Despite Slowdown, Brazil Commercial Real Estate Remains Hot and Talk of a “Bubble” Increases

Brazilian commercial city São Paulo has become one of the world’s most expensive cities to rent prime office space, with a square meter costing about $110 USD in some districts …

Brazilian commercial city São Paulo has become one of the world’s most expensive cities to rent prime office space, with a square meter costing about $110 USD in some districts of the city, according to Fabio Maceira, CEO of real estate investment consultancy Jones Lang LaSalle Brazil.  As a whole, according to recent data from Global Property Guide,  real estate prices have continued to move upwards amidst growing concerns that the Brazilian property market may have been overheated.

Brazil’s economy has been slowing down in the recent past, yet real-estate developers are not seeing any decrease in the demand for property.  “The overall vacancy rate climbed 4.2 percentage points since mid-2012 but there is plenty of demand to sustain high rental rates in the country’s most prominent markets,” LaSalle says. Brazil is also the emerging country most considered for real estate acquisitions this year, according to a survey conducted by the Association of Foreign Investors in Real Estate (AFIRE), the Wisconsin School of Business and the James A. Graaaskamp Center for Real Estate.

Simply put, Brazil’s real estate market is hot. And it has been hot for at least the past three years.

The FIPE ZAP property index, which collects data on a monthly basis, illustrates this trend. Home prices, according to the FIPE, have risen between 7% (Fortaleza) and 27% (Curitiba) in the past 12 months.

The Property Bubble

From the outset it seems a bubble is being built up in the housing sector, but Luiz Antonio Graça, President of Brazilian consultancy firm Brasil Real Estate, says that is unlikely.

“We have the opposite here: Mortgages lending is granted with discretion, the balance between collateral value and debt is positive, and interest rates are within acceptable levels for the overall Brazilian population. Moreover, unlike the situation in the U.S. and Spain, for example, the vast majority of lending here is granted for first home purchases. What can happen from time to time is a momentary oversupply of a product, which is normal in the housing market. And most foreign companies have understood this,” Graça explains.

A growth slowdown would be a more appropriate designation. “We believe there is still room for growth in the sector, however, it will happen at a slower pace, not only because the value of real estate should be approaching its saturation point, and geographic expansion and development of new land in urban environments [will soon] see less available space, but the gradual recovery of the U.S. and European markets will take investments back to these economies,” said Christian Majczak, Director of consultancy Go4! Consultoria de Negócios.

Yet, office rents in Rio continue to outpace inflation, and tenants have already committed to leasing the majority of the projects still under construction that will add another 166,000 square meters, Lang LaSalle reported. São Paulo added 330,000 square meters of office space in the second half of 2012 and is expected to add 524,000 more square meters by the end of the year.

Majczak says office buildings will always be in high demand, especially in large cities, due to the aging of buildings in use, or changes in lifestyle (i.e. people seeking housing, retail and office space in the same development).

This is great news for office-using companies, as an uptick in supply gives tenants more leverage to negotiate prices. In fact, this oversupply of properties has caused rental prices in Rio to drop by about 0.1 percent for the first time since 2010, according to data from FIPE.

“In addition to Brazil being a country with areas of high socio-economic diversity, there is currently some stability in property prices due to high vacancy. This stability can generate lower prices because the economy is sluggish, but eventually this price drop can increase occupancy rates and thus encourage the builders to resume construction,” Graça explains, adding that despite recent local socio-economic concerns, companies looking to buy or rent office space in Brazil are still enthusiastic about the real estate market.

“Brazil always surprises companies in a positive way, because the country has an enormous range of opportunities,” Graça says.

The Market Breakdown

In Rio de Janeiro, property prices grew 15% in the 12 months ending in August 2013, according to FIPE ZAP. Demand for office space is expected to remain high, Majczak says, as the city, home to firms like Petrobras, is still attractive for its flourishing oil industry and because of the 2016 Olympic Games.

In the northeast region, Salvador and Recife have a lot more room for growth, with both having the added appeal of major trade ports and huge tourist industries. In the south, cities like Porto Alegre, and Joinville in the state of Santa Catarina,  have been attracting a lot of interest, so there is still  a lot of room for growth, according to Majczak.

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Finally, prices in São Paulo and Curitiba (the city with the highest increase) grew 13.7 and 26.8% respectively, but are now beginning to slow slightly.

The extended rate, which calculates prices from São Paulo, Rio de Janeiro, Belo Horizonte, Brasília, Curitiba, Florianópolis, Fortaleza, Niterói, Porto Alegre, Recife, Salvador, Santo André, São Bernardo do Campo, São Caetano do Sul and Vila Velha e Vitória, show a 12-month increase of 12.3%.  As said, rental prices in Rio decreased 0.1% in August, but have increased 7.5%t so far this year. In São Paulo, lease prices were up 0.4% in August and 4.5% in the year.

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