• Investment Strategies For Brazil

Below is an account of how and why Brazil provides an excellent property investment arena. Various investment strategies are available in Brazil and it is important to be fully aware of all the options prior to making an informed decision.

• General Factors

Predictions by leading financiers, Goldman Sachs, are ranking Brazil amongst the top 5 world economies by the year 2050. As one of the world’s largest countries, with a current population of over 180 million, Brazil’s economic potential is enormous. The current availability of cheap labour and materials, coupled with comparatively low real estate prices, means the conditions for growth are quite outstanding.

Major investment is ongoing to improve Brazil’s infrastructure and create purpose-built eco-friendly tourist facilities. Due to increased government efforts, Brazil’s tourism market continues to grow steadily, with visitor arrivals rising by 9.6% in the first quarter of 2007, when compared with the previous year. Furthermore, Wilma Faria’s PSB government estimates that in eight years Rio Grande do Norte, currently with 45 thousand beds, will see an additional 140 thousand beds, clearly indicating the vast proportions of tourism growth this particular State is set to undergo.

Growth is being centred on the coastal destinations of Fortaleza, Salvador and Natal in particular, the location of a new airport which will be the eighth largest in the world and the largest in South America upon its completion in June 2009. Easy access from North America and Europe is on the increase, while costs of travel are dropping each year, giving Brazil a truly global investment and tourism appeal.

With a tropical climate, world-famous, beautiful beaches and a year-round tourist season, Brazil is set to benefit purchasers with buy-to-let investment strategies as well as those looking for above average returns on their overseas holiday properties. The low cost of living (now approximately 20% of that in the UK) also appeals to investors and tourists looking for a lower cost alternative to the peaking Caribbean market.

There are no complications regarding property ownership in Brazil and investments can be purchased as 100% Freehold.

• Economic Factors

Inflation has been drastically reduced over recent years and currently stands at around 5.7% with good signs that this trend will continue. This, along with a favorable exchange rate, has encouraged many major international businesses to produce their goods in Brazil at a fraction of former costs.

Brazil already has the tenth largest GDP in the world, being the largest global exporter of coffee, oranges and sugarcane. Since the country’s new administration took office in 2003, the government has succeeded in creating an economy ripe for foreign investors and actively promotes a fiscal and political environment conducive to further growth.

Brazil is counted as one of the four largest developing economies in the world today, along with China, India and Russia. Indeed, Goldman Sachs predicts the Brazilian economy will be of a similar size to that of Japan in 2050 if current initiatives and trends continue successfully.

• Political Factors

Brazil is a Federal Republic with an elected President serving a 4 year term in office. Luiz Inacio Lula da Silva, who was elected in January 2003, is widely considered to be a reformist.

Since the election in 2003, tourism has been a top priority in the government’s agenda and the creation of the Ministry of Tourism in 2003 underlines this commitment. During 2005 alone, 210,000 jobs were created in the tourism sector and in excess of $736 million was invested by the government to upgrade the infrastructure around all major tourist resorts.

The Brazilian government has also launched a National Tourism Plan, with clear objectives as follows:

  • Attract over 9 million foreign tourists per annum
  • Generate 1,200,000 new jobs
  • Receive 8 billion dollars in foreign currency
  • Develop at least three quality resorts in every Brazilian state
  • Increase the number of domestic travelers to 65 million per annum
  • Finally, the present government has instigated numerous fiscal reforms, aimed at boosting Brazil’s economy throughout every industrial sector, including tourism. Many new eco-tourism projects are being strongly supported by the government, bringing with them foreign investors, jobs and tourists; all vital components to Brazil’s ongoing economic success.

• Natural Factors

With over 8,000km of virtually unspoilt beaches, the Brazilian coastline is possibly the most impressive in the world and many beautiful lagoons can be found bordering the coast. The coastline is blessed with fertile lands which are home to a multitude of palm trees and plantations, offering visitors a truly Tropical environment. Brazil is also home to the great Rain Forests and the Amazon River.

Compared with other Tropical destinations, Brazil does not suffer from extreme weather such as hurricanes, flooding or tropical storms, nor is it ever affected by earthquakes. Temperatures remain almost constant throughout the year, with averages in the north east of 27ºC.

According to NASA, north east Brazil has the second cleanest air in the world, second only to Antarctica!

• Logistical Factors

Brazil is approximately 10 hours flight away from Central Europe, and closer still to North America. Tour Operators such as Thompson Holidays already operate competitively priced direct services into Natal. It is a trend of the European travel industry that where one tour operator goes, the others soon follow. Therefore, the frequency and number of routes available to travelers can safely be expected to increase dramatically, precipitated by the opening of Natal’s vast new airport facilities at São Gonçalo do Amarante, due to open in 2009.

Accessibility is to be a major factor in boosting Brazil’s so-far untapped potential, particularly in developments within easy travel distance of international airports. Road and rail improvements are also taking place to compliment the new airport and encourage more visitors to the area.

Meanwhile, construction is now underway to accommodate the huge influx of tourists and investors to Brazil, while timely buyers are anticipating lucrative returns once projects come nearer to completion. Major entry points include Rio de Janeiro, Sao Paolo, Salvador, Natal, Fortaleza, Brasilia and Belo Horizonte. However, it must not be forgotten that Brazil is a vast country (the 5th largest in the world), so these entry points may not necessarily be close to your particular destination. Investors must of course check journey times when assessing travel options.

Investors should bear in mind that Brazil is still an investor’s market: completion of the new airports, roads, hotels and tourist facilities are underway and, while some are complete, much is still to be done, making now an ideal time to invest in this growing market.

• Taxation

Income earned from property in Brazil is taxable whether the investor is resident or non-resident in Brazil.
Non-residents are usually subject to a capital gains tax rate of 15% on any gains made on properties in Brazil. However this figure is subject to alteration depending on any double taxation treaties in place between Brazil and the investor’s country of residence.

Property purchase tax is not charged on short term investments, as the investor never actually takes ownership of the property by signing the completion documents.

Brazil property has great appeal amongst North Americans and Europeans alike, including Scandinavian investors who are particularly enthusiastic about capitalizing on Brazil as an emerging tourist and investment location. This global appeal makes Brazil an outstanding prospect for our investors.

Brazil is highly recommended as a 3-5 year investment. Although good returns can also be achieved on a short term investment strategy, the potential for even higher gains is strong with a mid-term strategy.

Capital appreciation is expected to perform exceptionally well over the next TEN YEARS, therefore the longer the term investors are able to leave their capital in the property, the higher their returns.

No finance is available in Brazil at the present time and full payment takes place over the course of construction. Typically, this is 30% - 20% - 20% - 30%, while purchase costs are settled mainly upon completion.

• Level of Complexity

An ongoing investment in Brazil is no more complex than one closer to home. Investors will however need to have their full records maintained and ongoing taxation requirements will need to be met.

Investors on a medium to long term strategy will have ongoing payments to maintain, whether community fees, utility bills or loan repayments to fund the investment from another country. A Brazilian bank account will also need to be opened. Property Management companies may be hired by the investor to take care of some ongoing payments and arrangements. Rentals need to be managed, be it by a local management company in Brazil, or privately.

• Key Risks

Medium to long term investment in Brazil is lower risk than a short term investment, which relies on finding a buyer within a very short time frame. Providing the correct investment is made on a good quality project with multiple facilities, establishing rentals and eventually a buyer for the investment should not be difficult, although patience may be required as with any property market.

Brazil is a vast country with a considerable coastline, so expect many more projects to be announced over the coming months/years, particularly in the prime investment locations of Natal, Fortaleza and Salvador. This means greater competition between investors, making the choice of location and project even more important to early buyers. However, this also means an inevitable increased volume of visitors, purchasers and rental tenants.

By appointing independent legal representation, the client can be sure that all necessary paperwork is in place before signing purchase contracts. Bank Guarantees are not common place in Brazilian property developments, however the best projects do have these in place to protect investors’ interests.

Property ownership is 100% freehold in Brazil, leaving no room for dispute.

• Return

Capital appreciation in Brazil is currently steady, but expected to increase dramatically with the release of many new projects and improvements in the country’s infrastructure. Conservative growth forecasts over the next three years indicate annual levels of 20% as a base figure. Increased public awareness across the globe will also have a positive effect on the property market.

In order to maximize return, investors need to take up early opportunities in new developments, ideally at pre-launch prices or at pre-planning stage. Investors must expect initial pricing structures to be increased on projects after only a short period of general release. Trends indicate that developers are undervaluing units to encourage early purchasers, then increasing prices upon achieving a predetermined amount of sales. This is a highly lucrative opportunity for early investors looking for quick growth.

In addition, discount schemes, furnished options or other benefits such as exclusive allocations of prime units to IPIN are all effective ways to increase profit.

• Financing

The non-availability of mortgages in Brazil need not discourage investors from choosing Brazilian property. Release of equity from other properties, be it in their country of origin or in other investment locations, is often an attractive option. Sometimes on specific projects, mortgage products are arranged from alternative locations, such as Spain for example.

Inflation is continuing to fall in Brazil, meaning mortgage products should become available shortly as economic conditions improve. The future availability of mortgage product will have a positive effect on real estate prices throughout Brazil, an added factor in favour of early investors

• Taxation

The breakdown of additional costs associated with purchasing a Brazilian property total up to 7%. These are broken down into 3.5% ITIV (similar to VAT), Notary fees of 1.25%, Deed registration of 0.75% and legal fees of up to 2%. Property tax in Brazil is just 0.6%, although this percentage is based upon a value inferior to the actual valuation of the property.

Capital Gains Tax in Brazil is 15% of any declared gains, subject to double taxation treaties in place between Brazil and the investor’s country of origin. It is recommended that all investors receive advice from their finance and/or legal advisors between making their reservation and going to purchase contract.