip investors should successfully avoid the final payment if they manage to re-assign their property contracts prior to completion.

Level of Complexity

Short term strategies in Brazil are low in complexity due to the fact that there are no ongoing property costs applicable in terms of property management. The purchase consists of a simple capital investment with no need to progress to a purchase contract or make any finance arrangements.

Furthermore, in most cases, for Brazilian off-plan investment, there are no charges made by the developer for assignable contracts, although this should always be checked on a case by case basis.

In the majority of cases, once the full deposit payment is received, the ‘flip’ may take place at any stage after the signing of the purchase contract.

Key Risks

It is important for the investor to be aware of how attractive a chosen property will be to buyers when there is so much other construction underway. The more outstanding the chosen property unit is, the lower the investment risk.

A unit needs to be in a prime location to attract the buyer, for example a corner unit on frontline beach or golf location, alternatively a penthouse with outstanding views. A standard first floor unit with pool views will generally take longer to sell than a similar

Competition is another critical factor. If there is a large volume of construction or existing properties at the investment location, investors will need to keep a watchful eye on the potential for oversupply. In Brazil, there will be a large volume of construction in progress for the next few years, although end users will still be buying throughout this initial development phase and looking for the best completed property on the market.

Investors should bear in mind that Brazil is still an investor’s market: completion of the new airports, roads, hotels and tourist facilities are underway and, while some are complete, much is still to be done, making now an ideal time to invest in this growing market.

On a purpose-built tourist resort, it is important to ensure adequate and multiple facilities are on-site. The investor should remember that many unique residential complexes may not have on-site facilities and if this is the case, for practicality’s sake the development should not be situated in too remote a location.

Finally, if a buyer is not found prior to completion of the property, the buyer will need to be confident that the investment can be adapted accordingly and full completion achieved.

Return

Capital appreciation levels are at their highest early in an investment market. Brazil has some of the lowest real estate prices in the world today considering the quality and type of units that are available, and it is set to see some significant increases from current levels in the foreseeable future. According to IPIN research taken from developers’ conservative estimates, buyers should expect to see growth of approximately 20% per annum.

Potential returns in Brazil are far greater for mid to long term investors. Price appreciation is due to accelerate in 2009 when major infrastructure and tourist industry advances have been completed. However, even over the intervening two years, capital appreciation is predicted to be high, and conservatively estimated at 25%.

To make the best possible returns on a buy to flip strategy in Brazil, it is recommended that investors spread their investments across multiple units as the purchase prices are so low. By spreading investments, investors avoid relying on only one property to attract a buyer and release their capital upon exit of the strategy.

Please see the example below:

  • A fully furnished, 3 bedroom villa unit is reserved for €85,000
  • The investor pays 30% deposit of €25,500 upon signing the purchase contract, plus expected legal costs at this point of approx €1,000.
  • The second 20% stage payment is completed at €17,000 when the developer completes the skeleton structure, approximately 3 months after the initial deposit payment.
  • The third 20% stage payment of a further €17,000 is paid upon completion of the roof structure.
  • After year one of the investment, capital appreciation has realised at 25% for the year, giving the property a new value of €106,250.
  • The investor decides to instigate an exit strategy after 16 months (just prior to completion), with capital appreciation continuing to perform at 25% per annum, meaning the property is now valued at €115,106.
  • The investor attracts a buyer for the property before proceeding to purchase contract, just 14 months into the investment.
  • Total capital invested is €60,500.
  • Sale price is €115,106.
  • Having recouped €59,500 of capital invested and seeing growth on the sale of the unit of €30,106, the total profit realised with this short term strategy is €29,106, an amazing return on capital invested of over 48% in a short 14 month investment timescale.

Financing

This short term investment strategy is purely based on capital, as little or no finance options are yet available in Brazil. However with the decrease of interest rates, a mortgage lending boom is expected and consequently, an increase in value of Brazil’s real estate.

In order to cover all eventualities, investors must be confident they can complete if no buyer is found and a full purchase is necessary.

If necessary, consultations can be arranged on equity release from existing property.

Taxation

Income earned from property in Brazil is taxable whether the investor is resident or non-resident in Brazil.

Non-residents are usually subject to a capital gains tax rate of 15% on any gains made on properties in Brazil. However this figure is subject to alteration depending on any double taxation treaties in place between Brazil and the investor’s country of residence.

Property purchase tax is not charged on short term investments, as the investor never actually takes ownership of the property by signing the completion documents.

Medium to Long Term Investment Strategy

Key Opportunity

Capital appreciation in Brazil is predicted to continue at a steep rate for at least the next 5 years. Off-plan prices currently remain low, with development concentrated around prime locations such as frontline golf and beach. As time goes by, construction will move further from these prime positions, making later investments less effective. In general, the earlier the investment is taken on, the greater the capital appreciation an investor can realize.

Strict building height restrictions on frontline locations are in place in Brazil, meaning investors are able to invest in either exclusive frontline beach property or second line beach apartments which will all have direct sea views.

Rental demand is be strong in the most popular locations, particularly around Natal, Fortaleza and Salvador which are to be undergoing massive investment in facilities, infrastructure and resorts over the next few years.

Running costs of apartments in hotspots such as Natal are low and you can expect to pay monthly community fees of anywhere between €50 and €100, which can be covered by rental income.

Brazil property has great appeal amongst North Americans and Europeans alike, including Scandinavian investors who are particularly enthusiastic about capitalizing on Brazil as an emerging tourist and investment location. This global appeal makes Brazil an outstanding prospect for our investors.

Much of the bad press regarding violence in Brazil relates to the slums in Rio de Janeiro and Sao Paulo, which are several hours away by plane from the recommended investment hotspots. In truth, Brazil is as safe an environment as the likes of North America and Europe, which have their own problem areas.

Timescale

Average construction time on Brazilian projects is 18 months to 2 years. Investors can expect to see healthy rental returns on their investments within 2½ years, depending on their chosen investment location. These returns will coincide with the completion of major tourist facilities and improvements to the infrastructure.

Brazil is highly recommended as a 3-5 year investment. Although good returns can also be achieved on a short term investment strategy, the potential for even higher gains is strong with a mid-term strategy.

Capital appreciation is expected to perform exceptionally well over the next TEN YEARS, therefore the longer the term investors are able to leave their capital in the property, the higher their returns.

No finance is available in Brazil at the present time and full payment takes place over the course of construction. Typically, this is 30% – 20% – 20% – 30%, while purchase costs are settled mainly upon completion.

Level of Complexity

An ongoing investment in Brazil is no more complex than one closer to home. Investors will however need to have their full records maintained and ongoing taxation requirements will need to be met.

Full payment for the property needs to be made at various stages of construction prior to completion of the purchase when full costs will be applicable, of between 6% and 7% of the purchase price.

Investors on a medium to long term strategy will have ongoing payments to maintain, whether community fees, utility bills or loan repayments to fund the investment from another country. A Brazilian bank account will also need to be opened. Property Management companies may be hired by the investor to take care of some ongoing payments and arrangements. Rentals need to be managed, be it by a local management company in Brazil, or privately.

Key Risks

Medium to long term investment in Brazil is lower risk than a short term investment, which relies on finding a buyer within a very short time frame. Providing the correct investment is made on a good quality project with multiple facilities, establishing rentals and eventually a buyer for the investment should not be difficult, although patience may be required as with any property market.

Brazil is a vast country with a considerable coastline, so expect many more projects to be announced over the coming months/years, particularly in the prime investment locations of Natal, Fortaleza and Salvador. This means greater competition between investors, making the choice of location and project even more important to early buyers. However, this also means an inevitable increased volume of visitors, purchasers and rental tenants.

By appointing independent legal representation, the client can be sure that all necessary paperwork is in place before signing purchase contracts. Bank Guarantees are not common place in Brazilian property developments, however the best projects do have these in place to protect investors’ interests.

Property ownership is 100% freehold in Brazil, leaving no room for dispute.

Return

Capital appreciation in Brazil is currently steady, but expected to increase dramatically with the release of many new projects and improvements in the country’s infrastructure. Conservative growth forecasts over the next three years indicate annual levels of 20% as a base figure. Increased public awareness across the globe will also have a positive effect on the property market.

In order to maximize return, investors need to take up early opportunities in new developments, ideally at pre-launch prices or at pre-planning stage. Investors must expect initial pricing structures to be increased on projects after only a short period of general release. Trends indicate that developers are undervaluing units to encourage early purchasers, then increasing prices upon achieving a predetermined amount of sales. This is a highly lucrative opportunity for early investors looking for quick growth.

In addition, discount schemes, furnished options or other benefits such as exclusive allocations of prime units to IPIN are all effective ways to increase profit.

Please see the example below*:

  • A fully furnished, 3 bedroom villa is reserved for €85,000
  • The investor pays a 30% deposit of €25,500 upon signing the purchase contract, plus expected legal costs at this stage of approximately €1,000.
  • The second stage payment of 20% is made which equates to €17,000 when the developer completes the skeleton structure, approximately 3 months after the initial deposit payment.
  • The third 20% stage payment of €17,000 is paid upon completion of the roof structure.
  • After year one of the investment, capital appreciation has reached 25% for the year, meaning the property is now valued at €106,250.
  • The remaining 30% payment of €25,500 is made upon completion of the property. All remaining costs are also settled at this point to total 7% of the purchase price. Taking the initial €1,000 already paid, this equates to an additional €4,950.
  • Upon completion of the purchase 18 months following initial reservation, the total capital invested is €90,950. The property value at this point, with growth still performing at 25% per annum, is €119,531.
  • Over the following 3½ years, the investor decides to rent the unit out via a local management company which generates funds to cover all ongoing costs.
  • 5 years after making the initial payment, the decision is made to exit the investment. Having benefited from 25% growth per annum over this period, the property is valued at €259,400.
  • The investor sells the property at the valuation price. This represents profit on capital invested including costs met of €168,450, a return of 85%.

* This is a simple example to show appreciation potential without taking potential finance arrangements/costs and rental returns into consideration over the course of the investment.

Financing

The non-availability of mortgages in Brazil need not discourage investors from choosing Brazilian property. Release of equity from other properties, be it in their country of origin or in other investment locations, is often an attractive option. Sometimes on specific projects, mortgage products are arranged from alternative locations, such as Spain for example.

Inflation is continuing to fall in Brazil, meaning mortgage products should become available shortly as economic conditions improve. The future availability of mortgage product will have a positive effect on real estate prices throughout Brazil, an added factor in favour of early investors

Taxation

The breakdown of additional costs associated with purchasing a Brazilian property total up to 7%. These are broken down into 3.5% ITIV (similar to VAT), Notary fees of 1.25%, Deed registration of 0.75% and legal fees of up to 2%. Property tax in Brazil is just 0.6%, although this percentage is based upon a value inferior to the actual valuation of the property.

Capital Gains Tax in Brazil is 15% of any declared gains, subject to double taxation treaties in place between Brazil and the investor’s country of origin. It is recommended that all investors receive advice from their finance and/or legal advisors between making their reservation and going to purchase contract.

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