Investors building on housing boom

Despite recent caution in the market, demand for housing remains strong in South America and, as Elizabeth Pfeuti reports, there are profits to be made

There is a reason why construction companies make up at least 30 per cent of the market capitalisation of the Brazilian stock exchange: a housing boom that has already lasted six years – and there is more to come.

Since 2006, there has been a huge growth in new accommodation units to house an increasingly wealthy population in Latin America’s largest country. According to Fundação João Pinheiro, the country’s statistics agency, the Brazilian housing deficit stands at more than six million homes. Roughly 80 per cent of this shortfall is in urban areas.

Aside from the basic improvement in wealth, demand has come from three main drivers: restrictions on long-term mortgages have been removed by the government – instead of borrowing for ten years, Brazilians can take home loans for up to 30; finance companies have been granted powers to repossess properties more easily after mortgage default; and Brazil has a young population that is demanding decent housing for its families – something it can now afford.

Foreign investors have been able to swoop in with capital and offer finance for developments with a pretty certain guarantee of a sale at the end.

“There’s a growing number of young families and a housing shortage,” says Jack Foster, head of real assets at Franklin Templeton. “Backing residential developments means there is a solid exit strategy, which is a fundamental part of investment.” Franklin Templeton has invested in Brazil for two decades, but Mr Foster says, in the last five to ten years, investing in the real estate sector has become more attractive.

Foreign investors have been able to swoop in with capital and offer finance for developments

This year there has been a blip, however, according to Esteban Polidura, senior Latin American real estate analyst at Deutsche Bank.

“There are some serious bottlenecks in the sector,” he says. “For example, there is a lack of public notaries, so sales cannot be processed as quickly as some would like, and maintaining efficiency at that level of construction is tough so revenues and cashflows are being impacted.”

The flurry of construction companies that listed or raised capital over the last couple of years, buoyed by and helping fuel the boom, are facing tough questions from investors.

Nick Robinson, head of Brazilian equities at Aberdeen Asset Management in Sao Paolo, says: “Sales have slowed, but they are now at a more manageable level. It has become harder to make a profit for construction companies and demand has weakened due to banks being more cautious, but the underlying demand remains.”


Help to buy homes in Mercosur states

Members of South America’s leading trading bloc, Mercosur, have introduced policies to encourage homebuyers.

Argentina’s President Cristina Fernandez de Kirchner announced the Argentine Bicentennial Credit Programme in June to ease the country’s housing shortage. Subsidised homebuilder loans, with backing from national pensions agency ANSES (Administración Nacional de la Seguridad Social), will see the state sell lots, from 1,700 hectares of land designated for home construction, to be drawn by lottery.

In Brazil, somewhat of a slowdown in the real estate sector is anticipated, due to a downturn in economic growth. A recent International Monetary Fund (IMF) report highlighted the need for the housing finance system to move towards longer-term funding in Brazil to encourage mortgage lending and noted recent moves by the government to eliminate minimum returns on savings deposits, which could lead to lower mortgage rates.

Mercosur’s newest full member Venezuela, headed by the socialist President Hugo Chavez, recently enacted new laws that guarantee access to all Venezuelans to mortgages to buy their homes. He has also introduced the Great Housing Mission to build three million homes by 2019.

New Paraguay President Federico Franco has made land reform one of his priorities after his deposed predecessor Fernando Lugo failed to make any progress in tackling this contentious issue.