The Right Brazil Property Investment

Demand within Brazil property looks set to continue for at least the next two decades with the market offering some of the best investment opportunities around. But as always, the secret to high returns is choosing the right sector for your investment in Brazil.

And all the signs are pointing to the middle and lower ends of the Brazilian property market as the areas where demand is highest and supply lowest. On the other hand, at the other end of the spectrum, the luxury property market is clearly showing signs of strain.

Over the last two years, investor focus – both Brazilian and foreign – has been firmly on the high-end of the Brazil real estate market. Properties priced over R$700,000 (€315,000) have seen spectacular rise prices, particularly in Rio de Janeiro and Sao Paulo, prompting speculation that the luxury property market is about to peak.

But while the top end of property investment may well be in danger of collapse, other market sectors are showing quite the opposite.

Prices have also risen in the middle and lower ends of the property market and construction continues apace, but demand still has a very long way to go before it comes close to meeting supply. Wilson Amaral, Chief Executive of Gafisa, one of Brazil’s largest real estate companies, claims that Brazil needs to build 1.6 million new properties every year just to satisfy demand from families entering the market. And all this without even addressing Brazil’s massive shortage of homes, currently estimated at around 7 million.

Quoted in the business broadsheet, Valor Economico, Mr Amaral said that “if Brazil goes on growing at 5% to 6% a year, with salaries rising above inflation and young people entering the job market, demand will go on rising at current levels for the next 20 years”.

His predictions echo the Ernst & Young report, Sustainable Brazil – Housing Market Potential, which describes meeting demand for property in Brazil as a “huge challenge”. Statistics in the report point to an increase of 58% in the number of households in Brazil by 2030. This together with a rapid increase in purchasing power leads Ernst & Young to forecast the construction of 37 million properties in Brazil over the next two decades.

A huge slice of these homes will be built for Brazil’s fast-emerging middle classes, indicating that this sector is the one with the biggest investment potential.

Meanwhile, the Brazilian government is focusing on meeting some of the demand. The state housing programme, Minha Casa Minha Vida aims to build 3 million homes by the end of 2014 through heavily-subsidised loans. But it’s more than obvious that Minha Casa Minha Vida will only go part of the way to help reduce demand.

Buyers in the middle and lower sectors of the Brazil property market tend to have a bigger stake in their homes than those in more developed markets. Brazilians buying off-plan typically pay 25% to 30% of the property price in monthly installments over the construction period. As a result, buyers are much more price sensitive and house prices in this sector of the market tend to experience a slow but steady rise unlike the steep price hikes seen in luxury property.

So, while speculation in the high-end property market in Brazil’s big cities is expected to lead to the market peaking in the very near future, the very opposite is true for the middle and lower sectors. Here, the combination of relentless demand – that’s unlikely to be met for at least 20 years – and buyer profile means there’s scope for successful investment in property for many years to come.