RICS International Summit Brasil: 2030 – The Future of Real Estate and the Built Environment

RICS International Summit Brasil‘2030 – The Future of Real Estate and the Built Environment’ was the theme of the RICS International Summit last week in Sao Paulo and it was well worth the trip.

Some key facts / predictions about Brazil:

Brazil’s economy is predicted to expand from US$2.3 trillion in 2013 to US$3.8 trillion by 2030.

Over this period the population is expected to increase by 10% according to RICS CEO Sean Thompson although this looks like an underestimate given the annual number of births and deaths and the expected increase in average life expectancy from 74.8 years to 78.6 over the same period (this alone is 5%).  The Brazilian institute for geography and statistics (IBGE) actually predicts an increase of 10.75% between December 2013 and December 2030 (17 years).  This compares to an actual increase of 7% between December 2006 and December 2013, and 0.9% in 2013 alone.

Here are a few ‘take aways’ with some comments:

Alexander Ellis, British Ambassador to Brazil, commented that ‘the time of big cities has arrived’. This is an interesting question: as the world gets more and more connected, as transport improves between cities and as Sao Paulo gets increasingly more congested, now may be the time of big cities, but the future may be more about many smaller cities with good infrastructure, intercommunicating well with each other.

Maílson da Nóbrega, the ex ‘Ministro da Fazenda’ (more or less equivalent to our Chancellor of the Exchequer) gave a punchy and highly structured speech.

On the one hand, he believes that Brazil has ‘lost dynamism’, that consumer confidence is dropping, that inflation is higher than desirable (c 6% compared to 4.5% – not really a big issue), and that the present government (of which he is clearly not the world’s biggest fan) has lost credibility when it comes to fiscal policy (creative accounting caused the downgrade in S+P’s rating earlier last week to one notch above junk). He believes that intervention by the current government has caused various problems including interest rates being manipulated downwards at the wrong time causing inflation. With a conciliatory tone, he accepted that President Dilma now realises that the Brazil Central Bank should have more automony. The government intervened in the energy market and now ‘we’re hoping on rain to stave off power cuts’ (a reference to fact that more than 75% of Brazil’s energy is hydro-electric ). He disagrees with protectionism (import taxes can be 50% of the value of the product).

These problems are however all relatively short term. On the other hand, he believes Brazil is a good long term bet because it has sound institutions: Brazil is a democracy, it has an independent judiciary, it has a free press and there is market discipline. He also believes that as Brazil has US$ 375 in foreign reserves it is able to weather economic shocks.

Mr Nóbrega believes Brazil is not on the brink of crisis but currently is in a ‘low growth’ crisis – growth is predicted to be about 2% this year, but this disguises huge regional variation.

He thinks Brazil has one of the most powerful markets in the world when it comes to housing. Housing credit according to him amounts to 20% of GDP compared to 70% in the USA. He sees huge room for expansion. He also believes there are safeguards in place to prevent a real estate bubble: Brazilians have to make a downpayment of up to 30% of the value of the property and there is a limit to how many mortgages one Brazilian can have.

He sees 5 sectors for expansion:
Real estate
Agri-business
Retail
Banks / financial institutions
Healthcare

Mr Nóbrega says that Brazil is ‘part of a new Latin America’ which includes Chile Mexico, Colombia and Peru and is typified by a capacity to detect and correct errors. He contrasts this with the ‘old Latin America’ which has a populist approach and includes Argentina, Bolivia, Equador and Nicaragua.

He sees the characteristics of the new Latin America as having a strong state, rule of law (respect for agreements and a right to property) and accountability (note that Brazil has convicted many politicians recently on corruption charges).

He believes that Brazil has crossed the Rubicon: there is ‘permanent stability in politics and economics’ and the country is in the antechamber of the ‘rich country club’. He sees the risks as lost opportunities and lower growth.

Following Mr Nóbrega’s gripping talk, came various other speakers.

Amanda Clack, a partner in PwC’s infrastructure team gave a very interesting talk. Infrastructure is clearly a key requirement to support the growing economy. She reported that there are 500 infrastructure projects in Brazil worth around US$420 billion but that 60% of these are in the very early phases.

She believes that Brazil should create a 50 year plan and devolve responsibility for infrastructure projects to an ‘infrastructure strategic board’ so that political change every 4 years is able to interfere less.

She identified three aspects to administering infrastructure projects: investment, testing and changing commuter patterns.

Amanda Clack believes that there is huge potential in Brazil to use the water resources both coastal and inland to move freight.

She sees the difficulties as bureaucracy, the legal system, complexity, the bidding and infrastructure process and the lack of know how. Coincidentally last week several companies involved with the Sao Paulo metro system including Alstom and Siemens were being investigated for forming a cartel in supplying the local government.

Ms Clack notes that Brazil ranks 104th out of 140 countries in the WEF’s assessment of infrastructure quality and that this drags GDP down.

She believes that between 2009 and 2030 air travel within Brazil will grow by a 5.65% pa: from 111 million to 352 million passengers. There is clearly investment potential there, and several people seem to have realised it judging by what has happened to Gol’s share price over the past couple of weeks: Gol’s share price is up 10% in a month and 31% since it’s low point on 14th March. Gol is either the biggest or second biggest carrier in terms of passengers carried within Brazil.

She believes that it is ‘crunch time’ for Brazilian infrastructure: only 12% of the road system is paved and this needs to improve, there are different rail gauges which makes intercommunication more difficult.

She reported that CEOs say infrastructure is very important and that well-developed infrastructure drives competitiveness.

During the afternoon session, there were several talks by investors and the key theme that came out of this was that now or soon is likely to be a buying opportunity in Brazil. Jules ‘Jay’ Marling IV made the point, in Portuguese, that Brazil is no longer an emerging market: it has already emerged.

IMF slashes Brazil GDP growth estimate for 2014

There were no surprises at the IMF’s decision to maintain their growth estimate for 2013 at 2.5% today, but the decision to reduce the 2014 estimate from 3.2% to 2.5% took some by surprise.

The countrywide figure of 2.5% masks huge regional variation in Brazil. Agriculture has performed very strongly this year following the reduction in the value of the Real and regions where agriculture is one of the principal economic drivers – such as Goiás – are likely to show stronger growth than 2.5%.

At 2.5%, the growth estimate for 2014 is the lowest among key emerging economies, according to the IMF:

GDP growth estimates by IMF @ 8-Oct-13
Country 2013 2014
Brazil 2.5% 2.5%
India 3.8% 5.1%
China 7.6% 7.3%
Russia 1.5% 3.0%

Brazil 2013 inflation and growth expectations on the rise, but slower growth anticipated for 2014

According to the Banco Central do Brazil’s latest economic forecasts, inflation is expected to be 5.83% in 2013 (market consensus) – average expectations were at 5.75%  a month ago.  A similar level of inflation is expected in 2014.

GDP growth (PIB) is expected to be 2.32% in 2013, up from 2.24% a month ago.

Expectations for economic growth in 2014 are on the decline – the average is currently 2.30% compared to 2.60% a month ago.

Brazil’s economists suprised by strong growth in Q2 2013

Brazil economy growth Q2 2013The Brazilian economy as a whole (PIB) increased by 2.8% over the year to the end of Q2 2013.  In the second quarter of this year alone, the growth was 1.5% which surprised economists who were expecting more like 1%.  This combined figure masks the disparity between the different sectors of “the economy of Brazil”;  the components are: agriculture 3.9%; industry 2.0% and services 0.8%.

The weakening of the Real, combined with an undiminished world appetite for food, has proven a real boon for the agricultural sector.  When the data comes out for the different regions of Brazil it is likely that the economy of the state of Goiás, and others where agriculture is a principal economic driver, will show stronger than average growth.

While the economy as a whole has grown, household consumption is reported to be weak and this has led to increased stock levels.

The expectation for Q3 2013 is for much weaker growth, of c. 0.5%, and the expectation for 2013 as a whole is for around 2.5% growth but that is looking conservative.

Against the Brazilian Real (BRL) The £ (GBP) has risen in value by 41% between August 2011 and August 2013

graph BRL-GBP Aug11-Aug13

From an internal perspective, the fall in the value of the Real may be down to two things:

1.  Less than exciting growth prospects combined with rising inflation

In January 2013, the government’s prediction for PIB (broadly equivalent to GDP) growth was 4% for 2013.  It was revised down to 2.2% recently.  At the same time, inflation is predicted to be around 5% in 2013.  This equates to negative real growth i.e. in terms of purchasing power, people in Brazil with Brazilian Reals will be able, on average, to buy fewer goods with their money at the end of the year than they were able to at the beginning of the year.

2.  The protests

These have quietened down considerably since July, but they may have (in my view wrongly) rattled the confidence of some leading to the outflow of international money.

The value of a currency is of course the result of an equation, and UK economy is now clearly recovering, which has lead to the British Pound being more attractive to international investors – this outside influence on the value of the Real is something that news reports in Brazil rarely consider.

So what does the future hold?

In terms of the outlook, interest rates may rise further (the key Selic rate rose was increased from 8.5% to 9% yesterday) with a view to curbing inflationary pressures which in turn may see the Real strengthening again.

The lower value of the Real should provide a huge boost to Brazil’s export market, as produce will appear to be cheaper to international buyers.  This should see regions where a significant part of economic output is based on agriculture (like Goias) growing more strongly than city regions like Sao Paolo.

While there has been asset inflation since 2011, assets in Brazil, especially real estate, may now represent good value for money for British investors.

16 million people in northeast Brazil without electricity yesterday

For two hours yesterday, 16 million people were without electricity in northeastern Brazil.

The cause was put down to fires in the state ofPiauí which saw the power level in the north-east drop from 10,000 mW to 1,000 mW.

This power outage highlighted the weaknesses in the infrastructure in some areas:  some hospitals were left without power because they do not have emergency generators, causing nurses to have to operate manual ventilating machines for patients who are unable to breath unaided.

July 2013 protests in Brazil may signal a positive future for the economy and real estate

The protests are believed to have started in Goiânia over a bus fare increase of over 10%, from R$2.70 to R$3.00.  This was the straw that broke the camel’s back:  people have, apparently, been complaining in Brazil for a long time over the state of education, transport, crime, healthcare services and corruption in politics but generally within the four walls of their houses.

When a great deal of people have to travel into Goiânia to work, frequently needing to take two buses to get there, public transport can amount to over R$10 per day.  On the basis of say 22 working days in the month, this cost can equate to a third of the income of someone earning the minimum wage which this year increased by about 9% to R$678, about £205 per month.

When the court ordered the fare increased be reversed, it was by then too late to stop the public from voicing their anger – it had broken free, and spread throughout Brazil.  While there has been some violence which has made the headlines, the vast majority of the protests have been peaceful.  There has been very little violence in Goiânia linked to the protests.

People in Brazil resent the amount of money being spent by politicians in the context of the quality of healthcare education and so on, e.g. the governor of Rio de Janeiro was recently in the news for frequently taking his family, and pets, in a state helicopter to his beach house.  The amount of money he is spending on helicopters has doubled since 2007.

There is speculation that the new football stadia will be white elephants after the the World Cup, and the copa das confederações which Brazil just won:  the new stadium in the capital Brasilia was programmed to cost R$740 millions and ended up costing 40% more.  Brasilia has a relatively small football team which according to Wikipedia until recently played in a stadium with a capacity of 5,000; the new stadium has a capacity of 71,000.

The wave of protests may result in better transport services, better healthcare, better education which are all necessary for sustainable economic growth.  More prudent public expenditure should free up money for private investment which may in turn drive economic growth.  More prudent public spending can be combined with better public services.

The protests may be an early signal of forthcoming economic improvement and a reason therefore to invest in Brazil real estate, not to be scared off by the short term noise.