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.