Brazil nuts

From Economist.com
A housing boom has investors swooning

INTERNATIONAL investors have grown less excited recently about emerging markets. But despite all the talk about the “decoupling” them from America’s economy, it turns out that when America has a cold, the rest of the world still sneezes—even if, thanks to the emergence of new sources of demand outside America, it does not get quite as sick as it did. As economic growth has slowed, share prices have tumbled in each of the BRIC (Brazil, Russia, India, China) stockmarkets, though they are all well up on what they were in late 2001, when Goldman Sachs invented the acronym.

Of those four, investors are most bullish on Brazil—despite its economy’s history of tanking at the very moment that international investors regain their confidence in it (which, on past form, would be just about now). Brazilian shares may be down by 16% this year in local-currency terms (and 10% in dollars), but they are still worth four times what they were five years ago.

Arjun Divecha, an emerging-markets guru at GMO, an investment firm, thinks the inflation hawks who run Brazil’s economic policy make it especially attractive, despite its reliance on oil and other commodities, which are slipping from their recent highs. This has helped make the real one of the world’s strongest currencies, turning conventional economic wisdom on its head. “Real interest rates have been very high, and will start to come down, which will stimulate a lot of domestic consumption,” Mr Divecha says.

And domestic growth is becoming the important emerging-market story: hundreds of millions of people are earning enough to let them rapidly accumulate higher-value consumer goods, from cars to computers. There may be no clearer example of this than the Brazilian residential property market.

José Paim de Andrade, who founded a Brazilian real-estate investment firm called Maxcap in 2002, could hardly have been more bullish when he visited The Economist in New York last week. He reckons that the housing boom will continue for five to seven years, as the rapid increase in incomes leads to widespread residential upgrading.

The property market has changed dramatically since 1997, when Mr Paim de Andrade led the first initial public offering of a Brazilian housebuilder (Rossi Residencial). Today, he notes that there are 31 real-estate companies listed on the Brazilian market. Brazilian homebuilders have a combined market capitalisation of around $20 billion, the same as that of publicly traded American homebuilders, a statistic that says a great deal about the shifting balance of economic power from the developed to developing world.

So much foreign money has flooded the market that “capital has become a commodity in Brazilian real estate”, he says, and there has been a bubble in the shares that is now starting to burst. He expects consolidation, as some of the firms that went public during the bubble just because they could get taken over.

But a bubble in real-estate shares is not the same as a bubble in real estate, insists Mr Paim de Andrade, even though house prices have doubled in the past five years. The mortgage market has only just begun(it did not exist in 1997) and mortgages are being provided by big retail banks who retain an ownership stake in them, rather than securitise them as in America. Interest rates have fallen from around 16% three or four years ago; loan periods have grown from 12 to 30 years; and salaries have soared.

Around 70% of Brazilians own their own homes, but many of these (around 85%, Mr Paim de Andrade estimates) are self-built one room at a time, and are of low quality. Much of the boom is about people moving to new and better properties, which is why building is taking place all over the country. One of Maxcap’s recent investments involved the launch of a 500-apartment complex in a northern Brazilian city. The apartments are priced at $200,000 to $600,000, which is high-end there. Three-quarters of them in the first month.

As goes residential housing, so goes the rest of the higher-value consumer goods market, investors hope—after all, those new homes need to be decorated.

Sam Zell, an American real estate billionaire, has invested heavily in Brazilian property, with stakes in four real-estate companies there. Garry Garrabrant, who runs his international-property business, Equity International, says that “Sam Zell and I have an agreement that we will stop promoting Brazil—but we love it in an expansive way.” In particular, he points to the institutionalisation of sound macroeconomic policy, the growth of lively and well-capitalised public- and private-equity markets, and an abundance of “local management talent in Brazil that is head and shoulders above every other emerging market.”

Mr Garrabrant says that after decades of struggling with a bad government, weak currency, high interest rates and the absence of intelligent debt, “Brazil has crossed over. It can’t go back.” We have heard this before. Fingers crossed that this time will be different.

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