A housing boom in Rio de Janeiro has given international investors a chance to own second homes.
A housing boom in Rio de Janeiro has given international investors a chance to own second homes.

Global investors home in on Brazil

Sand, sea and samba. Brazil's beautiful beaches, bustling economy and exotic nightlife have always been a favourite of the world's financial community. But now global property investors, including those from the UAE, and second-home buyers are moving in.

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The South American giant is in the middle of what the international analyst BMI calls "an epic real estate boom". Home prices rose 20 per cent last year, an expansion rate that is only a distant memory in most parts of the world.

"Brazil ticks all the boxes [for property investors]," says Paul Preston, the managing director of Elysian Properties, one of several local companies promoting property in the country.

Brazil's economy continues to surge despite the global downturn, with GDP expanding at an annual rate of 5 per cent, thanks to a diverse manufacturing base and escalating energy sector.

Brazil will get another boost when it hosts the 2014 FIFA World Cup, which has already provided a huge infusion of infrastructure spending. And the Olympics will take over Rio de Janeiro two years later.

The property industry has been one of the major beneficiaries of the economic growth. More than 30 million Brazilians have joined the middle class since 2003 - and they are eager to buy homes.

At the same time, financing is more widely available, resulting in millions of home buyers using mortgages for the first time.

"For 100 years people in Brazil couldn't buy property because they couldn't afford to buy property," says Sam Rodgers, the Middle East and North Africa director for the Bric Group, another company selling Brazilian property in the Middle East. "There is a massive housing deficit."

Between 5 million and 8 million homes are needed to meet the demand, economists estimate.

To help to spur construction of affordable homes, the government in 2009 launched a programme called Minha Casa Minha Vida, which aims to subsidise construction of more than 3 million houses by 2014.

The result is a rare opportunity for international investors, who can target domestic housing projects as well as the beachfront resorts that typically attract the attention of the global industry.

"Interest in Brazilian property has surged in the last five years," says Liam Bailey, the research director at Knight Frank, a property agency based in London.

There is still a lack of transparency in the market, high inflation and an overvalued currency, Knight Frank notes in its research. And the current levels of capital appreciation are almost certainly unsustainable.

But increasing foreign investment, expanding tourism and the availability of financing should spark continued growth.

In prime locations, such as the fabled Ipanema beach, prices for new apartments were up more than 30 per cent in April compared with the same period last year, Knight Frank says.

As a global property market Brazil is still in its infancy, with only 1 per cent of wealthy investors in North America targeting the country, compared with 17 per cent who favoured France and 12 per cent looking at Mexico, according to Knight Frank.

"At present, US and Latin American investors predominate," Mr Bailey says. "But we expect the origin of investors to diversify in the next five years particularly given Brazil is to be the host country for the 2014 soccer World Cup and the 2016 Olympics placing it firmly in the spotlight."

Prices in Brazil are still far below what can be found in most mature European and Latin American markets, even in beach resort areas.

Mr Rodgers' company is selling 450-square-metre plots in an unbuilt development on the waterfront for US$36,500 (Dh134,065). Apartments in the development are priced at $188,000.

In most areas of the world, off-plan sales in projects such as the one marketed by Mr Rodgers have dried up. Too many investors were burnt in the global property collapse by projects that were never built or did not live up to expectations.

But Mr Rodgers says he has sold 250 plots and apartments in the past year, primarily to buyers from the UAE, Kuwait and Qatar.

A security industry executive based in Dubai, who asked not to be named, recently bought four plots valued at between $60,000 and $65,000 each in Rio Hills, a 3.3 million sq ft development next to Lake Guarapine in the state of Rio de Janeiro.

He bought the property even though he has never been to Brazil. "You can live in Brazil easily, you can start a business easily and you can get your money out easily," he says.

The buyer plans to build a house for himself and either rent or sell the other parcels. He investigated India, South Africa, Spain and other markets but concluded those countries are "not booming like Brazil".

Mr Preston's company, which owns Rio Hills, has sold 35 plots in recent weeks. He plans a trip to Qatar next week to market the project, focusing on the demand for housing and Brazil's growing economy.

"People are investing in a market where there is demand for the product," he says.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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