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Brazilian Real Estate Market

  • Overview

    According to data compiled and published by the IBGE, in 2007, the Brasilian construction industry accounted for approximately 7.32% of the country´s GDP. Between 2000 and 2005 the building supply chain averaged 13% of the Brasilian GDP.
    Brasil´s total investment in the real estate industry, however, has not been sufficient to eliminate its housing deficit. 
    In 2007 according to the Fundação João Pinheiro, there was a shortage of approximately 7.2 million housing units, 3.3 million of which were located in the Company’s regions of operations. The lower-middle-income housing sectors are particularly suffering.

  • Demographic and socio-cultural factors

    Many factors are coming together to support a high demand for residential properties in the coming years including a high percentage of young people, the declining number of residents per household and the preference of home ownership.
    According to the IBGE, between 2000 and 2007 the Brasilian population increased from 169.8 million to 183.9 million, representing an annual compound growth of 1.34%. Despite these figures historically the growth rates of the Brasilian population have been decreasing. 
    From 1970 to 1980, the population growth rate was 2.4% and from 1980 to 1991, the growth rate declined to 1.9%. 
    In spite of this trend, Brasilian population growth rates are still considerably higher than the average growth rate of the main Western European countries, which was 0.28% from 2000 to 2007, and of the U.S. population, which was 1.12% from 2000 to 2007.
    The progressive reduction in mortality rates combined with a natural slowdown in birth rates has resulted in a gradual aging trend of the Brasilian population, according to the IBGE, evidenced by the ratio of people over the age of 60 for every 100 children under the age of 5. In 2003 this indicator stood at 48.3 in 1981, rose to 76.5 in 1993 and reached 114.7. 
    In 2002, the number of people over the age of 60 had already exceeded the number of children under the age of 5. 
    Despite a narrowing age structure, the total young population of Brasil still represents a large potential for housing demand over the coming decades. In 2000, the population under the age of 25 represented 49.7% of Brasil´s total population versus 35.4% in the U.S. and the 28.9% in the main Western European countries.
    The number of residents per household in Brasil is also decreasing. The number of households increased by 12.4 million, between 1991 and 2000, representing a growth rate of 3.6%, compared with a population growth of 1.6% in the same period. 
    In 1970, the average number of residents per household was 5.28, falling to 3.79 in 2000. This reduction is mainly due to the decline in the average number of children per family and to an increase in single-person households. In ten years, the percentage of single-person households rose from 7.5% to 10.2% of the total number of households.
    Finally, the total number of housing units sold reflects a socio-cultural preference among Brasilians.
    Despite the high interest rates during the 1990s, home ownership as a percentage of total households increased from 70.8% to 73.5% from 1993 to 2005, while rental homes increased from 15.3% to 16.0%.

  • Real Estate Development in Brazil

    Although each region in Brasil has its particularities in terms of economic conditions and supply and demand for real estate, it is possible to identify some nationwide demographic, economic, financial, and socio-cultural factors that support the potential for growth of the Brasilian real estate market. 
    The Greater São Paulo and Greater Rio de Janeiro areas cover approximately 284,176.7 km2 and 43,797.4 km2, representing 2.9% and 0.5% of the Brazilian landmass making them the largest and most densely populated cities in Brasil. 
    The IBGE estimated that the populations of São Paulo and Rio de Janeiro were 10.8 million and 6.1 million in 2007, respectively, representing 5.9% and 3.3% of the total Brasilian population. 
    Both São Paulo and Rio de Janeiro have their own characteristics; in Rio de Janeiro, for example, income is more concentrated than in São Paulo. In addition, the real estate market in São Paulo is more fragmented in comparison with Rio de Janeiro. 
    Porto Alegre and Curitiba are capital cities in the southern region of Brasil and share common traits; including population, a high GDP per capita, and high education indexes. The two cities have recently adopted master plans in step with modern urbanization concepts. Because it is more flexible concerning the height of buildings and the use of land, Curitiba presents a more competitive final building cost than Porto Alegre, resulting in a lower final price of buildings in Curitiba.

  • Brazilian Real Estate Credit Policy

    Financial and Economic Factors 
    Due to the difficult economic situation in Brasil during the 1990s, inflation and interest rates were high, leading to an almost total disappearance of financing for residential properties. 
    During the early 1980s financing for residential property through the Brasilian government´s Housing Financing System fell from an average of approximately 500,000 units per year to an average of approximately 120,000 units per year by the late 1980s falling to 50,000 units per year in the first half of the 1990s.
    July 1994 saw the introduction of the Plano Real (the Real Plan), the average purchasing power of the Brasilian population increased: after inflation was drastically reduced, wages rose in real terms and interest rates fell. However, a series of crises in the international markets eventually prompted the Brasilian government to change the exchange policy in effect since the introduction of the Plano Real in early 1999. 
    This led to a sharp depreciation of the Brasilian currency versus the U.S. dollar and brought new uncertainties as to how much longer the low inflation rates that had been observed since the plan´s introduction would continue, and as to the possibility of lower interest rates. 
    The flow of funds to Brasil in 2002 was due to lack of confidence investors had in international markets and uncertainties in relation to the U.S. economy.
    The Federal Government began to ease monetary policy and reduce interest rates in 2003, which raised the availability of credit in Brasil. In 2004 there was a recovery in economy as a result of improvements.
    The volume of financing for real estate development and the interest shown by purchasers have varied according to interest rates and requirements imposed by the CMN regarding banks using funds deposited in savings accounts in order to provide financing. 
    Starting in 1997, both private banks and the Brasilian Federal Savings Bank, through the Brasilian government´s Housing Financing System, played an important role in providing real estate loans, particularly for lower-middle-income housing. 
    More recently, the CEF introduced a new system with more rigorous selection and client analysis procedures that led to lower availability of financing for lower-income groups. Economic and political uncertainties prompted private banks to restrict credit in general, which created purchasing difficulties for consumers with low purchasing power. 
    In response to the reduced amount of bank financing available, new types of financing have emerged, such as the issue of Real Estate Receivables Certificate (Certificado de Recebíveis Imobiliários), or CRI, Real Estate Receivables Letter (Cedula de Crédito Imobiliário), or CCI, Real Estate Credit Note (Letra de Crédito Imobiliário), or LCI, and real estate funds, among others.
    The Brasilian real estate industry, especially the residential and commercial developments business, is subject to numerous federal, state and municipal laws, rules and regulations. However, other than the provisions of the Unit Developments Law, there is currently no systematization or codification of the other rules applying to the real estate industry and/or to the development and construction of buildings, so that it are just a set of substantially scattered, sometimes vague, rules. 
    The development and construction of buildings is subject to rules and regulations on land use and development, state and municipal zoning, construction, consumer credit, consumer protection and government measures relating to instalment adjustments for inflation in the event of sales on credit, and other rules. 
    In addition, such activities are also subject to environmental, labour, social security and tax laws and regulations. The regulations can especially affect the development and construction of buildings in three areas: (i) regulation applying to a company as a developer and builder; (ii) regulation applying to development and construction activities; and (iii) regulation applying to the financing and sales of properties.
    The legal restrictions relating to the development and construction of buildings, such as those applying to zoning and the environment, have a relevant role in the design of buildings and can affect or even set the market profile of the products that are offered to the consumers. 
    The Brasilian Civil Code governs development obligations. Due to the importance given to real estate, transfers by deed between living persons are only possible if certain legal formalities are fulfilled, such as the registration of the transfer property with the proper real estate registry office. 
    The process of registration with the real estate registry is regulated by the law of public registers. As a general rule, the Civil Code requires that the transfers of properties be carried out by means of a public deed, except for the cases related to the Real Estate Finance System (Sistema Financeiro Imobilário), or SFI, the Brasilian government´s Housing Financing System, and some other exceptions provided for by law, for the purpose of offering greater security to the market. In addition, all transfers of title or real property encumbering are subject to annotation with the relevant real estate registry.
    The Unit Developments Law regulates real estate development, pursuant to which real estate development is defined as an activity performed for the purpose of fostering and carrying out construction for either full or partial sale of buildings or group of buildings made up of independent units.
    A developer in turn is an individual or legal entity that sells the independent units making up a development, irrespective of their construction. The owners or holders of purchasing rights on the development area are also considered developers. 
    The main duties of the developer are to:

    • Register the building with the real estate registry office;
    • Indicate the number of the building registration in advertising materials and the agreements executed with unit purchasers;
    • Make arrangements for the building construction, unless the developer discontinues the development
    • Transfer the unit to the purchaser exactly as described in the sales contract
    • Register the construction blueprint, the specifications and the agreement of joint ownership at the real estate registry office

    To complete a development, the developer may define a grace period within which the development may legally be discontinued, but such period is limited to the term of effectiveness of the registration (180 days) or, as the case may be, its revalidation. 
    Within 60 days of the end of the grace period, a developer should also execute the contract concerning the notional fraction of interest in the land, the construction contract and the condominium agreement. The construction of a building may be agreed to and paid for by the developer or the final unit owners. 
    Brasilian legislation foresees two building construction systems in the event of developments, implying construction under:

    • A turnkey contract
    • A construction management contract

    Constructions under a turnkey contract may be for a fixed price, meaning the price is set before the construction begins, or for a price adjusted for inflation, pursuant to indexes previously set by the parties. In the case of a construction management contract, also called “construction at cost,” purchasers of units in a building under construction pay the total cost of the production in monthly proportional payments. Hence, the sales contracts will not set a final unit sales price, as the law requires only the inclusion of an estimate.
    Asset Appropriation 
    A Special Tax System of Asset Appropriation was introduced in 2004. Under such system, developers may choose to submit a development to the special asset appropriation tax system by means of:

    • The delivery of an instrument opting for the special tax regime to the federal revenue office
    • The filing of this instrument with the relevant real estate registry office, thus subjecting the land and accretions comprising the development to the special tax regime

    Choosing to submit to the special tax regime is an irrevocable decision, effective for as long as the developer may have credits or liabilities against unit purchasers.
    In addition, under such system, the land, and whatever is built on it, the construction, any financial contributions, as well as any other rights and assets pertaining to the development, are to be kept separate from the remaining assets of the developer, thus constituting separate and specific assets. 
    The appropriated assets only answer for liabilities of the development itself, while having no connection with the other assets, rights and obligations of the developer, or with other assets previously appropriated. The developer is legally liable for losses it may cause to the assets allocated for appropriation.
    In the event of bankruptcy or civil insolvency of the developer, joint ownership of the construction under a condominium must be instituted by resolution of the unit purchasers gathered in a meeting called by the committee of representatives, by a judicial decision, or by the financing institution, in the event that the construction had been financed. The joint owners of the construction may resolve on whether to proceed or liquidate the appropriated assets.
    The developer´s bankruptcy or civil insolvency do not affect the appropriated assets, as neither the land, nor whatever may have been built on it, nor the assets, rights, obligations or charges of the development are included in the bankrupt estate.

  • Credit Policy Regulations

    Brasilian Government´s Housing Finance System 
    Brasil’s real estate industry largely depends on financing so the influence of the government´s credit policy on the development and construction business may become even more substantial.
    The Brasilian government´s Housing Financing System was created in 1964, to enable and promote the construction and acquisition of homes by the population, especially the lower-income population. 
    The following are members of the Brasilian government´s Housing Financing System, as financial agents;

    • Multiservice banks with a real estate credit portfolio
    • The federal savings bank, or CEF
    • Real estate credit companies
    • Savings and loans associations
    • Housing companies
    • Housing foundations
    • Social security institutions
    • Mortgage lenders
    • Mortgage funds of military clubs and pension fund associations
    • State and municipal pension fund associations and
    • Private pension funds and foundations

    The source of the financing within the context of the Brasilian government´s Housing Financing System is the funds deposited in the Unemployment Compensation Fund (Fundo de Garantia por Tempo de Serviço), or FGTS, and those deposited in savings accounts.
    The main requirements relating to credit extended within the context of the Brasilian government´s Housing Financing System for the purchase of homes by the population are:

    • Real property units are financed for the borrower´s own use as a home 
    • The maximum amount of each loan, comprising the principal and accessory charges, is R$450,000 or 90% of the property value 
    • The maximum sales price per unit is R$500,000 
    • The maximum actual cost for the borrower, including charges such as interest, fees and other financial costs, except certain insurance policies and monthly management fees under the loan, may not exceed 12.0% per year
    • If there is an outstanding balance at the end of the agreed term for the loan, the debtor is liable for it and the agreement may be extended by half of the initial term
    • The borrower should provide one of the following guarantees:
      • First-degree mortgage over property unit
      • First-degree mortgage or conditional sale of another property of either the borrower or a third party
      • Other guarantees, at the discretion of the financial agent. The guarantees, however, may be replaced

    Mortgage Portfolio 
    The financing funds in the Brasilian government´s Housing Finance System derive from the Unemployment Compensation Fund and from savings accounts. Nevertheless, not all the funds derived from deposits in savings accounts are allocated to the Brasilian government´s Housing Financing System. 
    At least 65% of the deposits should be used for real estate loans as follows: ‚ at least 80% for loans within the context of the Brasilian government´s Housing Finance System, including investments in securities, such as the LCI, the CCI, the CRI, or the Mortgage Bill (Letra Hipotec π aria), or LH, which derive from credits existing under loans granted within the context of the Brasilian government´s Housing Financing System; and ‚ the remaining 20% for real estate loans granted at market rates. 
    The 20% remaining balance indicated above, and used for real estate loans granted at market rates, includes the mortgage portfolio used by banks to grant housing loans. In this type of loan, the rates and loan amounts are usually higher than those practiced in the Brasilian government´s Housing Financing System.
    Real Estate Finance System

    1997 saw the creation of the Real Estate Finance System after the development of primary markets (loans) and secondary markets for the financing of real estate by means of the creation of advantageous remunerations and special instruments for the protection of creditors´ rights.
    One of the primary innovations was the permission to charge capitalized interest, formerly prohibited. In addition, the former prohibition on charging adjustments for inflation at intervals of less than twelve months no longer applies for real estate loans extending for more than 36 months.
    Operations involving real estate sales on credit, lease, or property financing, as a rule, may be agreed under the same capital remuneration conditions laid down for the financing of real estate. In such events, non-financial entities are authorized to charge capitalized interest rates in excess of 12% per year on the monthly payments.
    One of the main innovations was the creation of real estate conditional sales (alienação fiduciária), now consolidated as the prime guarantee in real estate financing. This type of conditional sale is similar to that adopted in Brasil for the financed sale of durable consumer goods. A real estate conditional sale is defined as "a legal transaction pursuant to which the debtor, or conditional purchaser, renders a guarantee whereby he/she/it agrees to transfer title to the real estate to the creditor, or conditional seller.” Conditional sales may be adopted by any individual or legal entity, rather than just the entities that operate in the Real Estate Finance System.
    In the event of a real estate conditional sale, such as in the case of conditional sales of other goods, if the debt is paid as agreed, the lender loses the property title previously transferred by the conditional seller, which recovers the title to the property used as collateral. Otherwise, if the debt is due and unpaid, the lender holds the title to the property, which nonetheless must be sold at a public auction within 30 days in order for the credit to be liquidated. 
    In contrast with what occurs in conditional sales of other goods, in real estate conditional sales the debt is liquidated and the borrower released from any further obligation even if the proceeds from the auction are insufficient to repay the lender. On the other hand, any of the proceeds from the auction in excess of the amount of the debt must be returned to the borrower within five days.
    The following types of guarantee apply to loans classified as a real estate financing:

    • Mortgages
    • Fiduciary assignment of rights under a credit resulting from real estate sales contracts
    • Pledge of credits resulting from real estate sales contracts or purchase and sale commitments

    The law also regulated the securitization of real estate credits. Although it was already possible to securitize real estate credits before the creation of the real estate finance system, the securitization authorized under the law allowed the creation of a specific vehicle for such type of securitization, with its own traits, such as the fiduciary regime, thereby making financing under this system less costly and more attractive.
    Credit securitization within the context of the Real Estate Finance System occurs through real estate credit securitization companies that are non-financial institutions organized as corporations and registered with the CVM as publicly held companies. The business purposes of such companies is to purchase and securitize real estate credits by issuing CRIs or other securities, including debentures and notes, backed by the real estate credits.
    The Real Estate Receivables Certificates, or CRIs, are credit instruments, or bonds, issued solely by real estate securitization companies, backed by real estate credits, freely negotiable, and are the equivalent of cash payments. These securities have certain characteristics, such as:

    • Being issued in book-entry form
    • The possibility of payment parcelling
    • The possibility of carrying either fixed or floating interest rates
    • The possibility of including adjustments for inflation
    • Registration and trading through centralized systems of custody and financial settlement of private securities
    • The possibility of adopting a fiduciary regime for the appropriation of credits and certain issued CRIs (thus constituting separate appropriated assets similar to the real estate asset appropriation system)
    • Carrying a floating charge backed by the assets of the issuer
  • Municipal Legislation

    Rio de Janeiro 
    The zoning, parcelling, and construction and building laws of the municipal area of Rio de Janeiro regulate the use of the soil in the municipality, including urban zoning, use of properties, intended activities, and construction and building types and conditions per zone. 
    In 1992, a ten-year plan was adopted, establishing urban policy rules and procedures in the municipal area of Rio de Janeiro, defining guidelines and creating instruments for enforcing that policy, as well as having set sectorial policies and programs.
     In 2002, a supplementary law extended the effectiveness of the plan until a specific law is enacted upon a review of the existing one, which, as of the date of this offering circular, is still pending.
    In 1999, new legislation was enacted providing for rules on the construction of apart-hotel buildings (called “flats” in Brasil), which are fully serviced apartments fitted for short-term rentals in the municipal area of Rio de Janeiro. It allows the construction of units with a minimum area of 30 to 50m2 and two parking spaces in the garage for use as service apart-hotels, amending a prior rule that required a minimum area of 70m2 for such units.
    A bill of law dated October 5, 2001, for a new master plan in the municipal area of Rio de Janeiro, had not yet been approved on the date of this offering circular.
    São Paulo 
    The Construction and Building Code was enacted in 1992. It regulates all administrative and Executive procedures, and sets forth general and specific rules applying to construction and building planning, licencing, execution, maintenance and use of works and construction of properties located in the municipality of São Paulo, in addition to establishing penalties and fines that apply in the event of noncompliance with such rules.
    The new zoning law in force in the municipal area of São Paulo, as published in 2004 and in effect since February 3, 2005, governs the parcelling, use and occupation of the soil. It contains technical and urban planning requirements for parcelling and establishes that any subdivision, land parcelling or separation of tracts of land will be contingent upon the prior authorization of the municipal administration. It describes the types of permitted use of the soil and their respective characteristics, having divided São Paulo into areas of use with fixed locations, limits and boundaries. It also provides for fines and penalties in the event of noncompliance.
    The current master plan and the planning system of the municipal area of São Paulo were adopted in 2002. A city master plan is the guiding tool used in urban areas and in zoning changes, and constitutes a reference to all public and private agents acting in the municipal area of Sao Paulo.
    Law No. 6.031, of December 28, 1988, regulates the use of the soil, urban zoning, use of certain areas, intended activities, as well as construction and building types and conditions in the urban zones of the municipality of Campinas, which has since then been amended by supplementary laws.
    Porto Alegre 
    The urban and environmental development master plan of the municipal area of Porto Alegre, approved by Municipal Supplementary Law No. 434, of November 5, 1999, regulates the use of the soil in Porto Alegre, its urban zoning, the use of certain areas and intended activities, construction and building types and conditions, and the environmental protection of each of the urban zones it establishes. That law has since then been amended by other supplementary laws.
    The Building Code of Porto Alegre, conveyed by Municipal Supplementary Law No. 284, of October 27, 1992, regulates administrative and executive procedures, and sets general and specific rules applying to construction and building planning, licensing, execution, maintenance and use.

  • Environmental Legislation

    The environment is protected by a set of federal, state and municipal laws, decrees, regulations and directives. For the most part, such rules govern the conservation of green areas, preservation of water sources and the control of solid waste and effluent disposal.
    As a rule, the states are more proactive in controlling developments that are actually or potentially deemed to be polluting. Such role may be performed directly by state environment offices or by their departments. 
    The protection of the environment is also exercised through municipal environmental offices and a federal agency, the Brasilian Institute of the Environment and Renewable Natural Resources (Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renov π aveis), or IBAMA.
    Environmental Penalties 
    Irrespective of the obligation to redress possible environmental damages, noncompliance with the laws and regulations on the environment may result in penalties of a criminal and administrative nature.
    The Environmental Crimes Law, the penalties applying to individuals, including professionals in the exercise of their duties, and directors, officers and managers of legal entities, may encompass restricted rights and prison time. 
    Legal entities are subject to fines, restricted rights, and provision of services to the community. From an administrative point of view, the penalties may range from warnings and fines to partially or fully suspended operations, and also the loss of, or limitation of tax incentives, and the termination of credit facilities extended by official financing institutions, as well as a prohibition on transactions with the government.
    Environmental Licensing
    If in any was work may imply environmental degradation, or potential pollution, environmental licensing is a mandatory requirement for any kind of activity 
    Any enterprise or development that has a local impact should be licensed by the municipalities. If it has a regional impact, such enterprises or developments are subject to licensing by state agencies.
    If any such enterprise or development subject to environmental licensing, for its size, nature and peculiarities, can have a substantial impact on the environment, then the licensing depends, for approval by the relevant authorities, on an environmental impact assessment and the submission of the corresponding report (called EIA/RIMA), which must be carried out and prepared by professionals specializing in different areas.
    In this event, the licensing proceeding should contemplate an environmental compensation, which translates into an investment to be made in either the creation or support of conservation units. The amount of the investments inherent to such compensation is arbitrated by the environmental authority and should not be lower than 0.5% of the total amount estimated to implement the enterprise or development.