Brazil’s Impressive Recovery

If any of us in the US or the Eurozone need reassurance that our economies will not only improve but also could soon be set on a path to growth, we need look only as far as Brazil. The Brazilian economy grew 8.4% in the first three quarters of last year, bouncing back from its most recent economic recession, which began toward the end of 2008. More than this, Brazil, like much of Latin America, experienced an unprecedented period of economic turbulence less than a decade ago.

It’s come a long way from those days and, in fact, is expected this year to resume its position as seventh largest economy in the world, a position it lost in the economic downturn of the mid 1990s. Brazil’s economic growth is evidenced by its gross domestic product, which is expected to top US$2 trillion in 2011.

Positioned as one of the premier global investment target markets, Brazil is set to further strengthen, as foreign investors ramp up their programs aimed at the country’s real estate sector. Two-thirds of real estate investors with funds committed to emerging markets in Latin America have earmarked investment dollars to go to Brazil over the next 12 to 24 months, according to a recent survey conducted by Ernst & Young of more than 60 international investors. These investors included private equity fund managers, investment bankers and real estate developers.

My colleague, Rogerio Basso, the Latin American hospitality practice leader, believes that is a substantial statement for a country that less than a decade ago was considered high risk due to an unstable economy, hyperinflation, mounting debt and a volatile currency, and I agree. Today, a strong economy buoyed by a broadly emerging middle class and availability of credit is fuelling investment interest across the real estate spectrum from residential to commercial assets and hotels.

In fact, the lodging sector is attracting keen attention, with approximately 50% of investors interested in Brazil indicating that hotels are a primary target. Of course, the country has a few advantages that many countries do not. Most notably, Brazil will host two global sports tournaments in the next five years: the FIFA World Cup in 2014 and the Olympics in 2016.

In addition to prompting the need for a major development boom in the hospitality and leisure sectors, these events have also fuelled a more-than US$1 trillion infrastructure spend aimed at updating the country’s airports, railways, roads and other vital infrastructure. All this will only benefit the country’s tourism and business sectors after 2016, leading to further opportunities in commercial real estate.

According to Basso, Brazil’s lodging sector is also benefitting from an increase in middle class disposable income, as well as expanding business travel as a result of a robust economy. The vast majority of foreign investors eyeing Brazil’s hotel sector see the potential for increasing values over the next two years, which is prompting their search for purchases.

Yet, it is currently difficult for foreign investors to find investment-grade hotel assets, and according to our survey 60% of those entering the market are seeking to do it through joint ventures with established local players. Development of new lodging facilities is one area of focus for foreign investors, especially as the country prepares for the World Cup and Olympics. Most international lodging operators are aggressively trying to sign up new management deals in the run-up to 2014 and 2016.

However, foreign investors do not appear to be looking to build, buy and own hotels with the intent of flipping them for higher prices around the time of the two sporting events. Almost 60% of our survey’s respondents indicated they would hold assets for six years or more, suggesting that investors see long-term value in the Brazilian hotel market. The survey points out that obstacles to successful foreign investment in Brazilian real estate still exist. High taxes and restrictive labor laws can hamper overall investment returns, and although financial transparency has improved in recent years, there is still a relative lack of information available to investors, especially related to real estate debt instruments.

Despite these hurdles, the survey strongly suggests that foreign investors are viewing Brazil as a significant growth market in the midterm and intend to commit major capital to its real estate sector over the next few years. Here in the US and in Europe, we can take heart that even the toughest markets can, and do, turn around.

Howard Roth is the Global Real Estate Leader and a partner with Ernst & Young LLP’s Real Estate practice. He may be reached at howard.roth@ey.com. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP or GlobeSt.com.