Brazil Real Estate Report Q3 2010

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Over much of the last decade, Brazil's economy has been operating in a virtuous circle that has involved lower risk premia, lower interest rates, a stronger currency, lower inflationary pressures and improved economic fundamentals. This should continue to be the case. Business Monitor International expects that Brazil's economy should expand by around 5% in 2010 and by 4% a year between 2011 and 2014.

Over the recent past some commentators have focused on opportunities for the economy that have arisen because of the awards of the 2014 FIFA World Cup and the 2016 Olympics to Brazil. Others have emphasised the boom in exports of energy, iron ore and other natural resources. BMI believes that the crucial factor over our forecast period, to 2014 - for the economy as a whole and for the real estate sector in particular - is the continuing growth in consumer spending. Consumption has been booming in part because of the rise in consumer sentiment, which is now at higher levels than at any time since the beginning of 2007. It is also because of the growth in employment, which is a consequence of soaring investment.

Our sources in São Paulo, Rio de Janeiro and Fortaleza indicate that demand for all kinds of commercial property has been running well ahead of supply. Vacancy rates are typically in single digits. Rents have grown strongly through 2009, in spite of the shrinkage of the economy, and are forecast to continue to rise. Tenants appear to have little leverage relative to landlords in lease negotiations. Supply has been constrained, in part because the global financial crisis caused a number of investors to suspend or postpone projects.

All of these conditions are consistent with a steady rise in prices and capital values, particularly for retail and office space. However, none of our sources indicated that this has happened , yet. We expect that yields for all three sub-sectors (offices, retail and industrial) will fall in São Paulo and Rio de Janeiro, as rises in prices and capital values outstrip growth in rents. In the short term the rise in yields of 2009 will likely be reversed. Yields should fall further between 2011 and 2014.

Our expectations for Fortaleza, the third of the cities for which we gathered information, are different. Across all three sub-sectors, yields have been lower than in São Paulo and Rio de Janeiro. This strikes us as an anomaly, which probably relates to the greater growth prospects in Fortaleza. We expect yields to increase gradually in Fortaleza, as rental growth outstrips rises in prices and capital values. However, by 2014 commercial property yields should still be lower than they are in the other two cities. Interviews with our in-country sources were conducted in late January and early February 2010.