Sustainable Brazil
Housing market potential

Table of contents
Introduction                             3

Housing ...

This is the first in a series of five          prerequisite for making valid projections for
publications th...

Housing and

Challenges on the                        ...
                                                                     Brazil is viewed internationally as a great

Housing in the
worldwide context

                                                In every country where there was an increase

One example of the latter is
interest rates: whereas rates

This increase stimulated the           it is a financial crisis that is not
construction of new homes and          l...

Housing map
Housing investment in selected countries


investors search for new markets         Such changes, associated with              continued to receive funds from...

Needs create
In drawing up the reference scenario    fami...
                                                        The constantly rising number of Brazilian

Urban population                                                       ...

Population and families

                                                                     In millions

Housing deficit per region and component in 2005
In thousands of homes ...

There is an acute housing shortage                    factor that influences the possible             annual deprec...

Map of the
housing business

                                                  In 2030, Brazil will have a contingent of more than


Distribution of investments
per region (annual average)
From 2008 to 2030

      5.9%                   R$ 18.8 b...

The hypothesis of social mobility,     rate for housing financing below...

Yearly investment in new homes
Per income bracket. 2008 to 2030*


The Construction                          products offered, which will ...
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Brazil Housing Market Potential


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Brazil Housing Market Potential

  1. 1. A Sustainable Brazil Housing market potential
  2. 2. A SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL Table of contents Introduction 3 Housing and sustainability 4 Housing in the worldwide context 6 The paper product used in this publication originates from forests under socially correct management acting in an environmentally correct and economically feasible Needs create opportunities 12 way. This is one of the ways that we contribute and demonstrate our commitment to the sustainable development of the planet and to the future of the Map of the housing business 18 communities where we operate.
  3. 3. Introduction This is the first in a series of five prerequisite for making valid projections for publications that analyze the horizons Brazil’s growth. The survey covers a total of the Brazilian economy for the next of 100 countries, analyzed not only from two decades, with a special focus on its the standpoint of their economic aspects, most strategic sectors, examined both but also in regard to their demographic from the perspective of their importance dynamics, quality of life and human and to domestic revenue generation and natural resources. For this publication, the business opportunities that they we have considered the housing indicators represent over time. In this context, of 24 of these countries in detail. the subject-matter of this publication – Housing - has a noteworthy position. This work, a joint effort between This is due to its role in creating national Ernst & Young and the Getúlio Vargas investment and fostering enhanced Foundation(FGV-Fundação Getúlio quality of life for the population and, Vargas), one of the foremost and given the present sustained upswing renowned academic institutions in of the Brazilian economy, to the horizon Brazil, also seeks to qualify the concept of opportunities it offers. The issues of development in Brazil in the decades addressed in the Sustainable Brazil ahead. More important than wondering series are the following: whether the country will grow a lot or a little is questioning whether it will Housing market potential; grow well, i.e. take full advantage of Economic growth and consumption its possibilities without exceeding its potential; limits. Housing, the focus of this study, Energy market challenges; is one of the pre-conditions for growing Prospects for Brazilian agri-business; well. Considering the scale of funds Horizons for industrial competitiveness. required and the needs involved in housing, government and private The initial approach takes into account incentive need to join forces in order Brazil’s potential for interaction with to accompany the level of development the world market, with scenarios being desired in other areas. This publication outlined up to the year 2030. An in depth considers some elements that companies view of the behavior of the main factors will need both for debating this topic determining the global scenario is a and for strategic planning.
  4. 4. 4 SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL Housing and sustainability Challenges on the sustain stable growth until 2030. Therefore, for example, the Brazilian by the different segments of the production chain are already taking highway to the market needs to be able to meet an place. The result, as can be observed increased housing demand. This is over the last two years, is a marked year 2030 in fact an enormous challenge as expansion of housing credit and a huge In the past two years, Brazil has posted Brazilian families will be expanding at volume of foreign investors involved in considerable increases in the amount an average annual rate of 2% over the providing funds to Brazilian construction of money available to finance real next 23 years. companies in the open market. estate projects, albeit the country The Mexican experience shows that is still far from reaching the volume recorded in 1980, in the heyday it is possible for a developing country Presumptions of transactions financed by the with socio-economic characteristics for Profitability now-extinct National Housing Bank similar to those of Brazil to attain (BNH - Banco Nacional de Habitação). a higher level of real estate credit. Due to its momentum and potential, The method applied to analyze housing Projections for the Mexican economy Brazil is viewed internationally as market potential shows that, in order show that, in 2008, 75% of its housing a great real estate market, and it is to continue on the road to sustainable needs – which involves new homes increasingly getting targeted by major development, investments in the and renovations – will receive credit. investors in this sector. In this context, housing area are strategic, both for In the case of Brazil, current housing the foreign crisis triggered in the maintaining a strong pace of economic needs amount to 2.1 million units, United States could even become a growth and for achieving higher quality including construction, renovation, positive factor, as there are tremendous of life indices for the population. maintenance and home repair, and real estate opportunities now in the acquisition of lands. Offering credit to Brazilian market. The reference scenario adopted the extent that has occurred in Mexico for this study indicates significant means more than tripling the amount The reference scenario allows us to results for the Brazilian economy, of financing extended in 2007, i.e. estimate the size of the market up to regardless of structural renewals, reaching 1.6 million credit operations 2030. Construction company turnover, that could lead to making its growth per year. for example, will jump from R$ 53.5 exponential. Perfecting the tax system billion in 2007 to R$ 129.6 billion and carrying out pension reforms, for The good news is that Brazil is highly in 2030. Equally important for the example, would expand overall income capable of meeting the demand for planning of companies operating in generation capacity, but even without housing and eliminating its housing this sector are the projections, based such factors, Brazil has tremendous deficit within a reasonable timeframe, on demographic and socio-economic potential to improve its position in the taking into account the economic and premises, for the transformations worldwide context. institutional advances achieved since that housing demand in Brazil will the 1990s. undergo. As will be seen, the process Obtaining quality results, on the for qualifying the Brazilian consumer other hand, is dependent upon The construction industry is enjoying market opens up new opportunities. the harmonious interaction of key a cycle of growth, and a significant Really understanding them is a condition economic variables that should part of the improvements required for profiting from them.
  5. 5. A Brazil is viewed internationally as a great real estate market, and it is increasingly getting targeted by major investors in this sector. The market in 2007 and in 2030, in R$ billion* 446.7 2007 2030 446.7 2007 2030 290.4 241.7 290.4 241.7 203.6 165.2 203.6 165.2 99.8 69.2 99.8 69.2 25.3 25.3 Housing Construction Construction Real estate investment value material sales** credit*** Housing Construction Construction Real estate (%) per year investment value material sales** credit*** 4.4% (%) per year 3.9% 4.8% 11.2% Source: Getulio Vargas Foundation 3.9% 4.4% 4.8% 11.2% ( * ) 2007 prices. ( ** ) For housing construction and renovations. ( *** ) Extended per year. 44 Housing investment in R$ billion* 446.7 350 350 300 300 250 250 200 200 150 150 100 100 50 50 1971 to 1976 to 1981 to 1986 to 1991 to 1996 to 2001 to 2006 to 2011 to 2016 to 2021 to 202 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 20 1971 to 1976 to 1981 to 1986 to 1991 to 1996 to 2001 to 2006 to 2011 to 2016 to 2021 to 2026 to 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Source: Getulio Vargas Foundation ( * ) 2007 prices.
  6. 6. 6 SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL Housing in the worldwide context A Differential in depth. From 1985 to 1995, this number was even higher, contributing for Growth 1.20 percentage point to economic growth of 8.7% per year. The study of international experiences in the housing area In the European Union, Spain is underscores the importance of a perfect example. From 1985 investments in the construction to 2005, per capita housing of new homes and also in the investment tripled. This increase maintenance and renovation of was accompanied by economic properties for enabling countries growth, stable by European to achieve economic growth and, standards, in the range of 3.3% even more importantly, to develop per year. From 1995 to 2005, the in a sustained manner. This analysis GDP grew an average of 3.63%, and contributes to the construction of residential investment accounted scenarios for the Brazilian market, for 0.53 percentage point of that in view of the fact that such growth – or for 14.5% of the total. experiences illustrate the economic factors that led some countries to Ireland, for its part, is an example succeed in this regard and indicate without precedent. Per capita the respective growth possibilities housing investment grew more than for Brazil. eight-fold between 1985 and 2005. The impact of this growth on GDP The case of South Korea, in this was equally significant. Between context, shows how a country with a 1995 and 2005, Irish economic huge housing deficiency was able to growth reached an average of deal with the matter in a relatively 7.48%, with a contribution of 1.21 short time span. Korea started from percentage point from the housing a per capita housing investment area, i.e. 16% of the total. level of US$ 308 in 1985, and reached US$ 1,320 by 2005. In that Housing investments in the United 20-year period, housing investment States are a special case because of contributed 0.64 percentage point its size – they represented 6.2% of to the country’s annual economic American GDP in 2005 for a housing growth of 6.6% – the highest market that is bigger than those GDP growth rate among the 24 of all 15 countries of the European economies that this study analyzed Union combined.
  7. 7. A In every country where there was an increase in housing investment, there were previous changes that permitted improvements in financing systems. The sector grew at a surprising rate that Mexico’s GDP growth was mobility. This process led to the in the period of 1985-2005 and higher than Brazil’s, mainly due to creation of new production and accounted for a substantial portion the positive performance of its real to the reduction of interest rates, of the good results achieved by estate market. which favored the mortgage credit the American economy. Per capita market. Since the mid 1980s, housing investment more than A comparison of the entire set of policies were implemented in each doubled and accounted for 0.49 countries allows us to make one country’s economy that allowed percentage point, or 16% of the important generalization: economies for the good performance of the GDP growth of 3.1%. From 1995 with higher housing investments real estate market. In Spain, the until 2005, the contribution from have higher growth rates. government stressed deregulation the housing segment was even of the mortgage market and higher: 0.60 percentage point, simplification of land registration or 18% of a GDP growth of 3.31% The Importance processes. In general, European per year. of Institutional Union countries eliminated interest rate controls. A particularly important reference Advances for the Brazilian context is Mexico, Even in the consolidated market a country with which Brazil In every country where housing represented by America, whose has many social and economic investments increased, important housing financing model serves as similarities. Mexican housing institutional changes occurred a reference for a good part of the investments are low in comparison beforehand that allowed for an world, changes were implemented with those of developed economies, improvement in the functioning in its securitized mortgage system but its continued growth since of their financing systems. Such during that time. the latter years of the 1990s improvements have occurred permitted marked results. Housing intensely in recent years, in a Technological innovations investments increased 33% from favorable global economic context produced quicker credit approval 1995 to 2005 and accounted that contributed to an overall tools that, together with interest for 0.50 percentage point of the increase in housing investments rate reductions, managed to economic growth rate of 3.62%. worldwide. It should be noted that a popularize their use and favor fair share of world economic growth the boom that lasted until 2005. The comparison with the Brazilian was caused by the investment of Among the lessons that developed economy is meaningful. Brazil’s funds in housing. countries can teach developing average growth rate between ones is the importance of 1995 and 2005 was 2.38%, with In the European Union, the building a trustworthy regulatory a contribution of 0.27 percentage unification of capital markets made apparatus. While there are some point on the part of housing a decisive contribution to creating issues that are beyond dispute, investments. The analysis shows an environment with greater savings others are arguable.
  8. 8. 8 SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL One example of the latter is interest rates: whereas rates secondary securities market that takes care of ensuring increased Crises and the are flexible in some countries, funding levels in the system. Search for New in others they cannot change Another common feature is the during the period the agreement existence of a set of measures Markets remains valid – thus, they are that ensure quick access to credit termed rigid. In some economies, free of red tape and, at the same The growth in demand for real the state plays a more important time, provide solid security to estate properties recorded role as loan guarantor, in investors. The state’s presence during the period from 1985 until addition to providing part of the depends largely on the country’s 2005 was something absolutely funds intended for housing of historical experience, though in unprecedented in the recent history low-income families; in others, order to meet the demands of of a considerable number of its activities are much more low-income families, the most developed economies. The initial discrete. One aspect present common role for government rigidity of the real estate supply in practically all good solutions is to serve as a partial provider favored price hikes in those countries, is the existence of a solid of funds. although to different extents. United States, per capital housing investment in US$ * 3,000 2,500 2,000 2,113 1,500 1,000 500 1970 1975 1980 1985 1990 1995 2000 2005 2007 Source: Getulio Vargas Foundation ( * ) US$ in 2005, adjusted for Purchase Power Parity.
  9. 9. 9 This increase stimulated the it is a financial crisis that is not construction of new homes and linked to the exhaustion of the the extension of credit, but this housing market per se, but is route is sometimes fraught with nevertheless one that led to a difficulties. serious reduction in residential investments. The positive economic In many countries, hikes in the outlook for the United States price of real estate reached through 2030 indicates recovery unsustainable levels. Since the of investments to the extent that middle of 2006, the marked rise the adjustment of asset values is in supply ended up leading to a absorbed by the market. price slump. The “bubble” first started to burst in the biggest real In the context of globalized estate market, the United States. capital markets, the crisis was The enormous facility with which not restricted to the United States loans were granted and property alone. In the European Union, value was enhanced contributed in countries such as Spain and to increasing American mortgage Ireland, real estate prices also credit risk. started to decline, albeit not as dramatically as in the United An important contribution to States. The majority of European the crisis was the fact that the countries have a fixed interest rate temporary enhancement of system, which reduces the impact properties values attributed book of rises in current agreements. values to the security interests on mortgage debts that was In addition to the strictly financial greater than the amount that aspects, the decline that is could be obtained in the near now being observed in Europe future. Moreover, the situation is related to depleted demand. was aggravated because loans Population growth has stabilized were granted in excess of the in several countries – projections quality of the underlying credit, actually show a decline in German which caused default and population, for example. In the liquidity problems for banks. main markets of the European This subsequently caused the Union, the end of the boom was implosion of the high-risk market just a matter of time. segment, the so-called subprime mortgage market. It may be said that the great expansion cycle of housing Analyzing the American crisis, investments in developed it becomes obvious that the countries is coming to an end. housing market suffered an If in the United States the crisis interruption in the growth is rather cyclical, in Europe process due to problems related there are structural aspects to the manner in which loans that indicate something more were extended. In other words, lasting. This explains why
  10. 10. 10 SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL Housing map Housing investment in selected countries European Union Per capita Economic Contribution housing growth from to growth Country investment 1995 to 2005 (percentage in US$*, 2005 (% per year) points) Ireland 5,388.14 7.48% 1.21 Portugal 2,283.61 2.35% 1.13 European Union 1,672.75 2.24% 0.34 Greece 2,133.78 3.92% 0.72 Turkey 405.09 4.13% 0.58 Norway 5,390.72 2.83% 0.72 Iceland 3,608.19 4.31% 0.58 Canada 2,178.24 3.34% 0.45 European Union Spain 2,406.00 3.63% 0.53 Japan 1,199.61 1.20% 0.19 Netherlands 2,072.00 2.28% 0.35 Per capita Economic Contribution Australia 2,246.51 housing 3.56% growth from 0.57 to growth Austria 1,443.51 2.21% 0.30 Country New Zealand investment 1,668.18 1995 to 2005 3.05% (percentage 0.45 Germany 1,537.50 1.37% 0.30 in US$*, 2005 (% per year) points) Ireland 5,388.14 Great Britain 1,315.60 7.48% 2.79% 1.21 0.30 South Korea 1,320.24 4.44% 0.64 Portugal 2,283.61 2.35% 1.13 France 1,396.13 2.14% 0.28 European Union Mexico 1,672.75 495.24 2.24% 3.62% 0.34 0.50 Greece 2,133.78 3.92% 0.72 Denmark 1,671.04 2.10% 0.28 Turkey United States 405.09 2,582.51 4.13% 3.31% 0.58 0.60 Norway Italy 5,390.72 1,236.88 2.83% 1.27% 0.72 0.22 Canada 2,178.24 3.34% 0.45 Iceland Finland 3,608.19 1,810.58 4.31% 3.46% 0.58 0.16 Brazil 241.67 2.38% 0.27 Spain 2,406.00 3.63% 0.53 Sweden 922.07 2.73% 0.10 Japan 1,199.61 1.20% 0.19 Netherlands 2,072.00 2.28% 0.35 Australia 2,246.51 3.56% 0.57 Austria 1,443.51 2.21% 0.30 Source: Getulio Vargas Foundation and OECD New Zealand 1,668.18 3.05% 0.45 Germany 1,537.50 1.37% 0.30 ( * ) in 2005 US$, adjusted for Purchase Power Parity. Great Britain 1,315.60 2.79% 0.30 South Korea 1,320.24 4.44% 0.64 France 1,396.13 2.14% 0.28 Mexico 495.24 3.62% 0.50 Denmark 1,671.04 2.10% 0.28 United States 2,582.51 3.31% 0.60 Italy 1,236.88 1.27% 0.22 Finland 1,810.58 3.46% 0.16 Brazil 1,400 241.67 2.38% 0.27 Sweden 922.07 2.73% 0.10 1,200 South Korea Per capital housing investment in US$* 1,320 1,000 800 600 1,400 Mexico 495 400 1,200 South Korea 1,320 200 1,000 Brazil 241 800 1970 1975 1980 1985 1990 1995 2000 2005 600 Mexico 495 400 200 Brazil 241 1970 1975 1980 1985 1990 1995 2000 2005 Source: Getulio Vargas Foundation and OECD ( * ) in 2005 US$, adjusted for Purchasing Power Parity.
  11. 11. 11 investors search for new markets Such changes, associated with continued to receive funds from in countries like Mexico, Brazil, a macroeconomic environment abroad, to the tune of IPOs tagged at China and India. When allocating favorable to income growth and R$ 8.3 billion. their capital, investors consider interest rate cuts, expanded the economic stability, income supply of credit and attracted foreign In order to understand the reasons levels, expectations for economic capital. From 2002 to 2007, the behind this influx of funds into Brazil, development, population growth annual flow of real estate credit rose we have to take into account that tendencies, funding systems from R$ 4.8 billion to R$ 25 billion. the risk factors that caused the real and institutional and legal Such prosperity attracted foreign estate crisis in developed countries environments. Brazil offers good investors who saw an excellent do not exist in a nation where terms conditions in all these aspects. opportunity to enter the market in for extending home mortgage loans the initial public offerings (IPOs) are much more restricted and where of Brazilian construction companies demand is high. Even when the crisis Advances of the and developers. In 2007, when the eases in the North American and Brazilian Market United States was already feeling European markets, Brazil can still the consequences of the subprime play an important role, which makes The Brazilian housing financing crisis, the Brazilian real estate sector it suitable for rapid growth. system has made improvements that contribute to solutions that have been largely accepted by market players. These improvements have caused major deregulation and strengthened the quality of securities offered to investors. Among advancements on a legal level, the following should be stressed: Law 9.514, of November 20, 1997: with this law, the Real Estate Financing System (“SFI”) was instituted, real estate credit securitization companies were created, Real Estate Receivables Certificates (CRIs) were established and chattel mortgage of property was introduced; Law 10.931, of August 2, 2004: introduced the concept of Detachable Property (“Patrimônio de Afetação”) for the purpose of protecting purchasers; the law also established continued payment of amortization installments where there is no disagreement in the event of legal disputes (the so-called undisputed amount).
  12. 12. 12 SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL Needs create opportunities In drawing up the reference scenario family, have a certain number of and the number of family start-ups, and projecting the Brazilian real children and to what extent there will but this relationship changes when estate market, the most important be a need for family cohabitation. the economic situation favors the step is the simultaneous analysis of premature starting of a family and the demographic factors and socio- There is a direct relationship the early decision whether or not economic dynamics that are the between the increase in the number to have children. The tendencies essential conditions for starting a of inhabitants and the need to build in Chile in the 1990s, and more family and hence satisfying housing new homes. Population growth, recently in Spain and in Ireland, investment needs in the years in turn, is determined by birth illustrate such a situation. In these ahead. In the final analysis, this and death rates and by migratory countries, there was a momentary means dovetailing Brazil’s projected movements. Even so, there are reversal of the trend for a declining housing needs into the panorama two equally important aspects: number of children, due to the drawn up for the Brazilian economy. urbanization and changes in a premature starting of families. population’s age structure. The housing needs of a country are dictated by three principal elements: The general move from the The Demographic countryside into cities brings about Scenario family dynamics: process of a new housing need all by itself, in starting new families, which is addition to causing new cultural In the last 17 years, the Brazilian influenced by growth in income behaviors, such as the decision to population has grown at a rate of and population; have fewer children. By the same 1.5% per year, above the world token, the aging of the population average of 1.4%, from 146.6 million housing deficit: housing shortfall changes the pattern of housing inhabitants in 1990 to 189.1 deriving from failure to meet needs. To understand this aspect, million in 2007. In 1990, 74.8% of housing needs over the years; we only need to recall that, from a Brazilians lived in urban areas – the certain age on, youths start their percentage rose to 85.1% in 2007. depreciation: need to substitute own families and wish to have their worn housing stock. own homes; that a couple in their In the next nine years, the forties usually looks for a new and combination of increasing The pace at which families are generally bigger residence; and that income and decreasing fertility started is the principal determinant senior citizens, on the other hand, will contribute to an even more of a country’s housing needs. require smaller houses. accentuated reduction in the growth In preparing growth projections for rate of the Brazilian population. the number of families, in addition The number of families can also be Even with the reduction of infant to the demographic factor, we also higher or lower due to economic mortality, the constantly rising have to consider income growth, conditions. There is a certain number of Brazilian women in the as this is the element that directly proportionality between the number job market and the generalized influences the decision to start a of adults of a determined population increase in educational levels will
  13. 13. A The constantly rising number of Brazilian women in the job market and the rise in educational levels will have negative effects on population growth. have negative effects on population Age pyramid growth, which will fall to 1.1%, 2007 a number equivalent to what is 2030 expected to be the world average. For the following 13 years, from 2017 to 2030, the historical Age (years) downward trend will become even more accentuated, and the 100+ population growth rate will stay 95-99 below 1%. 90-94 85-89 In developed countries, the trend 80-84 towards a reduced population growth rate, associated with increased life 75-79 expectancy, has been determining 70-74 a major shift in the profile of the 65-69 population. In Brazil, it is already 60-64 possible to observe significant changes in the distribution of the 55-59 age pyramid. Just a relatively short 50-54 time ago, in 1990, the average age 45-49 of Brazilians was 25.6 years and 40-44 their average life expectancy was 35-39 66.3 years – and only 36.4% of the population was 30 years or older. 30-34 In 2007, the average age rose to 29.8 25-29 years, and average life expectancy 20-24 to 72.4 years – and 45.7% of the 15-19 population was already 30 or older. 10-14 In 2017, the average age of 5-9 Brazilians will be 32.5 years, their 0-4 average life expectancy will be 74.7 years, and 51.5% of the population 20 15 10 5 5 10 15 20 will be 30 or older. In Brazil in Millions Millions 2030, when no less than 91.1% of the population will be living in cities, Source: Brazilian Geographic and Statistics the average age will be 36, and Institute (“IBGE”) and United Nations
  14. 14. 14 SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL Urban population Demographic growth (%) (% per year) 100 3.5% 91.1% 3.0% 80 2.5% 60 2.0% 1.5% 40 1.0% 20 0.7% 0.5% 1950 60 70 80 90 00 10 20 2030 1950 60 70 80 90 00 10 20 2030 Source: Brazilian Geographic and Statistics Institute (“IBGE”) and United Nations almost 60% of the population will to 2.4 in 2030. The distribution per Those two trends, with different be 30 or older. Thus, there will be income bracket shows that family dynamics, effect the way housing more adults able to start families growth will be more accentuated policies are designed and how and which will require households. in the population strata with more construction companies will have It should be pointed out that, in purchasing power. Between 2007 to run their businesses. In the 2007, some countries in which such and 2030, the number of families first phase, until 2017, a housing aging started earlier, such as Chile with incomes of up to R$ 1,000 will policy based on subsidies gains and South Korea, already had a decrease, and their share of the total more relevance as a mechanism higher life expectancy than Brazilians will change from 53% to 31%. to complement the incomes of will have in 2030: 78.6 years. poorer families. In the second During the next 22 years, two phase, in which the strata with The New Families different phases can be forecast. less income diminishes, subsidies Of the 15.3 million new families that become less important. After 2017, Between 2007 and 2030, the number will be started in the next decade, market mechanisms and credit of families in Brazil will rise from 60.3 57% will be on the bottom of the terms will become even more million to 95.5 million – this growth social pyramid, with family incomes important for meeting housing of 58% represents more than double of under R$ 2,000. From 2017 on, needs. For companies, whether they the pace of worldwide population that tendency will change, and 78% are construction or manufacturing increase. Falling birth rates will also of the 19.9 million new families will firms, there will be changes in their have effects on the size of families, have incomes of between R$ 2,000 target customers and, therefore, in dropping from 3.1 people in 2007 and R$ 8,000. the product lines to be offered.
  15. 15. 15 Population and families In millions Persons Year Families Population per family 2007 60.3 189.1 3.1 2017 75.6 211.2 2.8 2030 95.5 233.6 2.4 Source: Brazilian Geographic and Statistics Institute (“IBGE”) and Getuliomillions In Vargas Foundation Persons Year Families Population per family 2007 60.3 In millions 189.1 3.1 2017 75.6 211.2 Growth rate 2.8 Income brackets 2030 2007 95.5 2030 233.6 (%) per year 2.4 up to R$ 1,000 31.7 29.1 -0.4% Distribution R$ 2,000 from R$ 1,000 to of families per income 15.5 bracket 27.6 2.5% from R$ 2,000 to R$ 4,000 8.4 21.8 4.2% from R$ 4,000 to R$ 8,000 3.3 11.0 5.4% from R$ 8,000 to R$ 16,000 1.1 In millions 4.3 6.1% from R$ 16,000 to R$ 32,000 0.3 1.3 Growth rate 7.4% Incomethan R$ 32,000 more brackets 2007 0.0 2030 0.3 (%) per year 10.1% Total up to R$ 1,000 60.3 31.7 95.4 29.1 -0.4% 2.0% from R$ 1,000 to R$ 2,000 15.5 27.6 2.5% from R$ 2,000 to R$ 4,000 8.4 21.8 4.2% from R$ 4,000 to R$ 8,000 3.3 11.0 5.4% from R$ 8,000 to R$ 16,000 1.1 4.3 6.1% from R$ 16,000 to R$ 32,000 0.3 1.3 7.4% more than R$ 32,000 0.0 0.3 10.1% Total 60.3 95.4 2.0% Source: Brazilian Geographic and Statistics Institute (“IBGE”) and Getulio Vargas Foundation The Housing of income. The housing deficit is the measure of the housing In 2005, the Brazilian housing shortage affected 7.8 million homes, which Shortfall shortage and comprises two is equivalent to 14.7% of demand. dimensions: The deficit due to cohabitation Current housing needs are not represented the largest part of the completely satisfied in a good inadequate housing: covers problem: 4.3 million households. In part of the world’s developing improvised domiciles, rustic absolute terms, the housing problem countries. Thus, in addition to homes, slum homes and slum- takes on a more critical dimension in the increase in demand caused by like tenements; the nation’s Southeast and Northeast new family start-ups, consideration regions, in that order. In relative terms, has to be given to the needs cohabitation: corresponds i.e. considering the relation between of families that currently live to the number of houses in the deficit and the number of homes, in inadequate homes or live which more than one family we find that the worse results are in together with others, due to lack is residing. the North and Northeast regions.
  16. 16. 16 SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL Housing deficit per region and component in 2005 In thousands of homes Northeast 2,737.3 North 1.071,8 PER REGION 1,487.4 1,249.9 464.0 607.8 BRAZIL Northeast 2,737.3 Total: 7,833.0 North 28.9% 1.071,8 20.5% PER REGION 1,487.4 1,249.9 464.0 607.8 Central-West BRAZIL 355.9 9.2% Cohabitation Inadequate Total: 4,303.2 7,833.0 Housing 97.3 Southeast 28.9% 3,529.8 258.5 12.4% 2,950.7 20.5% South 8.6% Central-West 717.3 355.9 9.2% 1,587.2 1,363.5 Cohabitation Inadequate Relative 4,303.214.7%Housing deficit 211.3 97.3 Southeast 3,529.8 506.0 258.5 12.4% 2,950.7 Source: Brazilian Geographic and Statistics Institute (“IBGE”) and Getulio Vargas Foundation South 8.6% Cohabitation 717.3 Inadequate housing 1,587.2 1,363.5 Relative 9.7% 9.6% 14.7% deficit 211.3 7.5% 506.0 6.6% 5.7% 4.8% Relative deficit per income class and component in 2005 3.3% (%) of the families 2.0% Cohabitation 1.8% 1.4% 1.0% 1.0% Inadequate housing 0.5% 0.2% 0.2% 0.0% 9.7% 9.6% up to from R$ 1,000 from R$ 2,000 from R$ 4,000 from R$ 8,000 from R$ 16,000 more than Total 7.5% R$ 1,000 to R$ 2,000 to R$ 4,000 to R$ 8,000 to R$ 16,000 to R$ 32,000 R$ 32,000 6.6% 5.7% 4.8% 3.3% 2.0% 1.8% 1.4% 1.0% 1.0% 0.5% 0.2% 0.2% 0.0% up to from R$ 1,000 from R$ 2,000 from R$ 4,000 from R$ 8,000 from R$ 16,000 more than Total R$ 1,000 to R$ 2,000 to R$ 4,000 to R$ 8,000 to R$ 16,000 to R$ 32,000 R$ 32,000 Source: Brazilian Geographic and Statistics Institute (“IBGE”) and Getulio Vargas Foundation
  17. 17. 17 There is an acute housing shortage factor that influences the possible annual depreciation rate works out in low income family segments, scenarios for the Brazilian real to 3%. which holds true both for the estate market. inadequate housing and cohabitation To calculate the value of the deficits. Around 10% of the homes of families with incomes of up to Substitution investments required in order to substitute the depreciated homes, R$ 1,000 were inadequate, and of Homes it is also necessary to determine the the percent for cohabitation was value of the housing stock, which is similar. Summing up the deficits for The preservation of homes also estimated based on the investment inadequate housing and cohabitation, generates needs directly related to flow of around R$ 2 trillion in 2007. the total reaches almost 20% of the volume and age of the housing For 2008, the investment value lower-income households. stock. Depreciation is usually necessary to substitute for the defined as a rate that is applied on depreciation of real estate properties The housing shortfall is a particularly the value of an asset. In view of the is R$ 59 billion. The need for serious matter in developing development of housing projects substitution varies in accordance with countries. Some, like Chile and in Brazil between 1940 and 2005, the income bracket – thus, around Mexico, have been more successful the average age of Brazilian real 60% of such investment needs to with housing deficit reduction estate properties is estimated at be targeted towards the recovery of policies. Government policy for the 35 years and, considering a usable the homes of families with average sector is, in this sense, a critical lifespan of around 50 years, the incomes of up to R$ 2,000. Housing capital stock Per income bracket, 2007 * TOTAL R$ 1,968.9 BILLION 667.7 (33.9%) 501.9 (25.5%) 398.1 (20.2%) 234.7 (11.9%) 36.8 6.3 (1.9%) 123.4 (0.3%) (6.3%) income up from R$ 1,000 from R$ 2,000 from R$ 4,000 from R$ 8,000 from R$ 16,000 more than to R$ 1,000 to R$ 2,000 to R$ 4,000 to R$ 8,000 to R$ 16,000 to R$ 32,000 R$ 32,000 Source: Brazilian Geographic and Statistics Institute (“IBGE”) and Getulio Vargas Foundation ( * ) in R$ billion
  18. 18. 18 SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL Map of the housing business Positive of 7.5%. With the combination of a decline in interest rates and a Scenarios gradual increase in the volume of subsidies, it is possible to see Housing need is not the same as how housing investments in Brazil the demand for homes. Need is could reach levels well above those possible demand, the fulfillment posted over the last 17 years. of which will depend on economic conditions: family incomes, funding The same scenario also presumes structure and the effectiveness of consolidation of secondary credit housing policies. Families always markets and more swiftness in the find some way to scrape out a living granting of funding. and provide themselves with some form of shelter, but if the latter In 22 years, Brazil will have a is not an adequate household, contingent of more than 233 then these families will add to the million people and around 95.5 numbers of the housing deficit. million families. Under the conditions studied, an average of By 2030, Brazil needs to find 2.5 persons per home is estimated, alternative solutions for the which means about 93.1 million housing deficit and allow new households – an increase of around families to be formed. Actually, 66% over 2007. it will be incumbent upon private initiative to supply a considerable In that period, 37 million homes part of the needs generated by will be built in the entire country, new families, in such a way that an average of 1.6 million new housing policy is complemented by residences per year. additional funds needed by the low income population. Investment will also reduce the housing shortfall. The deficit The reference scenario forecasts due to inadequate housing will average economic growth of 4%, be completely eliminated by 2030. in a context of high social mobility. Cohabitation will be considerably reduced and represent 2.5% of A gradual reduction of interest the total amount of households, rates is also forecast toward the which will include many families year 2030, with average home that live together by choice. Thus, financing rates down to a level considering that the demand for
  19. 19. A In 2030, Brazil will have a contingent of more than 230 million people and around 95 million families. The average will be 2.5 persons per home, which means 93.1 million households. Housing capital stock and per capita GDP in R$ in 2007 GDP 28.230 Housing capital 26.739 25,000 20,000 15,000 10,000 5,000 1950 1960 1970 1980 1990 2000 2010 2020 2030 Source: Getulio Vargas Foundation homes is gradually met and The annual housing investment Brazil, in 22 years, on a level with construction and renovation take flow will be approximately efforts towards housing capital place so as to steadily eliminate R$ 316 billion, R$ 219 billion creation equivalent to those of the housing shortfall, the reference between 2008 and 2017, and Ireland and Spain at present. scenario indicates that there will R$ 390 billion in the 2018-2030 Thus, the per capita housing be an average annual increase of period. Such investments will stock will reach R$ 28.2 thousand, 1.745 million adequate homes represent 7.3% of the GDP, an at 2007 prices, and will be higher (new and renovated households) increase of 4.3 percentage points than the per capita GDP of R$ 26.7 added to the nation’s housing stock. as compared to 2005 – putting thousand in 2030.
  20. 20. A SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL Population and HOMES The future of housing investment in Brazil Housing investment In R$ billion, per income bracket, from 2008 to 2030 32.5 (10.3%) Persons Income up to R$ 1,000 per home 3.4 2.9 2.5 63.7 (20.2%) From R$ 1,000 to R$ 2,000 82.6 (26.1%) From R$ 2,000 to R$ 4,000 Year 2007 2017 2030 Homes (millions) 56.2 72.4 93.1 63.1 (20.0%) Population (millions) 189.1 211.2 233.6 From R$ 4,000 to R$ 8,000 44.7 (14.2%) Housing investment per year From R$ 8,000 to R$ 16,000 New Housing Housing homes investment investment 20.6 (6.5%) Period (millions) (R$ billion) (% of GDP) From R$ 16,000 to R$ 32,000 2008-2017 1.613 219.4 6.8% 8.6 (2.7%) 2018-2030 1.598 390.0 7.6% More than R$ 32,000 Figures between parentheses for 2008-2030 2008-2030 1.604 315.9 7.3% refer to the percentage of each bracket. Source: Getulio Vargas Foundation Source: Getulio Vargas Foundation and OCDE
  21. 21. A Distribution of investments per region (annual average) From 2008 to 2030 5.9% R$ 18.8 bi North R$ 47.9 bi 15.2% Northeast R$ 19.6 bi Central-West R$ 182.9 bi 6.2% Southeast R$ 46.7 bi South 57.9% TOTAL 14.8% R$ 315.9 billion
  22. 22. 22 SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL The hypothesis of social mobility, rate for housing financing below investment increases substantially with sustained growth of average 7.5% per year – with regard to in comparison to GDP in order incomes and an effective housing meeting housing needs, which to meet the needs that arise on policy, as the reference scenario leads to a quicker reduction of the road to 2030. The increase presumes, means a reduction the housing deficit based on more in housing investment flows, in the number of homes in the effective housing policies. Under indisputably leads to a major income bracket up to R$ 1,000. such circumstances, the results improvement in the well-being of Thus, the average investment would be markedly different: the families. And in addition to that, in new residences will be higher housing deficit due to inadequate the investment increase brings in income brackets between housing would be eliminated by about benefits for the directly R$ 1,000 and R$ 2,000, which 2017, which would only leave the related production chain and for will represent 26.2% of the total. portion of cohabitation by choice. society at large, due to increased Alternatively, consideration is also The annual housing investment employment and income generated given to a scenario that takes into flow would be R$ 346.1 billion, an by building projects. account institutional advances and amount 10% higher than that under a more vigorous annual economic the reference scenario. Thus, when the complex housing growth of 4.6%. There will be a production process is observed from quick increase both in the volume In both scenarios projected in this a wider perspective, considering of subsidies – with a net interest study, the proportion of housing all angles, it can be noted that The real estate market in two scenarios 2007 a 2030 Reference Scenario Indicators 1990-2007 scenario with advances Housing investment (%) GDP 3.4% 7.3% 8.0% Housing investment R$ billion* 68.1 315.9 346.1 Per capita housing investment R$ * 408.6 1,479.3 1,592.8 Economic growth per year 2.8% 4.0% 4.6% Population growth per year 1.5% 0.9% 0.9% Relative housing deficit 13.1% 7.0% 4.4% Source: Getulio Vargas Foundation ( * ) Amount at 2007 prices. ( ** ) Amounts for the year 2017.
  23. 23. 23 Yearly investment in new homes Per income bracket. 2008 to 2030* 55.8 TOTAL (28.7%) 45.0 R$ 194.4 (23.1%) BILLION 36.4 (18.7%) 33.1 (17.0%) 1.0 16.1 (0.5%) (8.3%) 7.0 (3.6%) income up from R$ 1,000 from R$ 2,000 from R$ 4,000 from R$ 8,000 from R$ 16,000 more than to R$ 1,000 to R$ 2,000 to R$ 4,000 to R$ 8,000 to R$ 16,000 to R$ 32,000 R$ 32,000 Source: Getulio Vargas Foundation * in R$ billion construction or renovation activities expected to be successful in meeting will favor a major expansion of involve a wide range of players and housing needs. This is the conclusion housing credit, which in 2030 will sectors benefitting from such a that is reached when analyzing represent 4.7% of GDP, or R$ 290 virtuous circle. some recent housing expansion billion in loans being extended that experiences – such as those in Chile, year. This means significant annual Mexico, Spain and Ireland – in which growth in this market, i.e. 11.2% per Credit-Driven changes in financial markets preceded year, far outpacing overall economic Expansion credit expansion. growth of 4.0%. In order to acquire real estate Brazil has already made important Considering the socio-economic property, a significant amount of improvements in the sector and profile of investments, credit savings is necessary, which is not advances towards a more sophisticated demand will be concentrated always affordable for most families. financial market. In 2007, however, (approximately 46%) in brackets Thus, whatever the scenario, the the volume of credit available was with average incomes between credit market is a fundamental still small given the country’s housing R$ 2,000 and R$ 8,000. In this aspect for development of the needs: only 1% of GDP. sense, credit will have to undergo housing sector. For the sector to transformations so that it becomes a expand, it is indispensable that The growth projection for the more universal instrument. Business housing investments rise. housing market in the reference opportunities will depend upon the scenario forecasts a gradual capacity to differentiate products Countries with underdeveloped reduction in interest rates and and, more importantly, by the financial markets should not be funding costs. Such improvements flexibility of supply.
  24. 24. 24 SUSTAINABLE BRAZIL HOUSING MARKET POTENTIAL The Construction products offered, which will need to be more sophisticated, and also industries will grow by approximately 4.8% per year under the reference Firms’ Market in the financing terms for real scenario. Along with construction estate projects, since to the extent firms, manufacturers of materials In the reference scenario, Brazilian that the target market has more will see a marked rise in sales in the housing stock will increase by income available to it, the need for period up until 2017. The growth R$ 4.6 trillion due to the construction subsidized funds drops considerably of 5.3% will represent an additional and renovation of homes up to the while at the same time the demand turnover of almost R$ 95 billion, year 2030. The yearly construction for credits increases. with sales of construction materials of 1.745 million new residences, for residences jumping from necessary to cope with the increased The improvement of the environment R$ 69.2 billion to R$ 115.8 number of families and to reduce for the housing sector has led many billion. The biggest slice of that the housing deficit, will bring companies to direct a substantial demand increase will stem from the about big business opportunities part of their business to serving renovation market, accounting for for construction companies and families with medium and low R$ 55 billion. developers, with important effects incomes. The expectation of an on the development pace of these end to the housing deficit by 2030, In the following period, the sales companies. however, may lead to the devaluation growth rate will fall to 4.4% per year, of lower value properties. The but the additional turnover in that The effect on the pace and volume scenario clearly shows that good phase will be R$ 167.4 billion, of of business can be divided into opportunities for companies that which R$ 65.7 billion will stem from two periods in which the socio- work with the low income population construction activities and R$ 101.7 economic profile of family growth will intensify until 2017 and will billion from renovation activities. is different in each phase in then be reduced from that time on. This increase reflects the demand regard to the distribution of The changes from one period to the of higher purchasing power and, investments between construction other will occur gradually, allowing therefore, for products with higher and renovation. From 2007 until companies to adjust their strategic added value. 2017, the construction market will planning to the new profile. grow at a pace of 4.7% per year. In Brazil, a part of the demand During that period, the real estate In any case, the highway leading for construction materials is directly market for low income families (up up to 2030 in Brazil is marked by supplied by the industry itself, to R$ 2,000 p.a.) is the one that business expansion and, therefore, but a more significant portion is will grow most in absolute terms. by turnover increase. In the sold by wholesale and retail It is a market that operates with reference scenario, this market companies. In particular, the amounts of between R$ 35,000 will grow at an average rate of wholesale network especially and R$ 70,000, at 2007 prices. 3.9% per year, from the current meets the demand of construction R$ 99.8 billion to R$ 241.7 billion companies and the retail network From 2017 on, the share of in 2030. The effect of this will be a supplies the market for maintenance middle income brackets in housing marked expansion in employment projects, works performed by small investments will increase, which opportunities in this field, with an entrepreneurs or through do-it- makes this group the main clientele expansion of 3.8% per year. yourself construction. For the future, by 2030. For such demand, an increase is expected in direct developers and construction sales and wholesale trade, which companies need to be prepared to More Value Added means that the turnover of the retail offer properties between R$ 70,000 in Materials market will grow a little less than and R$ 150,000. This is clearly that of manufacturers, but will also a new phase. The transformation Between 2007 and 2030, the be significant (tagged at 4.2% will determine modifications in the sales of construction material per year).
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