Resicom – Holiday Investment – 04-21 – LB

Cheap housing withstands Brazil’s depression

While the dramatic slump in the overall Brazilian property market continues to deepen, demand and sales remain strong in the low-income housing sector. While a struggling economy has led to mounting mortgage rates, rising inflation and high unemployment, people still need somewhere to live. Brazil is suffering from an estimated housing deficit of four million and there is still huge pent-up demand for property among those workers with just enough income to buy their own homes.

Government support

The prospect of those on modest means being able to buy a small house or apartment is made possible through the My House, My Life government housing subsidy programme, which has a 2015 budget equal to $3.73bn (£2.38bn). President Dilma Rousseff has promised that the program will be shielded from upcoming budget cuts due to its recognised broader economic benefit.

The government also requires employers to pay into a workers’ severance fund, which is often used to buy a home, as its returns lag behind inflation. Proposed reforms that would increase the returns may be good news for the workers but may impact negatively on the real estate market, as they would reduce the incentive to invest the money in property.

Low-income segment holding firm

Gafisa SA’s Tenda division, which focuses on the low-income segment, is set to launch new projects valued at over $570m by the end of 2016. Gafisa’s shares are up by 14%, while MRV Engenharia SA, which also concentrates on low-income housing, has seen its stock remain stable. Compare this to Brazil’s Benchmark Index, which has dropped by 2%, and falls of up to 76% in the share value of other Brazilian real estate developers that concentrated on high-end property following the boom of four years ago.

Boom and bust

 Around 2011 Brazil saw a dramatic economic upturn that greatly expended the country’s middle class. This led to a massive surge in home purchases as millions of first-time buyers came onto the market and others started looking for bigger and better properties. Prices increased by up to 30% annually, with an associated rise in the value of commercial real estate as businesses and service industries thrived.

This led many developers to launch major housing projects aimed at the middle- and high-income bracket; however, this sector has been decimated by the recent economic slump, with mortgage funding much harder to obtain and many luxury apartments now sitting empty, while ambitious construction projects have largely halted.

No sign of recovery

Brazil’s central bank recently raised its interest rates to the highest rate for nine years. The result is that a basic savings account with a 9.2% return is a better bet than the average rental yield of around 4.7%, even without the growing risks of rental default and possibly a long and expensive eviction battle.

While many investors have lost confidence in the market and are staying away altogether, others are demanding discounts of up to 30% on the asking price for apartments. As Brazil enters its worst recession for 25 years, experts say prices show no sign of recovery in the foreseeable future.

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