Sectorial Panorama

The Real Estate Market 

In most developed countries, the housing market served as a starting point for the formation of large fortunes. It does not take much effort to determine a considerable list of American families have achieved great development of his wealth, focusing on the real estate business.Was this focus toward building or even targeted for investment in assets, the truth is that the income generated by the real estate sector was crucial for many American families to join the ranks of major global fortunes. 

For illustrative purposes only, according to The Economist, at the end of 2002, total assets of the "developed countries" were composed of: 

Residential property: $ 48 trillion 

Commercial properties: U.S. $ 14 trillion 

Stocks: U.S. $ 20 trillion 

Government Securities: U.S. $ 20 trillion 

Securities issued by companies: $ 13 trillion 

Total: U.S. $ 115 trillion. 

In other words, almost half of assets in developed countries, are related to real estate assets. 

Many may wonder how you can be experiencing a "housing boom" in Brazil in the 21st century.Although a slew of factors that together explain this fact, a huge estate with expression translates this: Economic Stability. This stability which we enjoy today is relatively new, having begun in 1994 with the Real Plan. 

For illustrative purposes only, see below the contribution of the housing market in GDP of some countries: 

Figure with contribution of rental income in GDP 

IMAGE 

The Mortgage Market 

The mortgages in Brazil currently accounts for only 2.8% of GDP (Gross Domestic Product). In the U.S. mortgage market with more evolved, this rises to between 20% and 25%. In Spain, the country that offers this type of loan, the mortgage represents 42% of GDP. Even developing countries have better results. In Chile, the proportion of mortgages to GDP is 15%. 

Still, it is important to note that the evolution of their participation in the Brazilian economy over the past few years has been quite significant, as can be seen in the figure below:

Investing in Real Estate 


A report in The Economist (June 16, 2005) shows that 23% of new homes sold in the United States in 2004 were bought by investors and that 14% were bought as second property of the purchaser. That's over a third of what was released and transacted in that country can be considered as an investment held in an alternative class of nonfinancial assets. 


There is a huge amount of variables that could influence the type of investment in which there will be a certain amount of resources. Several factors must be taken into consideration. To simplify a comparison between the main instruments available in the market for investment of resources, we will treat as major variables, the following: 

· Profitability 
· Liquidity 
· Risk 

In the following table you can view in simplified form the major features of each instrument, as these variables.

Analyzing the returns of these instruments over the past 10 years (Figure below), we see the return of Fixed Income (DI Selic real - net of inflation) is very similar to the return of a commercial property, leased for an amount equivalent to 0.8% month. Obviously, this is a cool comparison, which does not take into account some relevant factors such as valuation of property in this period. What in the period under review had a significant weight.

Just to get an idea of the contribution factor "recovery" return on investment property (commercial property) in the last 10 years in Brazil, according to a study by Prof.. Paul Picchetti FGV Projects, taking into account a significant amount of property belonging to pension funds, distributed between Commercial Offices, Hyper Markets, Hotels, Shopping Centers, Garages and establishments for wholesale and retail trade, the market value of they more than doubled in that period. 


In terms of liquidity, it is undeniable that the active real estate when compared to other investment instruments, enjoys a distinct disadvantage. Given the extensive paperwork involved in purchasing a property, it is natural that the liquidity of these investments is lower than those related to financial markets. 

Anyway, the market is evolving and increasingly, there are options to obtain liquidity from real estate assets. Structured using the active real estate as collateral, the assembly backed funds in receivables generated by these assets or even operations Sale Leaseback are being used to reduce the liquidity gap exists between investments in real estate assets and the capital market. 

In terms of risk, the real estate assets can be even considered as a protection, or an instrument of risk mitigation, when inserted into a portfolio of other asset classes such as equities, fixed income and others. 

This protection comes mainly from the fact that this is a real asset, which already gives it protection from inflationary effects. 



Future Prospects 


Although any exercise of estimating the future potential of the property market is very difficult, it is quite feasible to assume that the expected growth is significant. 

According to most economists, the year 2010 will be a year of strong growth for the Brazilian economy. It is very likely that there is also a small increase in the basic interest rate (Selic), only to contain potential inflationary pressures. Thus, we believe that the real interest rate should not differ greatly from current level. From this premise, the return on investments in real estate assets are becoming very competitive when compared to those in the financial market. 

The figure below shows the evolution over the last ten years, the real interest rate, and how to reduce it over that period equate to return on the average rental income (between 0.6 and 0.8% per month ).

Estimates of the Brazilian economic growth point to progress in an annual average of about 4.2% annually over the period from 2009 to 2030. Just to give an idea of what we hope will be the evolution of market rents for rents in the Brazilian economy, we establish the following relationships:


· Part of 2008 GDP of R $ 2,889 billion, and that the rental income equivalent to 4.1% of total GDP, we have that in the year 2008, those rents moved a value of approximately $ 117 billion.
· Assuming that such participation will evolve to a level of 7.1% by 2030, these incomes have to jog something around R $ 544 billion.