A survey of 60 international investors (including private equity fund managers, investment bankers and real estate developers) released this week by Ernst & Young has found that Brazil will continue to be one of the most popular destinations in the world for residential property investment in 2011, and in fact will see the level of investment increase even further.
“Two-thirds of real estate investors with funds committed to emerging markets in Latin America have earmarked investment dollars for Brazil over the next 12 to 24 months,” says Rogerio Basso, the Latin American hospitality practice leader at Ernst & Young.
“That’s a pretty substantial statement for a country that less than a decade ago was considered high risk due to an unstable economy, hyperinflation, mounting debt and a volatile currency,” he added.
“Agreed” says Invest in Brazil director Richard Cash. “A year ago Ernst & Young concluded in their 2010 market report that Brazil would offer a strong opportunity for land investors. I would suggest this is still the case. I would also note that there is an appetite for international brand hotels in expanding their operations through Brazil, especially in areas of already high hotel occupancy in cities such as Joao Pessoa.”
Apparently residential and hotel investments are the two most popular sectors. According to the Ernst and Young survey hotel investments are the primary target of around 50% of the investors looking at Brazilian real estate investments.
“Brazil’s lodging sector is benefiting from an increase in middle class disposable income, as well as expanding business travel” says Basso.
The World Cup to be held in Brazil in 2014, and the Olympics in 2016 is also adding to the appeal of Brazilian hotel investments.
But the biggest problem remaining is finding hotels worthy of investment according to the survey, “it is currently tough for foreign investors to find investment grade hotel assets, and 60% of those entering the market are seeking to do it through joint ventures with established local players,” said the report.
60% was a common number actually, as 60% of those who plan to invest in the hotel sector said they planning to hold the assets for at least six years. This suggests that most investors see Brazil’s growth potential and large domestic market as a motivator for investment,” commented Michael Fishbin, Ernst & Young’s Global Hospitality Leader.
The other problems for investment in Brazil are the high taxes, high financing costs, restrictive labour laws, and a lack of information, especially on debt instruments in the real estate sector.
The high financing costs mean at least 30% equity is usually required to maximise to potential returns. This prompts most hotel investors to go down the route of building hotels within larger mixed use developments.
“It is not always easy either; mixed use resorts with land, with the right commercial planning in place, and with real appeal for international operators are still rare. The critical point for investors and developers alike is to have the right partners and the right project,” concluded Cash.
Photo credits: Mike Vondran via Flickr