Brazil Investment Guide

ABSOLUTE gUIDE SERIES

Brazil

to Investment Property

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ABSOLUTE gUIDE SERIES - BRAZILABSOLUTE gUIDE SERIES - BRAZIL

Date of Publication: September 2008© Obelisk

5. Welcome to Brazil Dedicated to providing impartial information.

6. Economic Growth & Stability 2008 has been one of the best years for the Brazilian economy.

7. Currency & BankingBrazil’s flexible exchange rate has led to “significant appreciation of the real”.

8. Foreign Investment Foreign direct investment increased by 84% from 2006 to 2007.

9. Political Situation & Stability Politically stable having firmly established democracy in 1985.

10. Tourism Tourism in Brazil is expected to contribute US$88.3 billion to the economy in 2008.

11. Infrastructure Brazil airports will receive US$2.5 billion for expansion and modernisation by 2010.

12 - 13. Property Market Brazil is one of the world’s few “stand-out hotspot locations in 2008”.

14 - 15. Secondary Market Properties in the Natal area have seen rental yields of around 10% per year.

16. Mortgage Market The Brazilian mortgage market is small but growing fast.

17. Market Risks Brazil presents few problems for foreign investors.

18. Purchase Process Foreigners are permitted to buy, own and rent property in Brazil.

19. Investment Costs Costs of buying are generally low.

20. Summary A buoyant economy, thriving tourist industry and booming property market all contribute to Brazil’s excellent investment potential.

21. Verdict Brazil is a leader among developing countries.

22. Obelisk Advantage Obelisk approaches its projects purely from an investment perspective.

Contents

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Natal

Recife

CuiabaBrasillia

Rio de JaneiroSao PauloJoinville

Caxias do SulPorto Alegre

Londrina

Campo Grande

Manaus Sao LuisFortaleza

Belem

Teresina

Boa Vista

Rio Branco

Salvador

Vitoria

MaceioAracaju

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to BrazilWelcomeAs the market leader for overseas investment property, we are committed to providing cutting edge information for property investors, one aspect that has earned us the award of International Property Specialist 2008 by Business Britain magazine.

We are therefore pleased to present our latest Property Investment guide to Brazil, an essential tool for the investor planning to buy property in this country. This guide forms part of the Obelisk Absolute guide Series, dedicated to providing impartial information about numerous investment destinations worldwide.

At Obelisk, we are only too aware of the importance of extensive research into an investment destination and, as part of our policy to offer investors the definitive service, this guide has been rigorously researched to

provide you with in-depth, clear-cut knowledge on the most important factors influencing your property investment decision in Brazil.

In this guide you will find recent economic performance and predicted growth, a profile of the current property market and its future potential, along with tourism trends and infrastructure improvements. The guide also includes information about Brazil’s mortgage market, the buying process and buying costs.

Obelisk’s Absolute guide to Brazil offers investors objective and authoritative information to facilitate an informed decision about investing in Brazil. We trust that you, as an investor, will find this guide indispensable.

Here’s to Successful Investing!

Brazil forms part of the Obelisk Absolute Guide Series, dedicated to providing impartial information to numerous property investment destinations worldwide.

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Economic Growth

& Stability2008 has been one of the best years for the Brazilian economy – the export and commodity markets are booming, strong gDP growth is forecast at least until 2012 and the currency sits at a 9-year high against the US dollar. In recent years, Brazil has undergone complete economic change and looks ready to undergo the transformation from developing nation to world power. With its strong economic growth, Brazil, currently the world’s 10th-largest economy and one of the best performing stock markets in the world in 2007, looks set to fulfill the goldman Sachs’ 2003 BRIC theory, which believes that Brazil (along with Russia, India and China) will become one of the world’s most powerful economies by 2050.

Rich in commodities and with the recent discovery of

potentially huge oil reserves, Brazil has enjoyed gDP growth of 5.4% since 2007, and The Economist forecasts an average annual gDP growth of 4.4% until 2012. In spite of rising food prices, inflation is in check and should fall within the Central Bank’s target of around 4.5% (+/-2%) for 2008. The job market is booming – 32% of jobs created in Latin America in 2007 were in Brazil – and year-on-year unemployment rates in July 2008 fell by nearly 1.5% to 8.1%.

Reflecting Brazil’s promising economic performance, Standard & Poor, the financial ratings agency, awarded the country the rating of BBB- in April 2008. The rating, representing investment status, reflects the important progress made in macroeconomic management.

GDP Growth (Q2 2008): 6%

GDP Per Capita (2007): US $9,695

Unemployment (Q1 2008): 8.1%

Inflation (Aug 2008): 4.7%

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The Brazilian ‘real’ is currently strong and the International Monetary Fund (IMF) reported in their 2008 Article IV Consultation, that Brazil’s flexible exchange rate has led to “significant appreciation of the real.” According to the IMF, the real appreciated by 16.5% during 2007 and record strength against the US dollar has allowed Brazil to accumulate reserves. In January 2008, Brazil became a net creditor with the rest of the world, having paid off its foreign debt.

Brazil’s banking system is developing at a good pace and Standard & Poor’s investment rating reflects the maturity of the country’s institutions. The IMF believe the financial sector to be generally sound and have praised the measures being taken to limit risk-taking practices.

Currency

& Banking

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Foreign Investment

Foreign Companies Investing in Brazil

Wal-Mart, ArcelorMittal, Epson, Fiat, General Electric, Global Crossing, L’Oréal, Repsol YPF, Unilever and Volkswagen.

In recent years, Brazil has become increasingly attractive for foreign direct investment (FDI). According to the AT Kearney 2007 Foreign Direct Investment Confidence Index, Brazil is one of the world’s favourite investment destinations and rose from seventh to sixth place from 2006 to 2007. Asian investors – increasingly present in Brazil – rank the country fourth as a favoured FDI destination while Brazil’s main FDI sources, the US and Europe, rate Brazil seventh and eighth respectively in their list of prefered investment locations.

Brazil attracts a major share of FDI in Latin America – according to the Brazilian investment agency, APEX-Brazil, 30% of Latin America’s FDI went to Brazil in 2007 and the UN’s Latin American Economic Commission reported that FDI increased by 84% from 2006 to 2007.

In April 2008, Standard & Poor stated that FDI so far in 2008 had reached an estimated US$12.4 billion, a figure that shows Brazil is on target to match the record figure of US$34.6 billion investment in 2007.

Recent increases in commodities and energy prices have boosted investor interest in Brazil, a country rich in raw materials, oil and gas. Brazil is one of the world’s top biofuel producers and major FDI has been made in this field. The manufacturing sector, particularly cars – Fiat recently invested US$2.8 billion in the expansion of their plant at Betim – and telecommunications are also extremely attractive markets for FDI in Brazil.

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Brazil is politically stable having firmly established democracy in 1985 after more than 20 years of military rule. The current President is Luiz Inacio Lula da Silva (first elected in 2002 and re-elected in 2006) and the government is made up of several parties including the main Partido do Movimento Democrático Brasileiro and Partido dos Trabalhadores. The next general election is due in October 2010.

The current government is largely responsible for consolidating Brazil’s macroeconomic stability while increasing social spending. Brazil now has an important international presence with its participation in UN missions and its leadership among emerging nations. According to President Lula, Brazil is being transformed “into a great economy and a great nation.”

Political Situation

& Stability

Mercosur Member: Founder member since 1991

WTO Member: Since 1995

Political System: Federal Republic

Ruling Party: Partido do Movimento Democrático Brasileiro, Partido dos Trabalhadores

Next General Election: October 2010

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TourismBrazil received over 5 million tourists in 2007, a figure its National Plan for Tourism 2007-2010 aims to increase to 9 million visitors a year, creating 1.2 million new jobs. In Q1 2008, Brazil received 1.8 million visitors, an increase of 5% on the same quarter in 2007.

According to the World Travel and Tourism Council (WTTC), tourism in Brazil is expected to contribute US$88.3 billion to the economy in 2008, an amount that is predicted to increase by nearly 56% by 2018. Travel and tourism currently accounts for nearly 6% of jobs in Brazil, which is forecast to rise substantially when Brazil hosts the World Cup in 2014.

Brazil is world renowned for its myriad of attractions including its 7,400km of tropical beaches, the wonders of the Amazon rainforest and the vibrancy of its people and culture. The north east region of Brazil, centred around the resort of Natal, is increasingly popular with tourists, particularly Brazil’s wealthy population, and major investment (over US$1.8 billion) in new hotels, golf courses and resorts is underway in the area. Natal is also home to a new airport, São gonçalo, which, when completed in 2010, will be the largest in South America.

Visitor Numbers (Q1 2008): Around 1.8 million

Tourism Contribution to GDP (2008): 6.2%

Tourism Contribution to Employment (2008): 5.9%

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InfrastructureNatal São Gonçalo Airport will be the largest airport in Latin America

Modernisation and expansion of all airports in World Cup match destinations

Investment of US$21.7 billion in roads, railways and ports

Brazil’s successful bid to host the World Cup in 2014 will provide a huge boost to the country’s tourism and will project Brazil into the international limelight. Conscious that Brazil needs to address the current lack of infrastructure in many parts of this huge country, the Brazilian government has announced several ambitious investment plans for the near future.

Through the government growth Acceleration Program, US$21.7 billion of public and private funds will be used to improve transport infrastructure including roads – these are set to receive over 75% of the investment - railways and ports.

Airports are another major focus for investment. Natal’s new São gonçalo Airport is under construction and those in cities hosting World Cup matches in 2014 such as

Brasilia, Rio de Janeiro and Sao Paulo, will receive US$2.5 billion for expansion and modernisation by 2010.

The 2014 World Cup, expected to attract over 500,000 visitors, will see massive investment in infrastructure such as public services – for example, hospitals and new hotels as well as stadiums in the 18 proposed match locations throughout the country.

Brazil has received major investment in retail infrastructure in recent years and the American retail giant, Wal-Mart, recently announced plans to invest US$1.1 billion in Brazil. Wal-Mart aims to open between 80 and 90 new stores during 2009 in addition to the 36 stores established in 2008.

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Brazil, a relatively new arrival on the international property scene, was classed in the Knight Frank International Residential Review 2008 as one of the few “stand-out hotspot locations in 2008”.

Capital Growth (over last year): around 30% in the north east

Average Annual Rental Yield: between 4% and 9.9% in the north east


Property Market

Brazil, a relatively new arrival on the international property scene, was classed in the Knight Frank International Residential Review 2008 as one of the few “stand-out hotspot locations in 2008”. According to the Review, Brazil’s natural beauty, favourable climate and competitive pricing means it is “attractive to international buyers.”

One of the areas in Brazil to fulfill the above criteria is the north east region around Natal, currently a major focus of international investment interest centred mostly on the coastal areas of this stunning region. Brazil releases no official statistics on house price increases, but Knight Frank report, average price growth in the north east region - Brazil’s emerging luxury second homes’ location - has been very strong over the past couple of years and states that in 2007, prices in-creased by around 30%. The report goes on to forecast this impressive growth is to continue.

Brazil is making significant progress to improve transparency within its property market. According to the Jones Lang LaSalle Real Estate Transparency Index 2008, from 2006 to 2008 Brazil registered the largest increase in transparency in Latin America (along with Panama) and was 11th in the world, increasing its score in 4 out of 5 categories.

Still classed as an emerging property destination within the global market, Brazil offers property prices that are around a third cheaper than European equivalents such as those found in Spain and Portugal. Referred to as the “darling of emerging markets” by Forbes magazine, Brazil is also considered by the Financial Times to be “a safe investment destination that is unlikely to falter.”

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Secondary

MarketBrazil’s international property market is currently led by the Portuguese (27%) followed by the British (15%) and Spanish and Italians (12% each). According to Knight Frank, “as the Brazilian second homes’ market becomes more sophisticated and is more widely promoted, it is likely that the demand from international purchasers will increase.”

A fundamental factor behind the growing Brazilian property market is the ever-increasing wealth among Brazilians. Brazil’s middle class represented nearly half the population in 2007 when Brazil’s millionaire population increased by 46%, one of the highest increases in the world.

The growing number of households with sufficient wealth to enter the property market (both first and

second home markets) adds to the resale market potential. Demand for housing in Brazil as a whole is currently extremely high – Reuters Real Estate analysts put the shortfall figure at over a staggering 27 million properties over the next 15 years.

With properties situated in developments in beach resorts in the Natal area seeing rental yields up to around 10% a year, the rental market presents good potential in many areas of Brazil including the major cities and resort areas such as those on the Natal coast-line. Rising tourism(mainly domestic but increasingly international) has led to demand for quality short-term rental accommodation, with Brazil’s newly-affluent population keen on luxury holiday accommodation in beach resorts, particularly in the north east region.

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According to Reuters Real Estate analysts, 27 million properties are needed in Brazil over the next 15 years to meet the demand for housing.

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Mortgage Market

The Brazilian mortgage market is still in its infancy, but the housing market has recently had an enormous boost with the introduction of mortgages for Brazilian nationals. Mortgages are currently unavailable for non-residents, although this is expected to change imminently, a move that Ken Thorkildsen, Director of Obelisk Private Finance believes will be “excellent news for property investors and will open up the property market substantially

According to Joao Robusti, President of the Sao Paulo Real Estate Association, mortgage loans represent a mere 2% of Brazil’s gDP, compared to 69% in the US. However, although the Brazilian mortgage market is small, it is growing fast. Brazil’s Central Bank reported a 30% year-on-year increase in mortgage loans from August 2007 to 2008.

Increasing demand from domestic buyers is boosting the mortgage market and by extension, the property market.

Brazilian banks are continually introducing new mortgage products for Brazilians and lending terms are becoming more flexible. However, according to Forbes, the term ‘subprime’ is virtually unheard of in Brazil. While mortgage lending interest rates are currently higher than in many countries, it is believed that the ever-increasing demand for mortgages in Brazil will soon lead to a significant drop in mortgage interest rates.

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Market RisksProperty investment into emerging markets may carry some degree of risk. However, the degree that market risk in a particular country affects a property investment depends largely on thorough due diligence conducted prior and during the purchase process.

Although Brazil presents few problems for foreign investors, it currently has one of the world’s least equal societies with a huge gap between rich and poor. However, the government Institute for Applied Economic Research study found that the gap between the highest and lowest salaries in Brazil fell by almost 7% between Q4 2007 and Q1 2008. The same study found that the gini index (the international standard for measuring equality – most Western European countries have gini ratings of around 0.35) fell to 0.505 in 2008 from 0.54 in 2002.

Another concern facing the Brazilian property market

are the effects of rising inflation stemming from higher commodity prices. However, the government has introduced inflation curbing measures including raising interest rates and Barclays Wealth Research believes that inflation is still within the Central Bank’s boundaries.

Although there are few visible signs as yet, Brazil may be affected by the global credit crunch. However, Brazil seems on target for the Economist’s predicted 5.4% gDP growth for 2008 and analysts believe this will be “sufficient to allow real incomes to rise in the forecast period”, a factor which will in turn lead to an increase in domestic demand.

In the past, some property analysts have expressed concern that high depreciation of the real is likely. However, according to the Economist, “capital inflows will remain firm and the real will depreciate only modestly in 2008-2012.”

“Domestic demand, and in particular investment, will make a much stronger contribution to growth than in the past, supported by the deepening domestic financial markets.”

Source: The Economist

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Purchase Process

Below is the standard purchase process in Brazil and issues that may affect a property purchase.

Under Brazilian law, foreigners may buy, own and rent property in Brazil and are entitled to similar rights as Brazilians regarding property ownership and tenant rights. The only restrictions affecting foreign buyers in Brazil include certain areas of land subject to national and security interests.

All foreigners purchasing property in Brazil require a tax identification number (cadastro de pessoa física/CPF). The CPF identifies the buyer for tax and registration purposes and is obtainable from the Brazilian tax office.

The transfer of all funds for a property purchase into Brazil must be made through the Central Bank of Brazil where records are kept of the transfer.

Before buying, the buyer should apply for a certificate known as ‘Certidao de Onus Reais’, an identification document for the property which states its entire ownership history.

A sales contract is drawn up detailing the full conditions of the sale and also acts as receipt for the deposit paid. The final sales deed completion is normally carried out in front of a public notary. The deed should then be registered at the Real Estate Registry.

Brazilian laws and legal processes may be very different from what you are used to and Obelisk strongly recommends that independent legal advice be taken during a property purchase.

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Investment Costs

The costs of a standard property purchase in Brazil may include the following:

Real Estate Property Tax at 0.3% to 1% of the purchase price.

Real Estate Transfer Tax from 2% to 6% of the purchase price.

Capital gains tax: Brazilian non-residents are subject to capital gains tax or withholding tax on profits made from the sale of property in Brazil. Withholding tax is levied at 15%, except when double taxation treaties provide for tax relief. However, when profits are remitted to a tax haven (Brazil regards any country or territory with income tax rates below 20% as a tax haven), withholding tax is levied at 25%.

Any income arising from property rental is taxed at the same rates as income tax, which currently range from 15% to 27.5%.

All properties are subject to an annual urban municipality tax (Imposto sobre a Propriedade Predial e Territorial Urbano/IPTU). Rates vary between municipalities and are based on the assessed value of the property.

Brazilian taxation is complex and subject to change. You are therefore recommended to take expert and up-to-date advice on taxation issues affecting the purchase and ownership of property in Brazil.

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SummaryBrazil is currently enjoying an economic boom with predicted annual gDP growth of 4.4% until 2012.

Brazil’s currency is strong and reached a record 9-year high against the US dollar in 2008.

Brazil ranks sixth in the world’s favourite investment destinations and received 30% of Latin America’s foreign investment in 2007.

Foreign direct investment increased by 84% from 2006 to 2007.

Political stability has contributed hugely to Brazil’s macroeconomic stability.

Tourism is a fast expanding sector of the Brazilian economy and the National Plan for Tourism aims to ensure annual visitor figures of 9 million.

Infrastructure will receive a major boost from investment for the World Cup 2014.

Major Brazilian airports are set to receive US$2.5 billion for expansion and modernisation by 2010.

Brazil is one of the few “stand-out hotspot locations in 2008”.

Property prices in the north east region increased by 30% in 2007.

Brazil qualifies as an emerging market with prices around 30% lower than European equivalents.

Demand for housing hugely exceeds supply with 27 million new properties required over the next 15 years.

The mortgage market is expected to open up to non-residents in the very near future.

Brazil’s property market is increasingly transparent and buying costs are low.

The following summary provides key highlights to consider when investing in Brazil’s property market:

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Brazil is currently undergoing one of the most remarkable transformations in the world. It is a leader among developing countries and an emerging world power, expected to be amongst the global economic giants by 2050. The Brazilian presence in the international financial and commodity markets has expanded hugely based on the country’s large and developed agriculture, manufacturing and mining industries, and sizeable services sector. Already a major exporter, Brazil’s economy has recently expanded still further with the bio-fuel industry. The recent discovery of huge oil reserves off the Brazilian coasts means the economic future is even more promising.

Brazil’s booming economy has led to increased affluence among the population whose middle class has expanded considerably and whose number of millionaires was one of the fastest growing in the world in 2007. As a result, the demand for quality homes from Brazil’s wealthier population has increased and the Brazilian property market has excellent potential.

Based on thorough research we have carried out on Brazil, we at Obelisk believe that Brazil is a good option to explore for overseas property investments, promising high capital growth and return on investment.

Verdict

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The Absolute guide Series Rating


Based on our extensive research, Obelisk has introduced a 5 star rating system to summarise the investment potential of a country. The availability of finance, economic stability, political stability, the strength of the local market to provide an exit strategy and the potential to earn from investment are the key criteria that determine the investment grade of each country.

Obelisk AdvantageVoted International Property Specialist of the Year 2008 by Business Britain magazine, Obelisk has been recognised as the authoritative voice within the industry and its clients benefit from the company’s uncompromising high standards and professionalism.

Obelisk has identified a simple and transparent purchase process for its clients as a simple, four step process:

The client chooses and reserves the unit that best suits their investment requirements, and Obelisk takes the client through a compliance procedure.

An independent lawyer, sourced and appointed for the client by Obelisk, will have already carried out full due diligence on the project. They will issue all purchase contracts and paperwork to the client.

On receipt of this contract, the client will sign and make the first payment. The lawyer will notify the client of all further payments when required.

The appointed lawyer will also represent the client in all aspects legally required within the country of purchase, ensuring that clients of Obelisk enjoy the benefits of simple and hassle-free real estate investment.

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For more information about Obelisk’s investment opportunities in Brazil, contact us now on [email protected], visit

our website at www.obeliskinternational.com or call us FREE on 0808 160 0670 (UK) or 1800 932 514 (IRE).


Awards Obelisk ‘International Property Specialist 2008’

DisclaimerThe material contained within this document has been prepared for information purposes only. Information contained herein is not to be relied upon as a basis of any contract or commitment. The information is not to be construed as an offer, invitation or solicitation to invest and opinions expressed are based on market conditions at the time of print and may be subject to change without prior notice. Information contained herein is believed to be correct, but cannot be guaranteed. In case of queries or doubt you should consult an independent investment adviser. No personal recommendation is being made to you and the past is not necessarily a guide to the future.

The brochure in its entirety – text, images, marks, graphics, logos, buttons, combinations of colours, and the structure, selection, ordering and presentation of its content – is protected by the legislation on intellectual and industrial property, it being forbidden to reproduce, distribute, publicly disseminate or transform it, except for personal private use. It is also forbidden to reproduce, relay, copy, assign or broadcast, in whole or in part, the information contained in this brochure, for whatever purpose and by whatever means, without written consent.

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Call us free from UK: Tel. 0808 160 0670 Call us free from Eire: Tel. 1800 932 514

For general and international enquiries contact us at: Tel: (0034) 952 820 319 Fax: (0034) 952 825 790

Alternatively you can email: [email protected] or visit: www.obeliskinternational.com

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