My Favorite Commercial Real Estate Play Right Now

Monday, June 08, 2009

Dear Reader,

There is a chronic shortage of quality office space in Fortaleza, which I noted on my first trip to Brazil last year. Finally, I’ve found a deal where we can profit from this shortage.

For the top professionals in Fortaleza—lawyers, accountants, architects, etc.—their only option is to rent space in shopping centers. When I first saw this, I assumed the guy I was meeting was too cheap to rent a proper office. But in this city, a unit above the food court is top of the line office space…and highly sought after. If there was anything better, it would be snapped up.

The case for buying quality office space in Fortaleza is pretty straight forward. There is a chronic shortage. The economy continues to grow, creating further unsatisfied demand. New supply will come on stream; very little of this however will be in the areas where businesses want to be based. There is a shortage of developable land in prime areas.

Brazilians like to live near where they work, or work near where they live. A short drive…or ideally a stroll. Parque de Coco is the most up market residential area in Fortaleza. This is where the Duets Office Towers will be located. Fortaleza’s biggest shopping center (Iguatami) and the established commercial and residential area of Aldeota are within minutes by car. The main thoroughfare through the city, Ave Santos Dumont, offers easy access across the city of Fortaleza and surrounds.

Duets Office Towers is a joint venture between Brazil’s third-biggest and publicly traded house builder Rossi (Rossi Residencial SA) and Fortaleza’s biggest developer Diagonal. The office suites are 33, 39 and 45 square meters. Suites can be joined together to make larger units on request. Construction will be high-end. Amenities include a beauty salon, gym, wellness center, restaurant, and meeting rooms. A shopping mall will be constructed as part of the project.

Units start at 182,000 reais ($92,226) or just under 5,413 reais ($2,743) per square meter. Two car parking spaces (which you must purchase with a unit) cost an additional 40,000 reais ($20,276). Prices stay the same across all floors.

On completion of building in three years, you have two options:
1) Pay the developer the outstanding balance, or
2) Let the developer finance the balance. This is available over 40 months.

The suites in Duet Office Towers would rent for 1,200-1,500 reais ($607-$760) per month if available today. I expect this figure to be higher by the time the units are delivered in 2012. The tenant is typically responsible for fitting out the unit and covering all costs (with the exception of property tax) associated with the unit. Of course, it is up to you (or your agent) to negotiate these terms on your behalf. Finding a reliable tenant isn’t difficult. Once you have found a tenant your involvement (and work) should be minimal. Rental income is taxed at 15% off the top. There are practically no costs you can offset against this.

As with previous recommendations I like the smaller 33-square-meter units at Duets. The yield on these smaller units will be higher. I have reserved one of the 33-square-meter suites.
E-mail (JavaScript must be enabled to view this email address) for an information pack including floor plans, renderings, and instructions on how you can reserve a unit. Units will be allocated strictly on a first-come-first-served basis.

Ronan McMahon