Real estate investment in Brazil 2016 and beyond By Markunas

With Brazil’s recession, political disarray and justifiably anxious and muddled market outlook by foreign investors, I thought it was a perfect time to take a closer look at Brazil’s real estate investment climate - as seen by both Brazilian and foreign real estate players. With this in mind, I helped organize and moderate an industry panel and presentation for an event, co-sponsored by the Brazilian-American Chamber of Commerce, Inc. - NY and the NYC Chapter of FIABCI. Held on November 3, the presentation was hosted by the prestigious law firm of Chadbourne & Parke. The panelists included: Brazilian economist Paulo Vieira da Cunha, Head of Macroeconomic Research, Ice Canyon LLC; Miguel Jerónimo, a Portuguese national, director of EMBRATUR (Brazilian Tourism Institute) in charge of promoting Brazil as a tourism destination; American Josh Pristaw, co-founder and senior managing director of GTIS, a global real estate investment firm headquartered in New York with offices in Sao Paulo and myself, a Brazil real estate industry consultant. Indeed and not surprisingly, insights and reflections from the speakers (and many in the audience) suggest a fragile and pessimistic outlook on Brazil. Current Distress • Unemployment continues to rise; • Banks are not financing deals easily or cheaply; • Shrinking mortgage market; • Federal government has a negative budget for 2016; • Political scene is in deep and real chaos; • President doesn’t have support of Congress; • Middle class deteriorating; • Elevated household debt burden; • High corporate leverage; and • Rising inflation, interest rates, corruption, etc, etc. Brazil’s real estate market (like other domestic markets) has been in absolute decline during 2015. We can easily predict how difficult 2016 will be. Some say Brazil’s recovery will be slow and only truly start a comeback  in 2018. As such, the sentiment that a perfect storm is brewing. These are conditions for investors who have or who are developing short-term tactics to purchase real estate i.e. distressed assets - with an accompanying long-term vision. Foreign investors with purchasing power and the ability to re-position assets will be in excellent condition to take advantage of Brazil’s market disequilibrium. The question is whether a foreign investor will want or have the incentive to enter the market to take advantage of the devaluation of the Brazilian real against the dollar or euro, looking for distressed assets. Why? First, there are uncertainties as to expectations that there will be any returns on investment during the crisis.   With the probability of zero or depreciating returns during 2016 and most probably during 2017, cold-blooded decisions must be made whether to risk investing in Brazil. Secondly, and it’s worth repeating, investors must be in it for the long-term considering the uncertainly of how or when, market rate returns make a comeback. The Real Estate Market Calendar and Clock Perfect storms pass. The clock is ticking. So what’s on the horizon? How should investors generally perceive asset values and time-frames? It’s considered that retail and middle-income residential markets are still in free-fall while hospitality, office and industrial/logistics are already hitting the bottom of the market. Buying, holding and re-deploying assets from 2016 through 2018 seems to be a plausible time frame. Thoughts on Minha Casa Minha Vida/Social Housing The low-income housing program Minha Casa Minha Vida (MCMV) “My House My Life” remains a government priority. However, with a budget deficit, the government made it clear that MCMV will not have the same velocity of growth as forecasted. As such, MCMV will also suffer from the crisis, despite being a strategically important housing program for the federal government. Investor discretion and caution are mandates in MCMV investments - now through at least 2017. What About Land? Another asset class (land) and strategy (land banking) should be considered by long-term investors. There are tremendous opportunities to buy raw or currently unproductive land at tremendous discounts to appraised values, located near existing industrial hubs, urban centers or close to major transportation corridors. With this investment model undeveloped land can be purchased and returned to productive use or held and sold later at a significant return. Pockets of valuable land for sale located near urban areas with exceptional upside potential have been identified outside the capital city of Sao Paulo in the State of Sao Paulo and near the capital city of Salvador in the State of Bahia. The Outlook It is generally agreed that 1) assets will be inexpensive with formidable upside potential, 2) market dynamics will create forced asset sales and bankruptcies, 3) currently there is finite investor competition with limited  capital available to take advantage of the current opportunity, and 4) there exists favorable long-term fundamentals in Brazil. That is to say; near-term distress with long-term growth. John Dean Markunas is the Brazil real estate industry consultant of RoJo Empreendimento, New York, N.Y.