Time
to get real – The Commercial Real Estate Industry in Brazil
Having worked with real estate for more
than five years in manifold ways, I want to seize this opportunity to present
the Brazilian commercial real estate industry to my readers. I have always had
a fascination for urban geography and downtown districts with high rise
architecture. Commercial properties are vital for everybody of us, because they
represent the physical space in which we human beings perform most of our
economic activities and spend a large amount of our lifetime.
Basically, commercial real estate
encompasses mainly five categories of real estate: office buildings, hotels, retail,
industrial properties and logistic properties. In contrast to residential real
estate, commercial real estate embraces property types in which various types
of economic activities take place. At this, I will primarily focus on office
real estate, hotels and retail.
Commercial real estate à la Brazil
When we talk about commercial real
estate and Brazil, one can state that the two megalopolises São Paulo and Rio
de Janeiro hold the lion’s share in Brazil’s commercial real estate universe. Taken
together, the two states São Paulo and Rio de Janeiro combine more than half of
Brazil’s total gross domestic product (GDP). Both of its identically named
capital cities are economic hubs for Brazil and South America. São Paulo and
Rio de Janeiro are nodal points of the service sector economy and both have
large international airports. This automatically generates demand for all types
of commercial properties. Together, São Paulo and Rio de Janeiro including their
metropolitan areas represent 60% of Brazil’s total office stock which is
equivalent to 15 million square meters (m2) of office space. For
comparison, the Manhattan office market which is the world's largest office market comprises 47 million m2 alone.
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| The Rochavera Corporate Towers office complex in São Paulo was completed in 2012 |
Who are the players in the Brazilian
real estate game? Generally speaking, the real estate industry is a vast
economic sector which comprises several subsectors. These subsectors are: real
estate investment, real estate development, real estate financing,
construction, property management and real estate brokerage. While the
construction sector is rather a part of the secondary sector due to its
“industrial” character, the other five subsectors can be associated with the
tertiary sector as they offer and sell real estate services. Brazil’s largest
construction companies are the following: Odebrecht, Andrade Gutierrez, OAS,
Camargo Corrêa und Quieroz Galvão. Their combined revenues make up 42 % of the
entire Brazilian construction sector. Their core business is to execute very
large construction projects such as roads, airports, seaports and power plants.
Besides, the Brazilian real estate industry consists of various corporations
the so-called “incorporadoras”. These
are multifaceted real estate companies which are active in real estate development,
construction, real estate investment and brokerage of both commercial and
residential properties. They lay the focus on office and commercial buildings,
residential condominiums and shopping malls. The largest and most well-known incorporadoras are Cyrela, Gafisa, BR
Malls, Multiplan, PDG Realty, Rossi and MRV.
The Brazilian construction sector is
vitally important for the country’s economy. In total, it generates 6.5% of the
entire Brazilian GDP. This is an equivalent of USD 153 billion (2014). In
total, more than three million people are directly employed in the construction
sector. During the years of the last growth cycle, the construction industry
played an important role in the Brazilian economic boom. Being a
labor-intensive sector, the construction industry managed to absorb a
considerable part of workforce and it created a “boom”-atmosphere based on the
multiple new constructions which were launched everywhere throughout the
country.
When we analyze “the real estate market”
we are always talking about submarkets. This is because we basically talk about
local real estate markets – e. g. a real estate market of a city or a
metropolitan area – rather than talking about a “national real estate market”.
Concentration of Brazil's office markets
How does the Brazilian office real
estate sector look like in a nutshell? São Paulo’s total office stock adds up
to 8.5 million m2 (including Alphaville). The multi-centric São
Paulo is characterized by its large variety of office regions such as Centro,
Avenida Paulista, Itaim Bibi, Marginal and Jardins. In 2015, the vacancy rate shot
up to 20.6% (up from 11.5% in 2014) and the top rents plunged to BRL 126/ m2
(this corresponds to USD 32/ m2, USD/BRL exchange rate in 2015) down
from BRL 185/ m2 in 2014. The new office supply in São Paulo
accounted for 412,000 m2. São Paulo’s trump is its vast area which enables
a frequent expansion and relocation of office districts throughout the
metropolitan area.
Rio de Janeiro’s total stock of office space
amounts 3.5 million m2. It is mainly concentrated on downtown Rio de
Janeiro (including the new Porto Maravilha) and Barra da Tijuca. The top rents attained
BRL 116/ m2 in 2015 (down from BRL 280/ m2 in 2014). Also
in Rio de Janeiro, the vacancy rate soared up and reached 24.3% in 2015 (2014: 13.4%).
New office supply added up to 141,900. Basically, the Rio de Janeiro office
market is still dominated by the downtown area which makes up 52% of its total
office stock. The office stock in the downtown area accumulates a lot of older constructions
which were built in the 1940s, 1950s and 1960s. The new submarkets Porto
Maravilha with its new constructions and developments adds further space for office market expansion to Rio de Janeiro’s
limited space. However, due to the present economic downturn, Porto Maravilha
currently faces a vacancy rate of 82%.
Of course, other Brazilian metropolises
such as Porto Alegre, Brasília and Belo Horizonte also exhibit office real estate
markets. However, these markets are much smaller than the office markets in São Paulo
and Rio de Janeiro and are of minor importance particularly from the viewpoint
of international real estate investors. International real estate investors
basically focus on São Paulo and Rio de Janeiro, because those markets
represent the most well-known locations within Brazil. Furthermore, the office
markets São Paulo and Rio de Janeiro show the highest level of transparency.
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São Paulo is by far Brazil’s most important commercial real estate market
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The shopping mall "gold rush"
A true real estate success story of the
past 10 years is the Brazilian shopping mall industry. Due to Brazil’s
propensity to consumption, the retail sector emerged as one of the key drivers
for the Brazilian economy. The number of shopping malls skyrocketed from 281
malls in the year 2000 up to 530 malls in 2015. In the period from 2006 until
2013, the Brazilian retail industry went through the roof with an average revenue
growth of 14.65% per annum. As a result, the shopping mall sector grew almost
five (!) times faster than Brazil’s total GDP on average. Now we know where all
the Brazilian money has gone lately. In total, the Brazilian shopping
malls employ 843.254 people and attract 415 million visitors per month. The
average Brazilian shopping mall has a size of 26,142 m2 of Gross
Leasable Area (GLA). More than half of all Brazilian shopping malls (55%) are
located in the Brazilian Southeast – which includes the three Brazilian core
states São Paulo, Rio de Janeiro and Minas Gerais. While a large amount of the
Brazilian shopping malls are located in its major metropolitan areas, there has
been a significant growth in small and medium cities in the past six years. Apart from São Paulo, Rio de
Janeiro and Belo Horizonte, various Brazilian cities became strongholds of the
most recent shopping mall boom. These cities are: Porto Alegre, Brasília, Curitiba,
Salvador, Fortaleza, Goiânia and Manaus.
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Shopping Mall in the Marginal region, São Paulo
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Demand for hotels in small and medium-sized cities continues
With all its natural beauties, good
weather and endless beaches, Brazil has excellent preconditions to be a tourist
magnet which could pave the way for a vital hotel industry. As a matter of
fact, Brazil attracts a lot of tourists, however these tourists are mainly
native Brazilians who spend the holidays in their own country. Merely 6.5 million
foreign tourists visited Brazil in 2014. On a global scale, this is a quite
moderate amount of foreign visitors, taking into consideration Brazil’s large
population of 204 million people. Surely, the 2014 Football World Cup led to a
rush on Brazil and spurred the tourism sector revenues. Nevertheless, the Brazilian
hotel market is not yet saturated. In 2014, there were approximately 10,000
hotels in operation in Brazil. Taken together, Brazil’s total amount of hotel
rooms came to slightly more than 485,000. For comparison: In the same year, Germany
had approximately 30,000 hotels with a total of 950,000 rooms and the U.S. had 51,200 hotels with
a total of 4.88 million hotel rooms.
In order to find a common ground across
different countries, one can observe an interesting ratio for a national hotel
market: It is called hotel supply ratio (HSR) and comprises the number of hotel
rooms divided by the thousandth part of a country’s total population. The
higher the HSR, the more hotel room supply exists within an economy. The lower
the HSR, the fewer hotel rooms are available on a national hotel market. Brazil’s
HSR adds up to 1.4. In a worldwide context, this is a low HSR and in a Latin American context it is an average HSR. For comparison: While the
HSR for the U.S. tops the ranking with 15.5, the UK has an HSR of 8.6. Mexico’s
HSR reaches 2.7 and Colombia’s HSR runs up to 0.8. The top ten hotel
corporations which are present in the Brazilian market are: Accor, Choice
Hotels, Louvre Hotels, Nobile, Blue Tree, Nacional Inn, Wyndham, IHG and
Windsor. After all, in the top ten there are four Brazilian hotel groups: Blue
Tree, Nacional Inn, Transamérica and Nobile.
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Brazil’s vast coastline: There is still demand for a higher amount of hotel rooms
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Commercial real estate and the Brazilian economy
How is the present situation of the
overall real estate markets across the country? How is the outlook for the
Brazilian commercial real estate markets? In the wake of the current economic
crisis, the construction sector suffered severe losses due to the economic
slump. The largest corruption scandal in Brazil’s history, ineffective economic
policies, a lack of investment and a sharp fall in commodity prices have finished Brazil’s most recent boom cycle. And the mega
corruption case called “Petrolão” did not spare the Brazilian construction
giant Odebrecht. Two further major construction companies already filed for bankruptcy.
Brazil’s economy is facing a harsh downturn at the moment. According to the CBIC,
the Brazilian construction industry association, the workforce in the
construction industry shrunk by 15% which corresponds to 300,000 employees who
lost their job in 2015.
The Brazilian Real devaluated 50% when
you compare the USD to BRL exchange rate in the period from February 1st,
2015 until February 1st, 2016. As a consequence of this severe currency
devaluation, Brazil was no longer the 7th largest economy worldwide
in 2015. It dropped down two ranks and is now the 9th largest
economy in terms of GDP. Due to the time lag which is distinctive for the real
estate sector, economic trends always hit the real estate industry delayed in
time. When we take a closer look at the market values of the incorporadoras, one
can state that the industry is nearly broke. PDG, Rossi, Helbor and Gafisa lost
more than 90% of their stock market value (in USD) within the past 24 months. At
the beginning of 2016, the shares seem to have reached a bottom level for the time being.
As mentioned above, the markets for office
properties struggles with a rent decrease and an escalating vacancy rate which
nearly doubled within one year. During my last visits in Brazil in 2015, I witnessed
numerous constructions and real estate developments which came to a halt. Real
estate profitability is measured by the capitalization rate (also called “cap
rate”). The higher the cap rate, the “cheaper” and the more profitable is the respective
property. There is a continuing upward pressure on cap rates which implies that
property prices continue their negative trend. At present, an increasing amount of commercial proerties are available for sale. Yet again, all these occurrences
prove the cyclical nature of real estate which can be compared to a venturous roller
coaster in motion. Ultimately, the current economic crisis leads to a sharp
correction of rents and property prices. After the overheated real estate “gold
rush” years 2011 and 2012 with double-digit growth rates, the parameters and key figures of the Brazilian real
estate sector face now the opportunity to get real and to come into a healthy
balance. In defiance of the economic slump, the legendary shopping mall success
story of the past 15 years, has potential to continue. While the large
Brazilian metropolises are nearly saturated with shopping malls, the small and
medium cities (tier 3 and tier 2 cities) still exhibit growth potential for
shopping malls. Despite the negative macroeconomic situation, there are still
opportunities in the Brazilian real estate universe. The demand for hotel real
estate still exists and there are several tier 2 and tier 3 cities in the vast Brazilian
inland which offer potential for profitable hotel investments. For now, the
industry’s challenge is to overcome the worst economic crisis since 1901 and to
attract foreign investment capital again. Apparently, 2016 will be a rough year
– but Brazil is experienced with economic volatility. Hopefully, the roller coaster will reach its valley soon so that it can bounce back.
TERMIN: 03.03.2016
