The market and economy of

April 2008 The property market and

Commissioned by: Agenzia del Demanio Via Piacenza, 3 00187 Roma

Drawn up by: Nomisma – Società di Studi Economici p.A. Strada Maggiore, 44 I-40125 Bologna () tel. +39 (051) 6483.301-111 fax +39 (051) 223441 email: [email protected] web site: www.nomisma.it

Project team: Daniela Percoco Maura Perillo

Report terminated in April 2008 The property market and economy of Brazil Contents

Contents

THE COUNTRY IN FIGURES...... 1

PART I – THE SOCIO-ECONOMIC FRAMEWORK...... 3 I.1 Political framework ...... 5 I.2 Demographics ...... 6 I.3 Administrative breakdown ...... 7 I.4 ...... 8 I.5 The economy...... 9 I.6 ...... 10 I.7 with Italy ...... 11 I.8 Taxation...... 12 I.9 Country risk and transparency of the property market ...... 13

PART II – THE PROPERTY MARKET ...... 15 II.1 Overview...... 17 II.2 The office market...... 18 II.3 The retail market ...... 22 II.4 The Industrial and logistics property market ...... 25 II.5 The hotel market ...... 26 II.6 The investment market...... 27 Bibliography ...... 29

The property market and economy of Brazil Contents

The property market and economy of Brazil The country in figures

The country in figures

Official name República Federativa do Brasil Population 190,010,647 Surface area 8,511,970 Km2 Density 22 inhab./Km2 Capital Brasilia Largest cities Belém, , , Poiane, Ma- naus, , Salvador, San Paolo, , Institutional form Federal Presidential Republic Currency Real Brazilian ( 1 real = 0.5757 $; 1 real = 0.3640 €) Ethnic groups White (54%), mulatto and mixed (38.5%), black (6%), American Indian (0.4%), other (1.1%) Religions Catholic (74%), Protestant (15.5%), non religious/atheist (7.5%), animist (1.3%), other (1.7%) Official language Portuguese (official), English, German, Italian, Indios languages Member of , OAS and the UN

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The property market and economy of Brazil The country in figures

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The property market and economy of Brazil The socio-economic framework

Part I

The socio-economic framework

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The property market and economy of Brazil The socio-economic framework

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The property market and economy of Brazil The socio-economic framework

I.1 Political framework Schedule I.1 Form of government: Federal Presidential Republic Head of State: Luiz Inàcio Lula da Silva Vice President: Josè Alencar

After the abolition of the monarchy, the first Republican in 1891 set up a Presidential Republic with three separate powers: the executive (exercised by the President and Vice President), the legislative (exercised by Parliament, comprising a Sen- ate and Chamber of Deputies) and the judiciary (exercised by the Federal Supreme Court/Higher Court of Justice1 and Higher Military Court). This set-up exists still today. Brazil is a Federal Presidential Republic comprising 26 states plus the Federal District of Brasilia, the country's capital. The President, elected by direct universal suffrage, is ap- pointed for four years and is also the head of the government. The National Congress, with legislative power, comprises a Federal Senate with state representatives (81 mem- bers appointed for 8 years) and a Chamber of Deputies (517 members appointed for 4 years). Every state in the Federation has a Governor, elected for 4 years. The last general election, leading to the re-appointment of the current President, Luiz Inácio Lula da Silva, was held in October 2006 and the next are scheduled for 2010. The general election includes voting for the Chamber of Deputies and a third of the Senate2.

1 The Federal Supreme Court has 11 judges appointed by the President after ratification by the Senate 2 The elections for the 81 members of the Federal Senate are held every 4 years, first for one third of the members, then for two-thirds.

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The property market and economy of Brazil The socio-economic framework

I.2 Demographics With about 190 million inhabitants, Brazil is the country in Latin America with the highest population and the fifth in the world in terms of the number of inhabitants. Due to its huge geographical extension, the population density is very low: just 22 inhab./km2. In recent years population growth has been constant and continuous, increasing from 182 million to over 190 million.

Figure I.1 The population is spread very un- Brazil – Population trend evenly, however, with a strong 192 190,010,647 concentration in cities. Rapid in- 190 dustrialization has forced people 188 away from the countryside: today, 186 about 85% of the population of Million 184 Brazil lives in cities (20 million in 182 San Paolo alone), and just 15% in 182,032,604 180 rural areas. 2003 2004 2005 2006 2007 Years In 2007, 68.4% of the population

Source: CIA World Factbook. was aged between 15 and 64, making Brazil the Latin American country with the highest proportion of people of a working age. After and Uru- Figure I.2 Brazil – Breakdown of population by age (2007) guay, Brazil also has a large percentage of eld- 100 erly people and relatively 80 few children of under 14. 60

The mortality rate is con- % 40 stant and the rate of births in steady decline. 20 0 Argentina Brazil ColombiaParaguay UruguayVenezuela Years

0-14 15-64 >65

Source: CIA World Factbook.

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The property market and economy of Brazil The socio-economic framework

I.3 Administrative breakdown Brazil comprises 26 States and one Federal District.

figure I.3 figure I.4 Brazil – The 26 States Brazil – Regions

Geographically the country is divided into 5 regions (regiões), which are not administra- tive entities. The states are: • (Região Norte): , Amapá, Amazonas, Pará, Rondônia, , ; • (Região Nordeste): , , , Maranhão, , , Pi- auí, , ; • (Região Centro-Oeste): Goiás, , , Distrito Federal do Brasil; • (Região Sudeste): Espírito Santo, , Rio de Janeiro, ; • (Região Sul): Paraná, , . Each state has some autonomy in terms of legislation, public safety and taxation. The state is headed by a Governor (governador), elected directly along with the entire legis- lative assembly (assembléia legislativa). Each state has municipalities (municípios), each with a Council (câmara de vereadores) and Mayor (prefeito), who are independent of both the Federal and the state government. The judiciary is organized into districts, or "jurisdictions" (foros). At the state level these jurisdictions are called comarcas. Each comarca may handle the judicial matters of one or more municipality.

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The property market and economy of Brazil The socio-economic framework

I.4 Infrastructure The infrastructure sector is of primary importance in Brazil, so much so that the govern- ment has well-defined strategies and specific programmes to optimize the sector and re- lated services. Starting in January 2007, the government allocated 504 bn. real every year until 2010, the equivalent of about € 185 bn., making infrastructure one of the coun- try's top priorities. Private companies are also allowed to invest in, and administer, cer- tain . The plan gives particular importance to communications with neighbouring countries, with the aim of further strengthening socio-economic links with MERCOSUR member states3. One of the most important ongoing projects is the transoceanic motorway, designed for goods traffic between Brazil and the Pacific Ocean. It will run 2,600 kilometres, cross the , and connect Rio Branco (capital of Acre, in Brazil) with the three leading in Peru. The work is scheduled for completion in 2011; the cost is about $ 1.8 bn. Ac- cording to Odebrecht, one of the leading Brazilian construction companies working on the project, it is the largest tender ever issued in Latin America. Currently Brazil has a network of about 1.8 million Km (the third largest in the world). Following the construction of many new , transport by river has become less important. The country has about 70 which each year handle over 80 million passengers. Over 30 airports have logistics terminals for cargo traffic. In 2002 the Brazilian government announced a 10-year plan for the upgrading of air- ports, above all those close to the most important industrial and tourist areas. The largest investments should be in the international airports of San Paolo, Santos-Dumont, Recife, Maceiò and Brasilia.

Table I.1 Brazil – Principal macroeconomic parameters 2004 2005 2006 2007* Nominal GDP ($, current prices) 604.9 796.3 967.0 1.177.0 Real GDP (% var.) 5.7 2.9 3.7 4.3 Industrial output (% var.) 0.2 3.1 2.8 4.4 Rate of (%) 9.3 7.6 3.3 3.0 Private consumption (% var.) 3.1 3.1 4.3 5.7 Public consumption (% var.) - - 3.6 3.3 Foreign debt (% of GDP) 36.4 27.4 22.2 14.1 *Data for first semester 2007. Source: ICE using IBGE (Brazilian Institute of Geography and Statistics) data. The Brazilian railway network, which is now entirely private (after privatization of the RFFSA, the Federal state railway company in the mid-nineties), covers 31,000 km

3 The South American common market. It was created by the Treaty of Asunciòn in March 1991 and originally com- prised Brazil, Argentina, and . Currently it also includes . Bolivia, Chile, , Ecua- dor andl Peru are associate members .

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The property market and economy of Brazil The socio-economic framework and is mainly used for goods. However, railways are also involved in the project for the upgrading of infrastructure, with increased investmens expected in coming years.

I.5 The economy Brazil is a developing economy, although among BRIC countries4 it is the one with the slowest growth rate due to the insufficiency of investments (albeit now increasing) and the high rate of taxation. In 2007, the current government, in relation to this fact, adopted a 3-year plan to encourage investments and reform the tax system. However, Brazil has the most advanced economy in South America thanks to the eco- nomic and structural reforms of recent years giving it a new and better position in the international community. Optimism is based on the forecast of for 2007 with good news about integration with the rest of the South American economy and about the availability of energy resources. The country is also the world's leading producer of , sugar cane and oranges, and is second for soya, , and chicken. The of these prod- ucts and other agricultural and industrial products have generated considerable wealth in recent years. Figure I.5 The first semester of 2007 saw an increase in Brazil – Breakdown of GDP by sector (March 2007) GDP in Brazil of 4.3% compared to the same period the previous year, faster growth than Agriculture 8% in recent years although not as high as the Industry 38% peak of 5.7% in 2004. Brazilian growth is not only the result of high levels of exports but also strong domestic Services 54% demand, stimulated by the economic poli- cies of the government which have raised

Source: EIU (Economist Intelligence Unit). the standard of living of average and made the economy one of lively consumerism. Private consumption increased from 3.1% in 2004 to 5.7% in the first semester of 2007. Prices have not risen comparably, with inflation at 3% and falling. The ratio of foreign debt to GDP, always an Achilles heel for Brazil, has fallen from 36.4% in 2004 to 14.1% in the first semester of 2007. GDP is made up of services (54%), manufacturing (38%) and agriculture (8%).

4 Brazil, Russia, and Cina.

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The property market and economy of Brazil The socio-economic framework

I.6 Employment

Figure I.6 Figure I.7 Brazil – Trend in the unemployment rate Brazil – Trend in the employment rate

13 100 99 12,3 12 11,5 95 11 9,8 10 90 90

% 9,6 9 89

Million 85 8 83 7 80 6,4 6 79 2003 2004 2005 2006 2007 75 2003 2004 2005 2006 2007 Years Years

Source: CIA World Factbook. Source: CIA World Factbook.

The unemployment rate continues to fall, after a downturn in 2004. Evidence of the fact that economic growth is still insufficient to absorb the demand for work, the unemployment rate is still quite high. Table I.2 Both in comparison with other BRIC and other Brazil – Unemployment in BRIC and MERCOSUR countries (2007, %) MERCOSUR countries is BRIC MERCOSUR high (worse only in Uruguay). 4.2 Argentina 8.7 Russia 6.6 Venezuela 8.9 On the other hand, in the first semester of 2007, India 7.8 Paraguay 9.4 100 million were employed with an employment Brazil 9.6 Brazil 9.6 rate of 52%. Compared to other South American Uruguay 10.8 Source: CIA World Factbook. countries, this is rather high, an indication of the underlying strength of the economy. Yet all other BRIC countries do better, so even as a growing economy there is still room for improve- ment.

Table I.3 Table I.4 Brazil – Employment in BRIC countries Brazil – Employment in MERCOSUR countries (July 2007) (July 2007) Employed Employed/ Population Employed Population Population Employed Population (%) (%) China 1,321,851,888 803,300,000 60.77 Brazil 190,010,647 99,470,000 52.35 Russia 141,377,752 75,100,000 53.12 Venezuela 26,023,528 12,500,000 48.03 Brazil 190,010,647 99,470,000 52.35 Paraguay 6,669,086 2,757,000 41.34 India 1,129,866,154 516,400,000 45.70 Argentina 40,301,927 16,100,000 39.95 Uruguay 3,460,607 1,278,000 36.93 Source: CIA World Factbook. Source: CIA World Factbook.

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The property market and economy of Brazil The socio-economic framework

I.7 Trade with Italy Italy's trade with Brazil (and Argentina) is the highest in Latin America. Particularly important for the “Made in Italy” is the large number of inhabitants of Ital- ian origin (about 23 million) which clearly favours the import of Italian products. Nonetheless, trade between the two countries is affected by the difficulty in penetrating the Brazilian market due to customs duties and the stratified nature of the Brazilian market itself, with only a small number of consumers with high disposable incomes and a large number with medium to low incomes. For the latter, Italian products are uncompe- titive with local products and other Mercosur countries, Asian countries and China. Italian exports feature industrial machinery, mechanical engineering goods, domestic ap- pliances, car components, sunglasses, chemical products, synthetic products, clothing and footwear, leather products, ICT, precision and electronic instruments, and carbon electrodes. Italy imports mainly agricultural produce, timber, quarried stone, foodstuffs, and its derivatives, refined energy products, meat, coffee and soya. According to the Brazilian Ministry of Development and Trade, in relation to Brazil's im- / performance in 2006, the country imported a total of products with a value of $ 91.4 billion, up 24.3% on the previous year. Imports from Italy were about $ 2.5 bil- lion, up only 12.9%. Consequently Italy's share of the market fell further, from 3.0% to 2.8%, although Italy remained the tenth largest supplier of Brazil.

Figure I.8 Figure I.9 Brazil – Leading trade partners (2008) Brazil – Supplier countries (2008) 20 20 18 18 16 16 14 14 12 12

% 10

% 10 8 8 6 2.8 6 4 4 2.8 2 2 0 0 a y ina ina ria an ce al USA h p re eria ge a o Chile an It lg n y C rmany J K Fr A na ico ile a l e Ni h A ti x h p ta ela ium G t US e C I zu Argent China rmany M Ja Russia Sou Holland ene Belg Argen Ge V

Source: Foreign Affairs Ministry. Source: Foreign Affairs Ministry.

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The property market and economy of Brazil The socio-economic framework

Figure I.10 If trade between Italy and Brazil is ex- Brazil – Trade between Italy and Brazil ( $ million) amined over the past 15 years, there have been three phases: ƒ 1991-1997, with an increase in imports and less marked in- crease in exports; ƒ 1998-2003, a slow-down in trade partly due to the effects of September 11; Source: ICE. ƒ from 2003 to today, an increase in both imports and exports.

I.8 Taxation Brazil has one of the most advanced and complex tax systems in Latin America. There are three sources of taxation: federal, state and municipality. The main federal taxes are: ƒ Income tax (IRPJ). This is 15% of the declared income, plus a further 10% for in- comes over 20,000 real per month. ƒ Income tax (IRPF). For earnings from whatever source of people resident or domi- ciled in Brazil. A sliding scale with maximum of 27.5%. ƒ Social contribution on gross income (CSSL). Companies working in Brazil (includ- ing banks) are subject to this tax, based on gross profits from earnings. Revenue from abroad is included. From 1 February 2000 to 31 December 2002, the rate was 9%; today it is 8%. CSSL is not deductible from earnings for income tax. ƒ Industrial production tax (IPI). This is VAT, which has a variable rate according to the product. The highest rate is for non-essential items such as cigarettes, soft drinks and cosmetics. ƒ Financial transactions tax (IOF). This tax applies to loans provided by finance companies, on foreign exchange operations, financial investments and mortgages. The level of tax varies according to the type of transaction. ƒ Turnover tax: 9 Social security (COFINS), at 3%; 9 Social integration (PIS/PASEP), at 1.65%;

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The property market and economy of Brazil The socio-economic framework

9 Provisional financial operations tax (CPMF), at 0.38%5; 9 Social security institute (CINSS). ƒ Import and export duties.

I.9 Country risk and transparency of the property market Brazil has been pursuing a policy of economic stability for some years and this seems to be bearing fruit. The leading rating agencies have raised their ratings for reliability. In addition, Brazil paid off its debt to the IMF in advance, has obtained good balance-of- payments figures and has record levels of foreign currency reserves. These factors will cer- tainly encourage investments from abroad. Table I.3 Brazil is considered overall Brazil – Reliability according to rating agencies Standard and Poor’s Moody’s Fitch OECD a stable country. The rat- Rating BB+ Ba1 BB+ 3 ings of leading agencies are shown in table I.3. Table I.4 In terms of the transparency Brazil – Property transparency index. North and South and risk of property invest- America Level of transpa- Index in Index in ments, the Jones Lang LaSalle Country rency 2006 2004 index is interesting. USA 1.15 1.24 High This places Brazil in the “semi- Canada 1.21 1.37 transparent” category, with a 2.51 3.14 Chile 3.11 3.24 score of 3.31. Medium high Brazil 3.31 3.62 This index, on a scale of 1 to 5, Argentina 3.41 3.76 where 1 is highly transparent Costa Rica 3.83 4.00 and 5 opaque, is based on the Peru 4.08 - Low following factors: Colombia 4.10 4.10 Uruguay 4.13 - - availability of accurate in- Panama 4.18 - formation on markets and Opaque Venezuela 4.43 - finance; Source: Jones Lang LaSalle. - the regulatory framework; - security of ownership and the ability to enforce rights of ownership; - the management and financial control of listed companies; - zoning and building regulations. In 2004-2006 Brazil fell slightly from 3.62 to 3.31, indicating an improvement in trans- parency, which should continue.

5 Scheduled for abolition during 2008.

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The property market and economy of Brazil The socio-economic framework

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The property market and economy of Brazil The property market

Part II

The property market

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The property market and economy of Brazil The property market

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The property market and economy of Brazil The property market - Overview

II.1 Overview The flourishing economy has led to the currently positive property market cycle overall. The fall in inflation means that the disposable incomes of poorer families have risen, cre- ating greater market dynamism. At the moment there is a shortage in Brazil of about 8 million houses and it is therefore no wonder that investors are attracted by the potential of the country. Brazil is one of the four fastest growing economies in the world. And that is not all. According to experts at Fitch Ratings about $ 190 bn. will be needed for housing and, according to the Brazil- ian government, in the next 15 years as many as 27 million new homes will need to be built simply to keep pace with the increase in population. This indicates that housing will flourish in the future and foreign investors will certainly play a large part. Driven essentially by the economic-financial sector, the office market in Brazil was characterized in 2007 by a high level of demand and take-up, and by a gradual in- crease on the supply side. Rents have therefore risen and yields fallen, although they re- main high. The retail market, too, driven by shopping malls, performed well. The additional pur- chasing power of families and the overall growth in the economy are key factors. Even the industrial property market did well, although not as well as other sectors in the property sector. Yet, growth can be expected over the next few months, not only in large cities such as San Paolo and Rio de Janeiro, but also in smaller cities to the south of the country. The hotel sector continued to attract a growing number of tourists and hence also heavy investments.

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The property market and economy of Brazil The property market - Offices

II.2 The office market The Brazilian office market in 2007 continued to expand mainly in San Paolo and Rio de Janeiro, where rents increased considerably. This trend is a result of the increase in demand and stagnant supply, above all in San Paolo. 2008 is following 2007, despite the many ongoing office developments, with de- mand way ahead of supply. Among Latin Ameri- Table II.1 Brazil – Comparison between BRIC and Latin American countries can countries, Brazil is (2008) Rank the fastest growing in Country City €/m2/year €/m2/month this sector as sin terms 2008 of increase in average 2 China 1.745 145 4 India Mumbai 1.214 101 rents. However, it is still 5 Russia Moscow 1.160 97 behind the so-called 23 Brazil San Paolo 508 42 Bric countries, as shown 25 Venezuela Caracas 478 40 in table II.1. opposite 29 Argentina Bueons Aires 412 34 45 Uruguay Montevideo 280 23 46 Cile Santiago 268 22 52 Colombia Bogota 217 18 Source: Cushman & Wakefield.

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The property market and economy of Brazil The property market - Offices

Rio de Janeiro Figure II.1 The office sector in Rio de Janeiro per- Rio de Janeiro – Vacancy rate (%) formed well in 2007, as shown by the high level of demand and continuous fall in the vacancy rate, now at an all-time low (6.4% on average). During 2007 this rate fell uninterruptedly as offices were quickly taken up. The lowest vacancy rate is in the south of the city (2.8%) and the highest is in Flamengo (10.4%). Total stock is in excess of 2.5 million m2, over half in the city centre (62%). Source: CB Richard Ellis. New office developments are under way Figure II.2 almost exclusively in Barra de Tijuca, Rio de Janeiro – Trend in rents for class A where heavy demand has attracted offices massive investments. The good performance of the sector has continued to drive up rents, 30% up on the fourth quarter of 2007.

Source : CB Richard Ellis. Table II.2 Rio de Janeiro – Leading parameters (Q4 2007) Stock in Vacany Gross absor- Total stock area/ New of- Class A rents Area rate ption (000 m2) Total stock fices(m2) (R$/m2/month) (%) (m2) (%) Centre 1,552 62 5.9 20,500 - 60-95 Botafogo 363.3 14 7.1 3,500 - 70-110 Flamengo 69.4 3 10.4 - - 60-90 Barra de Tijuca 262.4 10 7.4 30,600 29.300 65-80 South 122.1 5 2.8 10,200 - 70-120 Other 148.1 6 8.6 400 - 50-70 Total 2,517 100 6.4 65,200 29,300 50-120 Tot. class A 680.3 27.1 5.3 4,600 - 75-120 Tot. class B 738.3 29.3 7.1 11,700 - 50-70 Source: CB Richard Ellis.

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The property market and economy of Brazil The property market - Offices

San Paolo Figure II.3 The office market in San Paolo in- San Paolo – Business areas cludes the City Centre, Paulista, Jeardin, Faria Lima, Itaim, Vila Olim- pia, Berrini, Chacara, Santo Antonio and Marginal (from old to recent). Business has increased since 2004. In 2007, demand was significantly up, with property values also up and the supply side rather weak although growing. Consequently, the vacancy rate has fallen, dramatically in the last quarter compared to the same period in 2006, at 8.7% on average. Class A and A+ have slightly higher vacancy rates, at around 10%, with the lowest values in the city centre and Paulista, Jardin, Faria Lima,

Source: Cushman & Wakefield. Itaim and Olimpia. Vice versa, in the areas of Moema and Marginal many offices are unlet due to lack of consistent demand (also preferring class B) rather than availability. In the last quarter of 2007, overall take-up was close to 45,000 m2, includ- ing 11,000 in Marginal alone. Given the high vacancy rate for high-quality properties in this area, demand is clearly different (i.e. oriented towards class B offices) unable to keep up with the rate at which new offices have come onto the market. Marginal is followed by Verbo Divino (and, significantly, by Faria Lima and Olimpia.

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The property market and economy of Brazil The property market - Offices

Figure II.4 Figure II.5 San Paolo – Vacancy rate for class A and A+ San Paolo – Breakdown of total stock of class A offices by area and A+ executive offices over time (%) (000 m2)

Source: Jones Lang LaSalle. Source: Jones Lang LaSalle.

Total stock continues to be on the increase, as over the entire past decade, reaching about 5.6 million m2 with 36% of this in class A and A+.

Table II.3 Figure II.6 San Paolo – Principal parameters for the San Paolo – Breakdown of stock by area office market and for class A and A+ prop- (4th quarter 2007) erties(4th quarter 2007) Tot. stock Vacancy rate Take-up Centre (m2) (%) (m2) Other 6% 21% Paulista Alphaville 18% 5% CBRE 2,029,000 12.7 85,600

Jardins 16% Marginal JLL 2,224,000 9.9 83,.209 34%

Source: CB Richard Ellis and Jones Lang LaSalle. Source: CB Richard Ellis.

Demand has driven up average rents, by 6% in the last quarter of 2007 compared to the previous one, and up 21% on a year-to-year basis. On average for a quality office rents are about R$ 85 m2/month.

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The property market and economy of Brazil The property market - Retail

II.3 The retail market Shops Given the favourable eco- Table II.4 Brazil – Top ten American locations (2007) nomic climate and the inter- City High Street €/m2/year €/m2/month est of investors, the conven- New York 5th Avenue 11,983 998.6 tional shops segment in Bra- New York Madison Avenue 9.,86 798.8 New York East 57th Street 7,190 599.2 zil performed well. In Igua- Los Angeles Rodeo Drive 4,793 399.4 temi Shopping, the main Chicago North Michigan Av. 3,395 282.9 shopping street in San Paolo, San Francisco Union Square 3,195 266.3 San Francisco Post Street 2,796 233.0 the average rent is € 133 Chicago East Oak Street 2,796 233.0 m2/month, which, albeit well San Paolo Iguatemi Shop- 1,596 below the almost € 1,000 ping 133.0 m2/month of Fifth Avenue in Vancouver Robson Street 1,584 132.0 Source: Cushman & Wakefield. New York, nonetheless is enough to make it a top ten city in the American continent. Figure II.7 Growth in the sector is shown in Brazil – Annual growth rate in the rents of shops in leading American cities some areas by sharp increases in (%, June 2007) the values of shops, in 2007 up as much as 50% (Direita / Itapetin- inga in San Paolo and Visconte de Piraji in Rio de Janeiro). Rents in some areas are higher than in Argentina and Mexico, evidence of the positive trend in demand and the developing sup- ply side still unable to meet de- mand.

Source: Cushman & Wakefield.

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The property market and economy of Brazil The property market - Retail

Table II.5 Brazil – Rents in leading Latin American cities (2007) Country City Street Rent (€/m2/month) Argentina Buenos Aires Florida 891 Argentina Buenos Aires Avenue Cabildo 321 Argentina Buenos Aires Avenue Santa Fe 365 Argentina Buenos Aires Avenue Rivadavia 205 Brazil Rio de Janeiro Rio Sul Shopping 1,320 Brazil Rio de Janeiro Visconte de Piragi 1,031 Brazil San Paolo Oscar Freire Jardins 565 Brazil San Paolo Direita (Itapetininga) 315 Brazil San Paolo Iguatemi Shopping 1,596 Brazil San Paolo Morumbi Shopping 1,236 Brazil San Paolo Shopping Patio Higienopolis 1,508 Brazil San Paolo Rua Estados Unidos 141 Mexico Mexico City Mazaryk 556 Mexico Mexico City Santa Fe 463 Mexico Mexico City Perisur 556 Mexico Mexico City Madero St. 463 Mexico Mexico City Altavista St. 417 Source: Cushman & Wakefield.

Shopping centers Starting in the 80s this segment began an uninterrupted period of growth, peaking in 1996-2001 when as many as 100 new shopping centers were opened in the country. To- day there are 367 in Brazil with a surface area of over 8 million m2. 55% are in the south- east, mainly in San Paolo and Rio de Janeiro (with 51 and 32 respectively). Figure II.8 Above all foreign investors have Brazil – Breakdown of shopping malls by area (2008) been attracted by the high levels North South North-East of yields compared to other 2% 20% 14% countries. West 9% Brazil is one of the leading coun- tries on the American continent and has the highest level of cross- border investments, mostly di-

South-East rected to the retail area. 55%

Source: ABRASCE.

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The property market and economy of Brazil The property market - Retail

Figure II.9 Table II.7 Brazil – Source of property investments Brazil – Principal sector and in- (April 2008) vestor country (April 2008) Principal Principal sector Investor country

Argentina Retail Chile Argentina 48 5 47 Cile Hotel Chile 32 68

Peru 89 11 Peru Retail Mexico Brazil 37 7 56 Brazil Retail Canada Caribbean 22 78 Caribbean Hotel USA Mexico 9 79 12 Mexico Retail USA Canada 77 17 6

USA 90 1 9 Canada Offices USA

Domestic Continental Cross Border USA Retail Australia Source: Real Capital Analytics. Source: Real Capital Analytics.

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The property market and economy of Brazil The property market - Factories

II.4 The Industrial and logistics property market San Paolo is considered the largest industrial market in Brazil, followed by Rio de Janeiro. The sector is characterized by general modernization and industry is increasingly keen to locate its logistics and manufacturing operations within 100 Km from the centre of large city conurbations, where there are significant tax incentives and labour is plentiful and uncostly, both important factors. Other cities in the south of Table II.8 Brazil – Average rents in the industrial and logistics sector Brazil, such as Curitiba and in Latin American countries Porto Alegre, are growing (2007) fast in industry and logistics. Country Rent ($/m2/month) Trend Argentina 3-5 The sector is expected to Belize 3-4 boom in the future, with Bolivia 2-3 Brazil 3-8 imports and exports sharply Chile 3,5-4,5 increasing, requiring new Colombia 3-5 industrial set-ups. Costa Rica 3-5 2-3 Rents and costs have been El Salvador 2-4 affected by the economic Guatemala 3-4 upturn, respectively at $ 3 Honduras 2-3 Mexico 4,5-5,0 to 8 m2/month, and $ 370 2-3 to 560 per m2. This makes Panama 2-4 Brazil the Latin American Paraguay 2-3 country with the highest Peru 2-3 Uruguay 2-4 industrial and logistics val- Venezuela 2-6 ues on average, another Source: CB Richard Ellis. evident sign of recent growth.

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The property market and economy of Brazil The property market - Hotels

II.5 The hotel market With its cultural and natural attrac- Figure II.10 Brazil – Number of tourists to Brazil tions, Brazil is one of the most popu- lar tourist destinations in the world. 8 7 It is estimated that in 2007 about 7 6 million tourists visited the country 5 and the number is set to rise. The 4 Million north-east is particularly popular; in 3 the period from 1995 to 2006, the 2 number of foreign tourists rose 160% 1 0 and is expected to grow. The gov- 2003 2004 2005 2006 2007

ernment has also put a great deal of Source: Obelisk based on Tourist Ministry data money into the tourist sector in the form of incentives and tax deductions for new hotels and services of all kinds, attracting domestic and foreign investors convinced that Brazil will be one of the leading markets in the future. Many new hotels were opened in 2007 and the level of capital investments was high, although still behind the USA, Canada and some European countries, including Italy. Table II.9 Brazil – Volume of investments, number of new rooms and hotels in 2007 Country Euro No. No. of Country Euro No. of No. of (bn.) rooms hotels (bn.) rooms hotels USA 40.5 214,150 753 UK 5.4 23,209 147 Canada 2.6 19,437 60 1.8 9,923 37 Dom. Rep. 0.4 3,909 6 France 1.5 11,632 78 Mexico 0.4 2,665 7 Italy 1.2 2,551 13 Brazil 0.1 1,147 5 0.6 13,528 72 America Chile 0.1 548 4 Russia 0.6 2,865 7 Other 0.1 530 3 Ireland 0.4 991 4 Total 44.2 242,386 838 0.4 1,795 3 3.0 4,115 13 Spain 0.3 1,347 7 Australia 0.9 4,143 21 0.3 584 2 Singapore 0.3 1,649 3 Belgium 0.3 2,260 9

Hong Kong 0.3 656 2 Europe 0.2 3,650 32 New Zeland 0.2 418 2 Finland 0.2 4,433 23 Indonesia 0.1 797 7 0.2 1,981 12

Asia China 0.1 990 3 0.2 3,141 19 Malaysia 0.1 369 3 Cyprus 0.1 588 2 Thailand 0.1 371 2 0.1 825 3 Vietnam 0.1 547 2 0.1 558 3 Other 0.2 1,331 13 Morocco 0.1 427 3 Total 5.5 15,386 71 Other 0.5 2,155 10 Total 14.5 88,443 486 Source: Real Capital Analytics.

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The property market and economy of Brazil The property market - Investments

II.6 The investment market Due to the excellent economic parameters of the country and falling inflation, one of the longest term investments by international investors has been Brazil. The property market as a whole has considerable growth potential in all sectors and is a driving force of the entire national economy. This is why in the last twelve months an increasing number o international investors has entered the housing and commercial markets. Figure II.11 Retail, and shopping centers in Brazil – Trend in yields (March 2008) particular (given the low vacancy rate and high, though diminish- ing, yields) attract high levels of investment. This sector is followed by housing and offices where de- mand is high but there are few offices available, limiting invest- ments. At the moment logistics does not attract investors but there is rea- son to believe it will be a major sector in the future. In 2007, yields were between 11% and 13.5% depending on the sec-

Source: GlobalProperty. tor, falling but still considerably higher than other countries.

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The property market and economy of Brazil The property market - Investments

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The property market and economy of Brazil Bibliography

Bibliography ƒ CB Richard Ellis, Latin America & The Caribbean, Ist sem. 2007 ƒ CB Richard Ellis, Market view-Office Market Rio de Janeiro, 4th quarter 2007 ƒ CB Richard Ellis, Sao Paulo Metropolitan Area-Office Market, 4th quarter 2007 ƒ Colliers International, The knowledge Report-Office Market Sao Paulo, Ist quarter 2007 ƒ Cushman & Wakefield, Main streets across the world, 2007 ƒ Cushman & Wakefield, Marketbeat Latin America 2007, 2007 ƒ Cushman & Wakefield, Office space across the world 2008, 2008 ƒ DTZ, Market Place Brazil, 2007-2008 ƒ GlobalProperty, Brazil, March 2008 ƒ ICE, various documents (www.ice.gov.it) ƒ Jones Lang LaSalle, Real Estate Profile-Rio de Janeiro, 2nd quarter 2007 ƒ Jones Lang LaSalle, Real Estate Profile-Sao Paulo, 4th quarter 2007 ƒ Obelisk, Brazilian Property Market, 2008 ƒ Prudential, Latin American Quarterly, February 2008 ƒ Quotidiano immobiliare, various articles ƒ Real Capital Analytics, Global Capital Trends, March/April 2008 ƒ www.abrasce.com.br, various documents ƒ www.cia.gov/library/publications/the-world-factbook, various documents ƒ www.eiu.com, various documents ƒ www.globalgeografia.com, various documents

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