APRIL 2013 |
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planned for this show”. The fi rst day’s attendance of nearly four thousand people suggests he might be right – especially as the busy days are Saturday and Sunday.
The two hundred exhibitors expect to sign up BRL500million (USD250million) during the event. Now, the show does not only deal with the Minha Casa, Minha Vida sector. Properties on offer ranged from USD35,000 to USD2.5million. Everybody at the show, at whatever level of market they were operating, seemed very bullish about both the state of the market and their own future. However, if anything, those involved in the Minha Casa, Minha Vida programme were even more optimistic than the rest of the exhibitors. Ocimar Damásio says: “40% of the buyers will be buying within the Minha Casa, Minha Vida programme.” Surprisingly, quite a number of the visitors had only recently heard about the programme and, not so surprisingly, seemed excited about the opportunity of owning a house for the fi rst time. EcoHouse Group, who were exhibiting at the show, expect to make sales of USD35million as a result of the show – twice the fi gure for the previous year.
This market is clearly divided into two sectors – the bottom end, catering to the families with an income less than three times the minimum wage and the slightly higher price range (you can scarcely call it ‘up-market’) aimed at the family with an income fi ve or six times the minimum wage. The lower end receives much more subsidy than the other part of the market. At the bottom end, the government donates the land and grants an overall subsidy to the buyers of nearly 80% of construction costs. At the upper end – for those families earning more than three times the minimum wage – the subsidy falls to about 18% and the land is not provided.
EcoHouse says “We focus on the 3x plus market. This is because this demographic is the strongest in terms of ability to access bank fi nance and also offers a better profi le of developer profi ts. Our returns to our investors require strong sales in Brazil and we have established a strong brand presence in this quadrant. When Bosque was launched, we sold over 400 units in a four day period, and the remaining 200 or so units we launched with sold out within weeks.”
Max, too, aims only at the higher end of the market.
Colin is developing projects targeted at both groups.
So who are their buyers? Who is the end user?
At the lower end, street cleaners, builders, waiters, bus drivers, factory workers. At the upper level, teachers, foremen in factories, police offi cers and
Casa Nova | Many projects are really small towns, with all of the necessary urban infrastructure built in the like. What prices will they be paying and
what will they get for their money? This will depend on where the property is located. Hardly surprising, apartments in Rio or São Paulo cost more to build and sell for higher prices than similar properties in Natal.
If we take someone in the lower part of the market, a typical two bedroom apartment in Natal, would be about 42m2 and cost about USD35,000 whereas a two bedroom apartment would probably measure 35m2 and cost about USD50,000.
Of these prices the state would pay about 80%, leaving the buyer to support
“Everyone at the show seemed bullish about the state of the market and their own future”
a mortgage of 20%. These mortgages are also at heavily subsidised rates, with buyers paying about 5% interest instead of the 14-15% payable on the open market.
How much does the developer make out of all this? Clearly, there is a certain confi dentiality about these fi gures and everybody seemed to agree that everything depended on how effi ciently the developer ran the operation. Max, however, was prepared to supply some numbers.
He thinks that an average developer is likely to see a profi t margin of 25-30% and an annual return on investment that is much higher. The constructor will be looking for a margin of 20-25%, so if the developer is also the constructor his overall margins will
ROUND TABLE be much higher. If the developers are using private
fi nance, what would the investor be likely to see? EcoHouse is very clear. Their investors will receive 20% for an investment left with the company for 12 months. Anthony says that 70% re-invest at the end of the initial period. Commercial investors are looking at 20-30% per annum.
That cost comes out of the developer’s margin but, with careful cash management and an experienced developer, remarkably small amounts of money are needed to bring a project to a successful conclusion.
Max refers to an example of a 100 unit project of houses costing BRL75,000 being completed with capital of only BRL1million (USD500,000), however, the amount of capital required is increasing. For example, you now need to have built half the infrastructure and started work on half the houses before the government will confi rm an allocation of Minha Casa, Minha Vida mortgage funds for your project.
Do these numbers all sound too good to be true? All of the experts agree that this is a danger and that the market is not without risk. However, they believe these returns can be generated if people use reliable companies. Investors have to be very careful to invest with companies with a proven track record. There are many forum comments about scams and investors losing their money. Why has the program been such a
success? Anthony is clear: “The level of absorption is unprecedented but down to simple statistics. It is driven by the fact that low cost mortgage fi nance has been made available to those on modest incomes, for a limited
MINHA CASA | 45
time. The MCMV programme has only delivered 1 million homes out of a plan for 3 million and yet even this will not markedly impact the estimated requirement of over 7.2 million.” Do our experts think there is a long term future in this market? All agree that the programme is likely to remain strong for a number of years – certainly as long as the current government is in power – but that successive fi ne tuning is likely to reduce net profi t margins for the developers. By how much is uncertain.
If an investor or a developer wants to enter this market, what should they be thinking about?
Ed is clear: “they must remember that this is Brazil. Things here work differently. Too many developers thought that they could ignore or get around the rules and they have often paid the price. If your advisor says that you can ignore some piece of legislation because his cousin is a Senator, get another advisor.” Colin agrees: “you have to tick all the boxes – and there are a lot of boxes. If you don’t, either your project won’t get built or you won’t get access to the subsidies and mortgage fi nance.” Max stresses the need to keep your nose clean and the need to maintain a good reputation with the authorities: ”If you don’t pay your suppliers, if you build up debts, if you have too many disputes with your workers etc, then it is likely that the Caixa just won’t deal with you, your buyers won’t be able to get mortgages and you won’t be able to sell your properties.”
All were agreed: It is good to be able to deliver decent housing to those that need it and, at the same time, to make a sensible profi t.
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