Brazil: Brazil

Guide to the Risk and Opportunity Ratings

At the end of each country profile, we have given a risk rating and an opportunity rating. These ratings are a summary of our analysis indicating the levels of risk when investing in a market and the level of opportunity to profit from it.

The ratings themselves are simple. Both work on a scale of one to five. The opportunity rating is indicated by the $ symbol. A single $ equals a low opportunity whilst 5 of them ($ $ $ $ $) equals the highest opportunity ranking.

For risk we have used the * symbol. A ranking of * equals a low risk rating whilst * * * * * equals a high risk rating.

Introduction

The fifth-largest country in the world, Brazil borders every country in South America except for Ecuador and Chile and straddles four time zones. Thirty-five times the size of the United Kingdom, the country boasts a huge variety of landscapes, from the dense jungle of the Amazon rainforest, to the beautiful white beaches of the 7,250-kilometre coastline, to the mountains, valleys and waterfalls of the interior. Such diversity, along with the climate, the rich cultural life and the hospitality and passion of the Brazilian people, has made Brazil one of the biggest tourist destinations in the world, with something for everyone.

Historically, Brazil’s economic fortunes have been mixed. However, it is now keen to assure the world that it is a country on the way up. In 2002, whilst America was focusing on security and on a potential war against Iraq, Brazil became part of the BRIC alliance, signing a trade and cooperation agreement with Russia, India and China and securing an agreement to supply these countries with raw materials and natural resources. Following this, the country’s GDP grew by 5.3%, its fastest rate since 1996.

Since 2003, President Lula’s administration has steadied exchange rates and aided social stability, and today Brazil ranks as the 13th largest economy on the planet. Goldman Sachs has predicted that it will become the fifth largest by 2035, making it one of the most compelling equity investment cases among the world’s large countries.

Is this a good place to buy?

Brazil is classified as a developing country, a description that more often than not means poor, with inadequate infrastructure and sometimes corruption. It can however also signify an untapped country rich with natural resources – a definition which fits Brazil perfectly. Property and land prices, though rising, are still undervalued and have a lot of potential.

Aside from the tropical climate, spectacular and varied scenery, the culture of enjoyment and the year-round sunshine (giving an annual potential occupancy rate of around 30 weeks), there are a number of practical reasons to buy property here. Brazil is considered a low risk in terms of war, terrorism and natural disasters, and the economy is relatively stable.

Property can be purchased on a 100% freehold basis, and both property rights and title are secure whilst taxes remain low (property taxes stand at around 0.2% to 2% of the assessed value). For those wishing to buy land or property for use as a second home or for retirement, the cost of living here stands at around 20% of that of the UK, and the currency exchange rate is favourable. Retirees are entitled to instant residency from the age of 50, otherwise multiple-entry visas are available.

Investors in rental properties can expect returns of approximately 6-7% per annum, based on an average of 60% occupancy, and property prices are increasing by over 15% a year. Finally, the selling process is easy, with transfer of title a simple process.

Price history

Prices in Brazil have been relatively unstable over the past few years, and Brazil experienced a decrease in property prices after the devaluation of its currency in 1999. In the four years leading up to 2005, property which had been sold at R$150,000 (£38,000/$65,000) went down to less than R$100,000 (£25,000/$42,000). Prices are therefore cheap, with a more stable economy forming a stronger base for values to climb back to their previous levels. Prices for a detached villa start at around £12,000, although a significant premium will be added to property close to Rio. Prices are also higher in the popular regions of North-East Brazil.

Another factor behind these predictions is the recent success of the tourism sector. The modernisation of main airports and construction of high-standard hotels and resorts (many of them operated by international groups) have boosted tourism in the northeast, and the government is committed to fostering the tourism market. Daily flights are available from a large number of European cities, and a week’s holiday from the UK including flights and accommodation can currently be found for as little as £299. Capital appreciation in Ceará in the North, where the number of foreign tourists has increased by 26% since 2000, reached 20% in 2004, a figure matched in a number of towns in Brazil.

Which type of property should you go for?

Two-thirds of Brazil’s population live on the coast, so this strip is well-developed with hotel properties, villas and apartments close to the beach and with good access to towns, resorts and all the facilities you would expect from a beach culture. There are also less-developed areas along the coast, though security can be an issue in these regions.

In urban areas, the best option is probably to invest in a serviced apartment in a reputable and secure area. For those planning to invest inland, building a home has proven popular. Many investors have also found that building a “pousada”, or guest house, in a small village in one of the “chapadas” (valleys) makes for a profitable investment as well as a relaxed lifestyle.

Buyers this market will appeal to

The majority of investors currently purchasing in Brazil consist of second home buyers and retirees. This is, however, changing, and hotel developments and increasing tourism mean that those interested in the rental market or in holiday lets are also beginning to see opportunities opening in a number of places. The great diversity of properties available means that there is a market for any type of buyer. Up to ten names are permitted on title deeds, so investment syndicates are also catered for.

Hotspots

As the largest and most famous cities in Brazil, Rio de Janeiro and Sao Paolo are the safest opportunities for investment, although prices are likely to be high in the desirable areas and percentage returns will diminish proportionately.

The two cities have a relationship similar to New York and Los Angeles – Sao Paolo is the centre of government and finance in the country, and is therefore likely to be popular with those looking for commercial and office properties, whilst Rio, the “cidade maravilhosa” (beautiful city), has a reputation for Carnival and the arts. Sandwiched between mountains and the sea, Rio has 45 miles of white-sand seafront, including the famous Copacabana and Ipanema beaches, and is therefore likely to be popular with those wanting to take advantage of high tourist numbers and the city’s reputation as one of the great romantic destinations.

Whilst these cities are undoubtedly popular destinations, higher returns and greater potential growth are more likely in the north of Brazil. The area is attracting interest from investors as it is relatively underdeveloped and has a wealth of natural beauty. With rainforest sweeping down to some of the finest beaches in the world, the north combines a fresh, unexplored feel with properties designed to a luxury standard. Tourism arrivals are predicted to increase by 80% before the end of 2006 now that Joao Pessoa airport has become international.

Confidence in this area is sufficiently high for some agents to offer guaranteed returns of up to 6% on some waterfront properties. Supportive infrastructure is under development. In Rio Grande do Norte the Mayor’s office is planning an investment of about R$400 million in hotel construction in the next four years. The state is reported to have the cleanest air and the purest water in the whole of South America, and in a recent survey the city of Natal was found to have the lowest crime rate and one of the highest quality of life rankings in the country.

Aside from Rio Grande do Norte, other states which are proving popular in the north include Ceará, a major tourist hub which has already reported significant returns on property; Pernambuco; Alagoas; Sergipe; Paraíba; and Piauí. An ambitious investment project has significantly improved infrastructure in these areas, road improvements between the cities being one of the measures taken. Bahia is also tipped for increased growth, although the tourist industry is already somewhat more developed here than in the above-mentioned areas.

Purchase process

The purchase process in Brazil is relatively simple. To buy it is necessary to obtain a CPF (Cadastro das Pessoas Físicas) number, a personal ID number which allows utilities and bank accounts to be registered. There is a nominal fee for this, and most developers should be able to process the application for you. This registration also provides details of capital brought into the country and allows for full repatriation of funds. The Brazilian government advises overseas buyers to appoint an “imobiliárias” who is a member of CRECI (Conselho Regional de Corretore Imobiliários – the Regional Council of Property Managers).

All properties built or administered after 31 December 1973 have a document called a “Matrícula”. This contains a detailed description and historical records of all legal, judicial and financial transactions pertaining to the property, as well as a description of the property itself, its precise address and location, past and present owner information and outstanding mortgages.

As in any foreign market, it is advisable to employ an agent, translator or lawyer who is well-versed in the legalities of the local property market to guide you through the purchase process, even though much of the process is managed through a “cartório” (notary office). All contracts are in Portuguese and English, with a written and binding guarantee of full title.

Deposits usually stand at 10%, but can range from five to twenty percent depending on the property. Stamp duty of 5% is also payable, purchase tax varies between two and seven percent, and agents’ fees typically range from four to ten percent. On top of this you need to allow around £200-£500 for legal and sundry fees. Income is taxed at 15% from around £3,000 to £6,000, while for income levels above this the rate goes up to 27.5% – these rates are also applicable to capital gains. The balance of the property price is paid on delivery.

Foreign nationals seeking permanent visas must show that they have investment funds of at least $50,000 (£28,000) – although this figure can be reduced if it can be shown that you plan to employ Brazilian staff. Retirement visas are granted to people who are over 50 years of age and have a minimum pension of $2,000 (£1,100).

Key risks and opportunities

As with every rapidly evolving market, dubious ‘due diligence’ and heavily-inflated prices have led to one or two horror stories. Comparing properties agent by agent is laborious, but does reveal discrepancies in pricing, exposing those who have added 25% to their prices. Analysis also reveals the truth behind situations where agents and developers are offering 15% guaranteed rentals – they may just be giving the buyer’s money back to them. As they say in Brazil, Brazilians “sabe jogar” (know how to play). It is important, therefore, to be careful, to check rental agreements carefully before purchasing and to use a reputable agent.

Asking expats who have already bought in Brazil to recommend a reputable agent is a sound idea. Trading practices differ considerably from those in the UK. Some Brazilian developers also have an unusual pricing structure that allows for increments once a development is finished (although this practice is diminishing now that the economy has stabilised). Selling, on the other hand, is relatively straightforward – find a buyer, transfer the deeds and the transaction is complete.

The general price history in Brazil may also be cause for caution, as the idea that prices are going to continue to rise is by no means a certainty. Brazil is not a country that tailors its financial policy to foreign investor interests, and it is far from certain that the next financial cycle will copy the last one with relatively high inflation and stable exchange rates. Any investor should bear in mind that the value of a property that costs £30,000 today could fall as well as rise. Brazil is still too insecure a market to invest your total worldly wealth and portfolio diversification is advisable.

Opportunity rating

Brazil offers substantial opportunities for profit, especially for investments in the north-east. This is due to the area’s increasing popularity as a tourist market following the Asian tsunami and to the substantial infrastructure improvements being made – one major example being the internationalisation of Joao Pessoa airport. GDP growth should also continue to have a positive effect on the property market.

Rating: $ $ $ $

Risk rating

Although the Brazilian currency is stabilising, government reforms are taking some time to come into effect, a factor which could present some risk in the medium to long term. In individual areas there are occasional risks caused by economic inequalities leading to increasing local unrest which may have connotations for the tourist sector and where security is concerned. However, such issues are rare in the tourist areas.

Rating: * * *

© Vacation Work 2005

“Where to buy a property abroad – An investors guide”, First edition 2006 David Cox, Ray Withers, Kate Godfrey.

Reproduced with the permission of Property Frontiers.

Further information on this topic can be found in “Where to buy a property abroad – an investors guide” 1st edition, by David Cox, Ray Withers and Kate Godfrey.

This book is available from all good bookshops nationwide at a recommended retail price of £12.95 or can be ordered directly from www.aninvestorsguide.com for £10.95 including postage and handling (to UK addresses only).

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All circumstances vary. BuyAssociation provides general advice for guidance purposes only. It is strongly recommended that you seek professional advice before making any purchase.