IS IT TIME TO BUY OR TO SELL?
A first ever survey of its type shows the real estate map of more than 1,000 neighborhoods in 41 cities and reveals that Brazil came in second with the highest surge in value in the world—but that the rise is starting to lose strength
Giuliana Napolitano, Carolina Meyer and Fabiane Stefano
Buying real estate is one of the rites of passage for adult life. People get married and dream of purchasing a home to have a solid base and raise their children. In the last six years, with the unblocking of real estate credit, roughly a million Brazilian families were able to materialize this dream. Since developers started offering ever more luxurious and comfortable buildings and subdivisions, the custom of measuring people’s social status based on the number of square meters and location of the home where they live has heightened.
As time went by, the increase in demand started pushing prices up at a frenzied pace. In 2009, real estate went up 22 percent in Brazil, the third fastest pace in the world. At the time, there was no lack of predictions that there was no more room for further increases. Then 2010 rolled around, values skyrocketed 25 percent, and Brazil took first place in the ranking of highest increases. In this process, the Brazilian real estate market became the most expensive in Latin America. Those who bought their homes before the boom saw their property values soar. And millions felt left behind –people whose income and borrowing power did not increase at the same rate as prices or, even more frustrating, people who thought too much and were run over by the avalanche. Prevented from materializing their home ownership projects so far, the “losers” of the recent real estate boom seemed doomed to buy something beyond their original plan—or condemned to renting. The good news: the movie may still have a happy ending.
At EXAME’s request, the Fundação de Pesquisas Econômicas (Fipe - Economic Research Foundation) a group connected to the University of São Paulo, conducted the broadest survey ever of the Brazilian real estate market. Fipe’s technicians analyzed real estate prices in 40 cities and the Federal District (Brasília)—that, together, have 50 million people and represent a fourth of the Brazilian population. The survey comprises, without mincing words, an unprecedented effort in the country to understand the reality of one of the most important sectors of any economy. In the pages that follow, the values of new and used properties are detailed for over 1,000 analyzed neighborhoods. All together, the survey shows an impressive strength on the Brazilian market. In the past 12 months ending in March, the high average of real estate values was 23 percent, the second greatest in the world—we only trailed India. But perhaps the most important observation is with respect to the last six months. It is clear that the crazy pace of valuation is starting to lose steam. During this period, the high was of 8.4 percent, still robust, but much less than the 13.5 percent during the same period a year ago. The deceleration is evident in six of the main Brazilian capitals: São Paulo, Rio de Janeiro, Brasília, Belo Horizonte, Recife and Fortaleza. “The high cycle in the Brazilian real estate market is tied directly to the expansion of the economy. When the idea of a ‘new era’ started to permeate people’s imaginations, real estate prices spun out of control. This clamber now appears to be losing strength”, says Robert Shiller, economics professor from Yale University and one of the foremost worldwide authorities on the subject.
Rio de Janeiro is an example of both phenomena portrayed in the survey, not only the increase in prices in the last year, but also the more recent slowdown. In the first quarter of this year, real estate value rose 4.1 percent, as compared to 9 percent in the first three months of last year. Even though the south district (Zona Sul) of the city is still regarded the Brazilian Manhattan, with the most expensive neighborhoods in Brazil, one can already find apartments at a discount in some parts of the city. The situation is not very different in Belo Horizonte. There, in the ultra-expensive neighborhood of Vila da Serra, developer Cyrela has spent over two years trying to shed ten units of the Olympus development. Even the desirable city of Brasilia went through a similar situation. In the Setor Noroeste, (Northwest Sector) developer Rossi lowered the price per square meter of units in the Persona Libertate condominium project from 11.000 to 8.000 Reals. The perception that prices were increasing at an unsustainable pace, linked to the uncertainties on the international market, made the Brazilian consumer start to take longer to close a deal. While a couple of years ago entire developments were sold on a single weekend in São Paulo, now it takes, on average, two months to unload the newly-launched buildings. “There is no more rush. Consumers have been analyzing each project calmly”, says Mirella Correa, a partner of the São Paulo-based Lopes real estate company. The number of units financed in the entire country in the first quarter of this year fell one percent when compared to the same period last year, according to the Brazilian Association of Real Estate Credit and Savings Entities. It is the first reversal in the pace in the last ten years. This statement is being felt by the developers. In 2010, the sales pace in nine capitals of the country was 15 percent, that is, of every 100 homes available for sale in the month, 15 were sold. In the first quarter of 2012, this rate was 10.4 percent. “The sector is very sensitive to price perceptions,” says Fábio Nogueira, CEO of Brazilian Mortgages, Brazil’s largest mortgage company. “When they go up a lot, people tend to wait for a slump to buy.”
A NEW MOMENT
Which of the two facets of the market—the one that produces the second largest valuation in the world or the one that shows developments taking time to be sold—best translates the current moment? That question is decisive in knowing what to do now. And there is no simple answer, since the Brazil of today is a mix of optimism (if compared to the rest of the world) and disappointment (if compared to the almost delirious predictions made by investors and members of the administration). Slowly, the notion gels that we are in the middle of the road—much better than most, but far from the most robust countries. The slower pace of the economy (the gross domestic product grew 2.7 percent last year and the estimate is for a figure not very different from that for this year) has a direct impact on the real estate market. Generally speaking, prices rose much more than wages. Not even the fall in interest rates for real estate loans—that, on average, slumped from 14 percent in 2006 to 9 percent this year—was able to compensate for this. In São Paulo and Rio de Janeiro, real estate increased in value, on average, 80 percent to 110 percent in the last four years. There are cases where values more than tripled. During this same timeframe, the population’s income grew less than 30 percent. And Brazilians’ debt burdens rose from 27 percent of annual wages in 2007, to the current 44 percent.
Faced with consumers who are not as willing to pay any price for property, developers went back to the drawing boards and revised their plans for 2012. The 11 publicly traded development companies are poised to release projects worth 41 billion Reals in sales. While the total is a billion above than last year, the pace has clearly slowed down. Since 2009, launches had been growing at 20 percent a year. The high point now was 2.5 percent. The reason for this deceleration in launches is the current supply of unsold properties, estimated at 30 billion Reals, the highest ever in Brazil. Given this fact, most developers are expected to focus their efforts on liquidating their current supply. Companies like Gafisa, Even and Trisul have already offered discounts of up to 30 percent on some projects. The moment, therefore, begins to favor the buyer (see graph on page 42). “For the person who wishes to buy a property, this is a good opportunity”, says Eduardo Gentil, partner in the São Paulo-based Trust Gestão Imobiliária consultancy firm. “Developers are flexible to negotiate prices and forms of payment. But one must choose companies with a history of quality and punctuality in delivery.”In economics, “when” is just as important as “what”. Timing analysis is decisive in differing the current
real estate sector. In the short run, it is clear that the market is going through an adjustment. In the months ahead, the expectation is that prices, on average, will increase more or less in line with inflation, following the pattern of more mature markets. In a certain way, this is similar to the path followed by other segments of the Brazilian economy. The strong increase in demand for goods and services did not keep pace with investments. There is no lack of examples of this: the increase in the number of passengers at the airports, the growth of freight at the ports and the increasing number of cars on the roads. In the real estate sector, the euphoria experienced in the past few years has unveiled several chokepoints: shortage of labor, raw material price increases and logistical knots. The result has been apartments delivered beyond due dates, quality issues and a flood of dissatisfied customers. Not to mention the busting of developers’ construction budgets—Cyrela alone realized a bust of 500 million Reals in 2010. “Developers discovered that they were not being able to handle the expansion,” says Eduardo Zylberstajn, a researcher at Fipe responsible for the survey.
Since the slower momentum among developers was offset by less buyer greed, the result is a more balanced market—in fact, good news. But things change when one’s vision moves to the more distant future. The interest rates for real estate credit—the main engine of real estate purchases—should fall more in the coming years. The latest Central Bank report depicts a basic interest rate of 8 percent in 2012—if confirmed, the lowest level in history. International experience shows that when the cost of financing falls, consumers respond. In Chile, considered the most developed Latin American real estate market, the real estate interest rate was 7.5 percent in 2002. Today, it is 4.5 percent. In this period, the representation of real estate credit in the gross national product rose from 12 to 20 percent.
In Brazil, credit for real estate accounts for a mere 5 percent of gross domestic product, but this may double in upcoming years. This would add a volume of 700 billion Reals in finance contracts by 2017—more than triple the current amount. And credit will add more fuel to burn in the sector, driving new rounds of value surges (hence, the news appears to be better for those who are on the selling end). Especially because, compared to the international market, real estate is still cheap here. There is no evidence of issues that sink entire economies, such as in Spain. As can be seen below, from the north to the south of Brazil, the signs are positive. That’s great for those who invest in real estate. Even better for the county’s economy.
With reporting from Bruno Ferrari, Cristiane Moraes, Daniel Barros, Daniela Rocha, Guilherme Manechini, Julio Lamas, Marcio Kroehn, Mariana Segala and Patrick Cruz
HOW TO MAKE A GOOD DEAL
THE ADVICE OF TEN REAL ESTATE MARKET SPECIALITS ABOUT WHEN TO BUY, SELL AND INVEST IN HOMES AND APARTMENTS
Real estate prices are going up less. Is it a good time to buy a home?
It depends. Generally, specialists say that a person who has found the home of “their dreams,” compared prices and found that the values were in line with the averages charged in that neighborhood should buy. Most of the specialists do not believe in price drops in the upcoming months, but there may be discounts on specific projects (developers have made promotions to sell homes or apartments they have had a hard time selling). The advice is to take advantage of these discounts, but to not get tied to them. “Buying a home is not just a financial decision. There may be a similar home that is cheaper, but most likely it will not be in the same region, it won’t offer such a good playground for the kids, etc. All of this has to be taken into account, not price alone,” says Curitiba financial consultant Mauro Halfeld.
Is it a good time to sell?
The market is more difficult. In 2010, according to the realty companies, listed real estate was practically sold real estate. The speed of sales in São Paulo, the largest market in the country, reached a record of 31 percent between 2009 and 2010—which means that 31 percent of the homes put up for sale were indeed sold in fewer than a month. Currently, this speed has fallen to roughly 11 percent. The national average fell from 15 to 10 percent during this period. Before selling, the property owner should decide what to do with the money. If he/she is buying another property, he/she should research prices to determine if they will be able to afford the purchase with the price they get.
Real estate prices are high. Is it worth investing in a residential property to collect monthly rents?
It’s only worth it if the monthly rent equals at least 0.6 percent of the value of the property (something like 7.5 percent per year). That is a yield equivalent to that of a savings account—and can be more than a Certificate of Deposit (DI fund) if the Selic rate (interbank discount rate) slumps to 8 percent per year, as many economists expect. Getting to 0.6 percent is not an easy task. That’s because the biggest readjustments only happened on finance contract renegotiations, which, in general, happen every three years. Beyond this, there is always the risk that the property may be vacant for a certain amount of time, which leads to losses. Another issue: if real estate finance interest rates go down even further, it may be better to buy than to rent, which would further reduce the amount of possible renters, and, thus, rent price.
People who bought homes during construction and then sold them made good money in the last five years. Is there still room to repeat this strategy?
Very little. For two reasons. First, because home prices are going up more slowly—in some places, the increase in price from project launch to delivery has been less than that of a fixed-term investment, when accounting for expenses on taxes, property registration fees and realtor commissions—between 2006 and 2010, in extreme cases, some individuals bought homes during construction and resold them upon delivery with profits of up to 300 percent. Furthermore, developer delivery delays can hinder the negotiation of the property on the market—in this case, investor profits take even longer to be realized.
With falling interest rates, is it possible to renegotiate real estate finance terms (refinance) and get lower rates?
Yes. Since 2006, those who have a bank mortgage can transfer the debt to another financial institution if the terms are better. But it is necessary to do the math to determine whether the savings made with interest actually offsets the fees that the banks and registries charge for the transaction. The estimated cost is 1 percent of the property price and must be paid up-front. The Treasury Department informed us that they are studying ways to cheapen this debt transfer, but that there is no timeframe for this. And, most likely, this will never be as easy as changing cell phone providers. |
