Hot Brazil
 In anticipation of a boom, property investors are keen to get in on a market that is currently offering undervalued real estate.
By Simon French
Published in Square Foot Magazine on March 15 2007
There have been many reports in the international press of late, promoting Brazil as a place to visit, do business in or live. This has led to a flurry of activity amongst overseas buyers keen to purchase Brazilian real estate.
Brazil, officially the Federative Republic of Brazil, covers almost half (47.3 percent) of South America, and is its largest country. Brazil's stable government, strengthening currency and effective inflation control, along with an enticingly low-cost of living (one-third that of Europe and the United States) and the prospect of high capital gains, are all factors appealing to investors.
And property prices are low. Where else can you find prime, beachfront property for the price of a studio apartment in a European city?
On the way up
Historically, Brazil's economic fortunes have been mixed. However, it is now keen to assure the world that it is on the way up. In 2002, whilst America was focusing on a potential war against Iraq, Brazil became part of the BRIC alliance, signing a trade and cooperation treaty with Russia, India and China and securing an agreement to supply these countries with raw materials and natural resources. Following this, the country's GDP grew by 5.3 percent, its fastest rate since 1996.
Since 2003, President Lula's administration has steadied exchange rates and aided social stability, and today Brazil ranks as the 13th largest economy on the planet. Leading financiers Goldman Sachs see Brazil placed amongst the top five world economies by the year 2050. As one of the world's largest countries, with a current population of over 180 million, Brazil's economic potential is enormous.
All-time low
 Property prices are at an all-time low in many locations in Brazil, meaning investors are now recognising the huge potential for profits on real estate. The major investment area of Bahia, on the northeast coast, boasts stunning beaches and a balmy tropical climate, bringing with it the prospect of increased property development projects and growing numbers of tourists.
The city of Sao Paulo is at the brink of a real-estate boom, shaking off its unstable image and emerging as a thriving city, attracting much business relocation from foreign companies. Experts also predict that Rio de Janeiro, with its long history of tourism, is about to see a significant growth spurt in terms of real-estate development.
All along the northeast coast, top-class resorts are springing up, with supporting infrastructures to boost the tourist industry. In Bahia for example, award-winning Breezes Costa do Sauipe is a top-quality multi-resort complex with five miles of unspoiled beach, offering sailing and equestrian activities as well as golf.
The booming tourist industry is creating a huge demand for accommodation and shrewd property investors are acting early, purchasing bargain properties with a view to generating good rental yields. Meanwhile the market is gaining momentum and property prices are steadily pushing upwards.
Reasons for a boom
With 4,500 miles of coastline and a year-round tourist season, Brazil is set to benefit purchasers with buy-to-let investment strategies.
The exchange rate is exceptionally favourable at the moment making it very cheap for Hong Kongers purchasing in dollars to buy property. In the past, Brazilian currency was artificially linked 1:1 to the US dollar, while today it is 2:1 (one dollar buys a little more than two Brazilian Real).
Also, the cost of living in Brazil is much lower than in Hong Kong, and as a result, the cost of maintaining and managing property is very low.
According to NASA, northeast Brazil has the second cleanest air in the world, second only to Antarctica. Not surprisingly, it's becoming increasingly popular as an expatriate retirement haven.
Growth is centred on the coastal destinations of Fortaleza, Salvador and Natal in particular, where a new airport is located. It will be the eighth largest in the world. Ease of access to and from North America and Europe looks set to increase, with costs of travel reducing each year.
There are no complications regarding property ownership in Brazil. The buying process is pain-free and investments can be purchased as 100 percent freehold.
Understanding the risks
As Brazil will be experiencing a large volume of construction over the next few years, investors should keep a watchful eye on the potential for oversupply.
Make sure the property you choose is "special" to lower your risk. A unit needs to be in a prime location, for example a corner beachfront unit or a penthouse with outstanding views. You need to be confident that the investment can be adapted in case you cannot find a buyer prior to completion of the property.
On a purpose-built resort, ensure adequate and multiple facilities are provided on-site. If you are drawn to a unique residential complex, that does not have on-site facilities, ensure that it is not in too remote a location.
Brazil's infrastructure is developing apace so, when choosing property, consider the positioning of new airports, roads, hotels and tourist facilities, slated for completion within two years.
Finally, income earned from property in Brazil is taxable whether or not the investor resides in Brazil. Non-residents are usually subject to a capital gains tax rate of 15 percent. However this figure is subject to alteration depending on any double taxation treaties in place between Brazil and the investor's country of residence. Property purchase tax is not charged on short-term investment, as the investor never actually takes ownership of the property by signing the completion documents.
Projections
Price appreciation is due to accelerate in 2009 when major infrastructure and tourist industry advances have been completed.
To make the best possible returns on a buy-to-flip strategy in Brazil, spread your investment across multiple property units, as the purchase prices are so low. By doing this, you avoid relying on only one property to attract a buyer and are more likely to release your capital upon exit of the strategy.
This short-term investment strategy is purely based on capital, as little or no finance options are yet available in Brazil. However with the decrease of interest rates, a mortgage lending boom is expected and consequently, an increase in the value of Brazilian real estate.
PURCHASE COSTS JUST 7 PERCENT
- 3.5 percent ITIV (similar to VAT)
- Notary fees of 1.25 percent
- Deed registration of 0.75 percent
- Legal fees of up to 2 percent
- Property tax in Brazil is just 0.6 percent, although this percentage is based upon a value inferior to the actual valuation of the property
- It is recommended that all investors receive legal advice before signing a purchase contract
LOW PRICED HOTSPOTS
- At Itamaraca (near Recife), a five-bedroom villa is going for $171,000, just 300ft from the beach
- A four-bedroom villa in Recife (the fourth largest city in Brazil) is on the market for $674,000. It's located on a hill overlooking the old town and the Atlantic
- A brand-new condo right on the beach in Taiba (near Fortaleza) is going for $400,000
|
