Brazil’s real estate market showed signs of slowing to match the relative underperformance of the rest of the Brazilian economy on Monday.
The Brazilian market in real estate has been expanding rapidly in recent years and by international standards the growth rate in the industry has been extremely healthy, with real estate lending expanding at approximately 50% per annum in a boom that has lasted since 2006. However, the rate of expansion has slowed considerably in the last quarter.
While the Brazilian real estate market is still expected to show 20% growth over 2012, this is less than the 30% expected by Octavio de Lazari Jnr., President of the Brazilian Association of Home Loans and Savings Banks. ‘Now we are revising [our estimate] to an expansion of 20% amid the overall slowdown of economic activity in Brazil,’ Mr. Lazari explained.
Brazil is the largest economy in South America, and experts predicted a respectable 4.5% growth rate for the economy as a whole at the start of the year. However, this estimate has been revised down to a more modest 1.8% for the same period due to the poor performance of European and North American economies. This downturn comes at a bad time for Brazilian real estate companies, many of which have already been hit by lower-than-expected demand.
Although mortgage lending has risen this year, ‘real estate companies have reduced the volume of new launches,’ said Mr. Lazari.
Companies that raised Brazilian reais in the billions through capital markets to finance new building schemes have seen their properties stand empty, costing money instead of making it. Now Brazil looks set to be pulled into the general economic contraction triggered by the collapse of the American financial sector in 2008.
The news comes as Brazil’s second biggest homebuilder, PDG Realty, saw a 4% share price drop caused by construction delays and cost overruns. In the same week homebuilder Gafisa announced that it expected arbitration to buy its Alphaville development out, allowing the company to struggle back into profit.
Brazil as a whole has been described as suffering from ‘reform fatigue,’ following a series of government initiatives intended to stave off economic stagnation by stimulating business. However, criticism of these initiatives has pointed out the lack of basic structural reforms. The comparison is with Mexico, whose economy is being driven by industry as companies like VW move production there. Mexico is expected by some analysts to overtake Brazil economically by 2028-29: ‘If Brazil doesn’t pass any structural reforms and Mexico does, then the scenario ‘Mexico high – Brazil low growth’ seems the most likely,’ economist Benito Berber said.
One factor that has fuelled the Brazilian property boom has been the psychological impetus imparted by expectations of the FIFA 2014 World Cup, for which Brazil is constructing stadiums, and the 2016 Summer Olympics in Rio de Janeiro. This psychological impetus is not expected to outlast the Games, leading experts to expect a drop in Brazilian economic performance after 2017.
Maracana Stadium is being upgraded for FIFA World Cup 2014 and Summer Olympics 2016
In the present situation, some see an up-side to the deceleration. ‘It was simply not possible to sustain the previous level of annual growth in lending,’ said Jorge Hereda, president of the government-run Caixa Economic Federal mortgage bank. ‘Now, with a more moderate pace of expansion, we’re going to see more balanced development.’ Caixa owns approximately 70% of Brazil’s mortgage lending.
And the immediate future, at least, is expected to confound pessimism: Mr. Lazari hopes to see a ‘greater expansion in real estate lending’ in 2013 than in 2012, while most economists are predicting a growth rate for Brazil as a whole of 3% in 2013, with some forecasters expecting a return to 4.5% growth rates.