Brazil: Can Real Estate Be Used to Hedge Inflation?
The residential market in Brazil has been under pressure due to challenging political and economic conditions. The country is beleaguered by an ‘old-fashioned’ recession. Is there any light at the end of the tunnel?
Even with high inflation easing somewhat, the key question is whether owners of apartments in Brazil have been capable of protecting themselves against eroding purchasing power in recent years. We need to look at different indices to answer this question. But the exercise is very tricky! Two main factors enter into the equation: investment horizon and (unsurprisingly) location.
Brazil is enduring a recession, with the country's economy having shrunk by 2.9% year-on-year in 3Q16, even though the annual GDP growth rate was worse (-3.6%) in the previous month1 . Yet, the annual inflation rate in Brazil stood at 6.29% in December 2016, markedly below the 10.71% y-on-y rate recorded in the previous January. Lower inflation allowed Brazil’s central bank of Brazil to cut its benchmark rate by 75bp to 13% on 11 January 2017. But when analysing the performance of the São Paolo stock market, total returns have been phenomenal over the last 12 months (as at 7 February 2017). What a contrast with the contraction of the real economy! The Ibovespa index climbed by over 60% in Brazilian real, a remarkable performance that was magnified in US dollar or euro for international investors, given the appreciation of the real of more than 20% against these currencies over the same period.
The past 12 months have been rather poor for Brazil's housing markets.
Persistent inflation has resulted in a general fall in residential property prices across the country. Even in nominal terms, prices have either stabilised or spiralled downwards for the first time in a long while! According to the FipeZap Properties Asking Price index, the nominal price of apartments – with one, two, three, four bedrooms or more – grew by a mere 0.65% on average in the 12 months to end-January 2017. The most-sought after cities, such as Rio de Janeiro, lost roughly 2% over the same period, as shown in the chart below. Consequently, the apartment market tumbled by roughly 7% in real terms due to high inflation (although inflation has eased somewhat from the 10% high in January 2016, as previously mentioned). Of course, total returns look less ugly, as they also comprise net rental income for buy-to-let investors.
As a reminder, the FipeZap index is the main indicator for the Brazilian residential real estate market (fipezap.zapimoveis.com.br). It looks at the property market in up to 26 of the country's main cities. The index is managed by FIPE (the Institute of Economic Research Foundation, linked to the School of Economics, Business Administration and Accounting of the University of São Paulo), in partnership with the ZAP Imoveis web portal. It is noteworthy that the index is calculated by FipeZap based on listings of apartments about to exchange hands,and published on ZAP's Real Estate website and elsewhere on the Internet. As always, there is a difference between the asking price and the actual selling price.
Nonetheless, the picture – at least for major cities – changes dramatically when the trend of nominal apartment prices is analysed over a much longer period.
Brazilian cities like Rio de Janeiro, São Paulo and Recife posted growth in prices well above consumer prices over a 9-year period. By way of comparison, the FipeZap index revealed remarkable growth (+251.4%) for Rio de Janeiro's listed apartments from January 2008 to end-January 2017, followed by São Paolo (+226.07%) and Recife (+101.23%). Adjusted for inflation, apartments in these three markets enjoyed higher prices in previous years.
In spite of this good news, the picture looks less rosy for 'lower-tiered' Brazilian cities.
Growth in nominal apartment prices for these cities fluctuated between 20 and 50% in the 9 years to end-January 2017. For instance, Brasilia's apartment prices increased by roughly 30% over this period, but failed to keep up with inflation on a sustainable basis. The same can be said for other cities including Campinas, Contagem, Curitiba, Florianopolis and Porto Alegre (this list is not exhaustive). As for asking prices, rents are far cheaper in tier-2 cities.
In addition, international buyers should factor in currency movements (because of the much-depreciated real) especially those with assets denominated in US dollars. Although the Brazilian currency has been appreciating in recent months, long-term investors who entered the market several years ago are still experiencing heavy currency losses.
What is around the corner?
We believe that much will depend on economic growth drivers in the near future, the health of the labour market (unemployment figures), financing conditions for buying property, inflation levels, the ongoing political situation and commodity prices. We admit that many of these factors do not look very promising at present (in spite of the stock market rally). We think residential prices should stabilise (at best in nominal terms) over the next 18 months. In other words, current and projected housing prices are not likely to offer protection for the upcoming inflation in Brazil. But as always, opportunistic investors should closely follow the country's property investment market.
1 Source: TradingEconomics