Profiting from the 2014 World Cup in Fortaleza Part 2
|Last October, I told you about the $5.25 billion investment the Fortaleza area will receive in the run up to the 2014 Soccer World Cup. Fortaleza is going to see a major upgrade in roads (there will be a new ring road), rail (a new metro system), bridges, port, and airport infrastructure. This will make certain areas more accessible and desirable.|
If we buy pre-construction today in areas set to benefit from The Path of Progress, by the time we take delivery of our units in three years time, this new infrastructure will have been delivered or will be within months of being delivered. Neighborhoods will change beyond recognition.
The end users (of which there are many in Brazil) won't catch on to this until they can see, touch, and jump on the infrastructure. Our place is ahead of them. But there's more than just an infrastructure story going on here....much more in fact.
Brazil has energy, food, water and manufacturing resources in abundance. It is emerging as one of the world's economic powerhouses. Wealth has been created and living standards have improved. Brazil is now technically defined as a "middle class" country with 53% of the population falling into this bracket. This new middle class wants to move into a shiny new condos or houses of their own. They will want to be near infrastructure that will bring them to work and play.
There's even more than new infrastructure and a new middle class going on...and it came up at every meeting I had over the past two days with my circle of local contacts and friends.
It's called "Minha Casa, Minha Vida". This translates to My House, My Life. This government program has the mandate to make home ownership affordable to Brazil's lower and middle classes. The My House, My Life program has 60 billion reais in the kitty. The program will help one million Brazilians become homeowners this year alone. That's a lot of new demand.
The program operates through a system of subsidies with Caixa Economica Federal, (Brazil's government-owned savings and mortgage bank) at the heart. Developers of qualifying projects receive a subsidy and a tax break. In return for this supply side incentive, they agree to offer units for sale at an agreed and competitive rate. The government is working very closely with their partner developers but they want to make sure that the incentives offered to buyers don't go straight into developers pockets, through increased prices.
The government subsidy varies according to the applicant's income. The minimum wage is currently 465 reais (set to rise to 505.90 reais next year.There are three categories:
Earn up to three times the minimum wage and you can own a home worth up to 50,000 reais, by making payments equal to just 10% of your income. Earn three to six times the minimum wage and you can buy a home costing up to 130,000 reais. The maximum price depends on where you live. In Rio and Sao Paulo, for example, it's 130,000 reais; in cities with more than 500,000 inhabitants (like Fortaleza), it's 100,000 reais, and the cap is 80,000 reais in smaller cities. Buyers within this range get a government cash subsidy and 100% mortgage over 30 years at 6%. Earn more than 6 times the minimum wage and your incentives are much more limited.
- Families earning up to three times the minimum wage per month
- Families earning three to six times the minimum wage per month
- Families earning six to ten times the minimum wage per month
Earlier today, I saw details of a project that fits in the three to six minimum wage bracket. This is the bracket where I expect to see the most activity, growth and further upward mobility. I know the site for this project. It is only 250 meters from the metro line and new shopping facilities. If you think this is some kind of slum or favela, you couldn't be more wrong. The plans call for a great project, well equipped with amenities (gym, pools etc) and the location is excellent.
This is great news if you are a low or middle income earning Brazilian…but where's the opportunity for us?
Firstly, these subsidies will greatly increase demand from end-users. Expect supply shortages, particularly in that all-important middle bracket to emerge. This will have an impact throughout the real estate market.
Foreign buyers can't avail of the subsidized loans. However, we may be able to buy qualifying units pre-construction and sell them on completion to an end-user who can avail of the subsidy. Alternatively, we might just want to sit on the unit, earn rent and watch it appreciate as Brazil's middle class becomes wealthier. Bear with me while I do my due diligence on what role we can (or can't play) in real estate that qualifies under this program. Believe me, these programs are complicated and few developers or lawyers have considered what role foreign investors might be able to play.
Finally, we could just invest or JV (joint venture) with a developer who is doing a project targeted at this market. Brazilian developers (even the big ones) prefer to JV with finance partners rather than borrow from banks. Money is expensive and they are conservative. They are always on the lookout for investors.
Plenty of food for thought. Tomorrow I'm back on a beach buggy heading west. Perfect for mulling over what "Minha Casa, Minha Vida" could mean for us investors.
|A finance graduate, Ronan McMahon worked in the e-business consultancy and dot-com industries before joining International Living as Real Estate Marketing Director in January 2004. Ronan has been an active real estate investor since his early twenties and joining International Living gave him the opportunity to marry his personal and professional interests. Last year Ronan took up the position of Executive Director with Pathfinder.|
Pathfinder is International Living's preferred Real Estate advertising partner. Pathfinder scouts the globe to find the most unique and value-oriented real estate opportunities.
Ronan writes International Living's Real Estate Trend Alert and regularly contributes to International Living's print and online publications. Ronan has travelled to 15 countries in the past 12 months alone following real estate trends with the potential for profit. Instinct, experience and an unrivalled black book of contacts give Ronan McMahon access to the inside track to unique profit opportunities.
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