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Monday, October 25, 2010

Value Brazil

How to Value Brazil Property and Land.

Please see an interview below with Aline Lisboa.
A fully qualified surveyor and valuation engineer with several years experience of examining real estate and land throughout Brazil.
-You can give our readers some information about your formation as a valuation engineer?
Like all engineering students, I gained my qualification from a state university (of Rio de Janeiro) and in the first part of my higher education, worked as an intern at an insurance corporation for six months.  My time here was spent supporting the overall operation of the organization as well as learning the fundamentals of property evaluation, feasibility analysis and several other topics which served to assist my engineering studies – in fact, I decided to extend my time there based in the organization’s consultation department.  Whilst studying still, I went work in the managing engineering department of the same company and I received a proposal from an ex-client (a bank that operates in six different countries who was also a client of this firm) to form the CONAI property and land evaluation company which, naturally, I jumped at.  Today, in addition to myself, we have an experienced architect, a qualified lawyer, an accounts team as well as administrative support and trainee engineers.  CONAI serves the likes of Banco Itaú, HSBC Bank Brasil, Brazilian Mortgages, Bancorbras, Banco do Brasil amongst others.
  Our operation is mainly focused on work with these banks on their credit lending, complemented by real estate and land viability studies; survey reports; detailed measurements and cost of works budgeting.  We also work with independent real estate companies and buyers, both small and large, in the same manner and our case load is increasing in line with the growth of the Brazilian property market.

-What are the main factors that should be taken into consideration when you approach the evaluation of a building or plot of land?

 From the outset, it is worth stating that approaching valuation should be viewed in essentially the same manner regardless of the type of real estate related asset – whether that is a field, an office space in a commercial building or a residential apartment.  In my professional view, perhaps the most important factor to consider is the location and neighborhood – something which remains fairly standard in most global marketplaces.  Of course, there are also other fundamentals such as the build quality (which, particularly in Brazil, can vary hugely); level of finishing; micro economic factors; neighboring towns / cities; competition; local government policy; regeneration policies in place; employment; income levels amongst other factors.  A problem that we often encounter that your readers should be aware of is that in large conurbations such as Rio de Janeiro and São Paulo, where there is urban sprawl and visible divides of income distribution, statistical discrepancies can occur in producing a market valuation due to such extreme variations in price ranges.  For example, I can value a 3 bedroom apartment in Barra da Tijuca in Rio’s West Zone (where the rate of violence is relatively low) and have the exactly the same unit in neighboring   Jacarepagua (where the violence rate is slightly higher due to the presence of a generally poorer demographic of resident) which would value significantly lower – the difficulty is exacerbated when evaluating a property that is on the border of a richer and a poorer area.  For many Brazilians, your postal code is a sign of your social status – a consideration that completely contradicts the mathematically-based principles we learnt at engineering school!  The point I am trying to make is that valuation is not always a clear cut process.

-In terms of analysis of property or land values – are there any public sources of data that can be accessed by investors?
Here in Brazil, the current professional analysis of the market value for property is solely allocated to private companies specializing in real estate assessments.  I believe one of the main reasons for this is the real estate market in Brazil has gone through a great period of change of the last two decades and, as such, the process has become convoluted.  However, during this period the market has become more sophisticated and sold data, although no official is often logged by real estate companies (which can be made available upon demand).  It is also possible to see the level of IPTU (Imposto sobre a propriedade predial e territorial urbana, local government tax) being paid which can determine what the declared value of the property is – however investors should be careful as to assume this value as we often see that, particularly in a growing market, the real time evaluation is often higher (this can be accidental or purposely registered with the local government in order to avoid paying higher taxes).  It is my belief that the Fundação Getulio Vargas (FGV) are in the process of creating what will be Brazil’s first official register of property and values – whilst this will not be a legal record, it is widely agreed that it will help with the process of understanding house prices in Brazil better (note there has not been a confirmed date for this to be available to the wider public).

-What are the main risks that you feel an investor in Brazil should be aware of and how can they be protected? 

When analyzing risks, I think it is important for the investor to ask him/herself the following questions as a minimum:
  • What are the most promising sites?
  • Which are regions are expected to grow the most?
  • Should the investment be within the city or in the outskirts?
  • Should the land plot be one that is ready for development or one where planning permission needs to be obtained?
  • What are the potential asset depreciating factors that could come into play?  For example, is the property or land plot located in a poorer neighborhood / is there a probability of growth of (Favela) slums or other related risks?
  • Is the area subject to flooding?
  • How are the basics infrastructural facilities such:  (water, electricity supply and sanitation)?
Other than these, obtaining the correct legal advice is a must and, whilst overseas Brazil property investors have identical rights to residents, any contractual agreement must been examined with a fine toothed comb.  There are also certificates that guarantee the investor a minimum level of security when purchasing a property, namely:
  • a certificate of encumbrances (Certidão de Ônus Reais) which will indicate whether the property or land plot has any attached issues whether that would be judicial, existing liens (such as mortgage ties) or other overriding factors (such as usufruct rights) that can corrupt a clean transaction;
  • a certificate which will show the history of the property in the last twenty years (Certidão Vintenária) – an added guarantee that is often used to assure the buyer that there have been no previous legal or other related issues;
  • a long lease certificate (Certidão Enfitêutica) in order to determine whether the property is public or private;
  • With regards to rural Brazilian land / property purchases, ownership can be protected in the form of a geo-referenced certificate from INCRA (Ministério do Desenvolvimento Agrário, Ministry of Agrarian Development).
Other important factors to bear in mind include issues with regards to shared condominium obligations (including related taxes and other fees) and  also, particularly with commercial property in Brazil, if the owner/s has/have any labour claims against him/her/them.

-How can overseas investors ascertain whether important factors such as water, electricity, drainage are adequately in place?

 The best point of reference for this information is the local government office Called here as (‘Prefeitura’). And some agencies which also are responsible for each kind of these services. In Rio de Janeiro, for example, the company responsible for water supply is SECONSERVA and then other services related to sanitation, gas supply, electricity, canal management, storm drainage and other essentials are dealt by in conjunction with COMLURB and the CGC (Coordenadoria Geral de Conservação, General Coordination of Conservation).  It’s important to remember that these services are primary only and investors should verify such essential systems within the buildings they are investing in – particularly with larger projects (such as condominiums or apartment blocks).

-With regards to the ongoing national controversy with regards to the Movement of Landless Workers (Movimento dos Trabalhadores Rurais Sem Terra, MST) – many investors remain concerned as to the risks of buying land, particularly in remote locations.  Can they be minimized? 

Firstly, is should be noted that the MST is a movement organized by rural workers in order to place pressure on the government to ensure full access and entitlement to land produce – the role of the movement is often unjustifiably assumed by both Brazilian and internationals as being something akin to gypsyism.   Secondly, what many people do not know is that not enough to simply ‘take hold’ of the land and for it to be subject to land reform it needs to be unproductive.  What follows is that the government buys the unproductive land in order for it to be redistributed to the rural workers.  There have been many cases where MST protesters have occupied these lands have been removed by the military because it is deemed to remain as private property.  A short-term solution for those who have land that may be considered unproductive is to take advantage of the market in Brazil and sell or perhaps come to an agreement to rent (where possible).  I am aware that this is what is occurring in various regions in São Paulo, Rio de Janeiro and Rio Grande do Sul amongst others.

-The CONAI organisation has its headquarters in Rio de Janeiro, which is one of the cities of Brazil which has witnessed massive growth in property prices in recent times prompting a debate that they are becoming out of touch with reality – how true do you think this is?
The growth of the market values of properties in Rio de Janeiro has happened for different reasons and some parts of the city have witnessed more rapid growth than others.  In the West Zone for example, we have Barra da Tijuca: a neighborhood that has a tremendous amount of land suitable for building with the added benefits of being located close to the beach; a good proportion of upper middle class Cariocas as well as very modern facilities / infrastructure without crowdiness.  Prices have increased considerably and land has highly sought after by developers.  The South Zone (home of world renowned areas such as Copacanbana, Ipanema and Leblon) contains some of the most expensive real estate in Brazil which has also increased (in addition to very limited available land space).  Then you have areas such as Jacarepagua (mentioned above) and areas of the north zone (such Tijuca, Duque de Caixas and Nova Iguaçu) and as well as moving to north of the state where much of the country’s new found oil wealth is to be found (such as Macaé and Campos de Goytacazes) – where prices are considerably lower in comparison but growth prospects look strong.   The fact is that it is important to look at prices from an affordability perpsective – as our economy has grown, so has the wage levels of the general population.  People in Rio, generally speaking, are earning more (this includes the lower classes) and have better access to credit than ever before and, therefore, prices have have been increasingy accordingly.  I think it will be time to worry about a bubble when the house prices go beyond the abilities of people being able to meet their commitments.  The banks have seen what has happened in the rest of the world with regards to over-zealous lending and also do not want a repeat scenario of what happened in the 1980s – for this reason, it is not a simple process to get a home loan in Brazil (as was formerly the case in countries like the USA) and inflation control is considered of more importance than ever (by both the government and the general public).  I also feel that Rio de Janeiro (and many other cities of Brazil) have an issue of under-supply, once this situation improves it should theoretically bring more equilibrium and sustained growth into the market place.

-What areas of Brazil do you see as the most promising? 

I think it is fair to say that most states in Brazil are witnessing growth in some way or another yet, specifically, as well as Rio de Janeiro (city and state), São Paulo has for a long time offered interesting opportunities – the East Zone is currently a hot bed of activity with the creation of the red subway line.  The central states such as Goiânia and Tocantins offer excellently valued real estate and are receiving a huge amount of both private and public funding (such as via the Growth Acceleration Programme).  In the south, Porto Alegre and Curitiba are excellent cities to invest in with modern facilities and some of the highest standards of living in the country.  The north-east also offers excellent value (prices are generally cheaper the further north of the country) and is also seeing a wide range of construction activity including hotel and other commercial development as well as residential projects throughout.

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