This is the Best Short-term Rental Play I Know

Monday, August 31, 2009

Dear Reader,

The short-term rental market in the boardwalk area of Fortaleza is the strongest I know. It’s going to get stronger, with the run-up to the 2014 World Cup. According to official reports, tourism numbers grew by 16.8% last year. More business travelers are coming also. Thing is: there’s practically no more land that is developable in this area. Strong and growing demand with a supply constraint! Perfect for a short-term rental play.

Last July, I recommended a project called Beach Class to members of Real Estate Trend Alert. We bought pre-release units in the development with special prices and terms. I bought four units myself. At launch, in August 2008, prices were 15% higher than we paid.

Headquartered in Recife, the developer of Beach Class (Moura Dubeux) is one of the biggest construction companies in northeast Brazil. This company has a strong reputation: 26 years experience, 80 projects completed, and 33 projects (including Beach Class) under construction. These guys have a track record of delivering quality.

Beach Class is a brand…not just a single project. Four Beach Class developments in the city of Recife target the executive market. The fifth Beach Class project in the Recife area is at Porto de Galinhas. This is one of the world’s most famous beaches.

Beach Class Suites in Recife are perfect for short-term rental. Year-round occupancy is 86%. The average nightly rate is BRL 240 ($128). Allowing for inflation, prices here rose by 50% during the build period. Buyers did well. They enjoyed capital appreciation during the build period, and strong rental demand on completion.

The Beach Class project in Fortaleza is known as Beach Class Colonial. It’s located a block off the beach and fifty meters from Fortaleza’s boardwalk. Excavation work on the site is now well advanced. The Beach Class Colonial units will be seriously high-spec. Amenities resemble that of a five-star hotel, and include swimming pool, a gym, sauna, crèche, game room, movie room, and a business center. Remember, Beach Class is a brand…and Moura Dubeux will ensure consistent standards across their Beach Class projects.

I recommended the smaller (56-square-meter) units, as a rental play, given the high rental yields in this market right now—up to 15% a year for units like Beach Class. But if you don’t want to hold your unit, the resale market is strong, too.

Today’s Opportunity

Around the launch date in August 2008, the developer sold eighty units to a European group. This group also opted for the smaller units I recommended. The deal fell through, for reasons that were not related to the quality of the project.

These units are now back on the market. If you missed out first time around you have a second chance. Available units start at BRL228, 000 ($121,985 at today’s exchange rate). Prices start at 4,000 reais per square-meter. The payment terms are 2.5% down and monthly payments of 2.5% during the build period.

Today’s prices are 18% higher than when we RETA buyers purchased last July. However, the pace at which the market is moving in Fortaleza makes this a good deal today. I still consider it a buying opportunity. The site has been cleared and excavation work is well advanced. Further price increases are expected in the coming months.

Since July 2008, prices in Fortaleza have risen to new highs. Prices for water-facing units in another development, Landscape, sold for as much as BRL 7,500 ($4,008) per square meter. Units with no views or limited views ranged from BRL 4,200 to BRL 5,500 ($2,245 to $2,939) per square meter. The next project in the boardwalk area will see pricing in the region of BRL 7,000 ($3,740) per square meter. This project is a block back from the boardwalk. Views however will be unobstructed—there will only be a park between this building and the boardwalk.

How You Can Benefit From the Vacation Rental Trend

The short-term rental market has strengthened at an astonishing pace. According to official reports, tourism numbers grew by 16.8% in Fortaleza last year. This year, Fortaleza will see further growth. Short-term rentals have been running at pretty much 100% occupancy since early December. Fortaleza’s hotels were running at 97% occupancy in January and during February’s carnival. Demand for short-term rentals from business travelers continues to grow. The location of, and amenities in, Beach Class make them perfect for short-term rental. The end of the boardwalk (Iracema Beach) where Beach Class is situated is seeing some major upgrades, including the construction of the largest aquarium in Latin America.

The completion of Beach Class is expected to be May 2011. If you are chasing a short-term rental yield, this is the best deal on the market in Fortaleza today. There is still potential for substantial capital appreciation. E-mail (JavaScript must be enabled to view this email address) for floor plans and a list of available units.

Ronan McMahon