Brazil House Prices.

Brazil House Price Index Reaching Final Stages

January 11th, 2011

With the aim of bring further transparency into Brazil’s real estate market, a new index that will measure changes in property values by type, over time and across geographic regions is in its final stages – initially for commercial property in the country’s major cities but with wider objectives to move into the residential sector.
Developed by the Getúlio Vargas Foundation (a leading academic research institute in Brazil) in coordination with the Brazilian Association of Closed Pension Funds (Associação Brasileira de Entidades Fechadas de Previdência Complementar or ABRAPP), the ‘Index of Profitability of the Brazil Real Estate Market’; also known as ‘IBRI’ (Índice de Referência de Rentabilidade do Mercado Imobiliário Brasileiro); will contain regularly updated information on values, transaction levels, income and expenditure with the primary objective of better monitoring of Brazilian real estate assets –  viewed as a natural progress as the industry continues its maturation process.
In terms of how the index has been compiled, according to coordinator of the project from the Getúlio Vargas Foundation Paulo Picchetti (in a previous interviewed undertaken with the Brazil Real Estate & Land Investment Guide): “the IBRI follows international standards for measuring the overall profitability of investments in commercial real estate [namely shopping centres, commercial offices, industrial units and garages amongst others].  In short, price appreciation is measured through the evaluations and the flow of revenue through rents / other income reported by the informants – during the process, we have:

• Developed confidential relationships within Brazil’s commercial real estate industry in order to analyse historical performance (on a per state basis);
• Converged the calculation formulas primarily used by the NCREIF (National Council for Real Estate Investment Fiduciaries) with those specific to Brazil’s commercial property sector;
• Evaluated unsold commercial properties in the Brazilian marketplaces followed by the subsequent exploration of potential alternatives and their comparative advantages / disadvantages;
• Ensured that well-defined governance structures are in place that will provide ongoing transparency and credibility to the indices;
• Constructed a comprehensive database designed to increase information and understanding about the Brazilian commercial property industry combined with the accurate presentation of the various profitability indices.”

According to Carla Safady, coordinator of the technical commission of property investments from ABRAPP, the extension of the index to reach the residential sector will be a “natural progression” with Picchetti stating: “we are in the preliminary stages of creating an index for this sector and currently in the process of evaluating a wide range of potential methodologies – some of which will use the principles of the commercial index and will be dependent on its execution.”  Brazil’s public banking institution, the Caixa Econômica Federal and Getúlio Vargas Foundation have also announced a partnership to mount a property valuation index (tentatively entitled ‘Índice de Valorização de Imóvel’ or ‘IVI’) although it has been stated that the project is in its infancy with no official launch date.
An article in construction magazine PINI showed that opinion amongst Brazil real estate specialists over the IBRI index remains divided.  Celso Petrucci, chief economist at Secovi-SP (the Union of Housing, São Paulo) believes that increased transparency will serve to boost the attraction of investment from both a domestic and international perspective: “with the amount of equity built over the last few years the index will enable it to be possible to have a starting point for a more rational and well-measured investment culture.”  He also highlights that the index involves the participation of serious companies – including Cyrela Commercial Properties, CB Richard Ellis, Colliers International, Jones Lang Lasalle, Banco Brascan and Banco Itaú amongst others – which serves to add further kudos.  Radegaz Nasser Junior, vice president of institutional relations at IBAP (the Brazilian Institute of Evaluation and Engineering Skills), on the other hand, questions the index’s realism with the Brazilian real estate market arguing that the variations are too huge to be evaluated accurately, stating: “even the same type of properties located on the same street may differ by over a double due to the way they are owned amongst a variety of other factors.”  He also moots the possibility of data being handled in accordance with the interests of companies that will integrate into the database of IBRI.  In response, Mr Pichetti stated: ”we have studied how the international real estate market has measured the performance of its assets and adapted these methodologies to the national market;” with Safady adding “there is also an advisory board composed of a variety of industry players to minimize this risk.”