Friday, October 01, 2010
When sizing up a potential real estate location, I always look for one of four strategies that indicate a potential rise in property values:
- A new, emerging middle class
- The Path of Progress
- An influx of foreign buyers
- Distressed or crisis opportunities
One of my hottest locations for real estate opportunities right now is Fortaleza, on Brazil's northeast coast. I identified two strategies at play when I first scouted this city more than two years ago, and they still hold true today.
A New Middle Class
A new, emerging middle class means new consumers. These new consumers buy cappuccinos, refrigerators, cars, vacations, new homes and second homes. This started happening in the US in the 1950s.
We can profit by owning the condo this new middle class lives or vacations in, or the building that houses the coffee shop where they sip frothy coffee.
Brazil became a middle- class country last year for the first time. Car sales were up 17.9% for the first quarter of this year, to 788,000 units. Domestic budget airlines are growing exponentially as this new middle class takes their first flight and vacation.
In 2010 to date, through the "Minha Casa, Minha Vida" (My House, My Life) program, close on one million new middle class homes have been delivered. In the first eight months of this year, 1.95 million new jobs were created, double the figure for the same period last year. The revised forecast for economic growth this year is 7.3%.
Fortaleza is Brazil's biggest domestic tourism destination. Brazilians come here to stay, sip cocktails by the beach, enjoy an evening meal and some entertainment. Passenger traffic at Fortaleza airport increased 23% year-on-year to the end of August 2010, and cargo traffic rose by 40% in the same period.
The Path of Progress
Anything that improves the accessibility of a piece of real estate increases its value. Infrastructure like roads, bridges, airports, and rail routes. Anything that improves amenities in an area will also increase real estate values...like resorts, golf courses, theme parks and conference centers.
We can profit by positioning ourselves ahead of this Path of Progress...
Fortaleza is enjoying a Path of Progress story today. Soccer's Confederations Cup comes here in 2013 followed by the World Cup the following year. 9.8 billion reais ($5.7 billion) will be spent improving infrastructure and tourism amenities in the run up to 2014. Airport capacity will be increased from five million to thirteen million passengers annually. A new metro system will provide modern and reliable public transport. The first of the routes are already operational. The new stadium will be world class, the new conference center the second- biggest in Brazil and the city will be home to South America's largest aquarium.
Outside of all this tourism-related development, Fortaleza is also seeing development associated with a new industrial center at Pecem port. Earlier this year, the government announced a duty-free zone, alongside Pecem and forty minutes west of Fortaleza. The scale is massive: the zone is more than 10,500 acres in total. Businesses located within this area will pay practically no taxes on inputs purchased and finished goods exported. There will be less bureaucracy and customs procedures for its exporters.
Buying in Fortaleza could position you ahead of the Path of Progress. There is currently a lack of both short-term rentals, and office space, in the city. You could do well if you buy here with a view to filling that gap in the market, particularly if you buy close to the new convention center or the metro line.
And now for the two strategies that don't apply to Fortaleza...
An influx of foreign buyers
In countries like Nicaragua and Panama, large numbers of foreign buyers (mainly North American) pushed property prices rapidly upwards in a relatively short timeframe. These buyers used equity in their properties back home to finance their overseas property purchases. With the global slowdown, those buyers have gone...and the markets that relied on them have suffered.
Brazil's real estate market is driven by the local middle classes. Less than two percent of property sales in the country's northeast are to foreign buyers. Thanks to the growing Brazilian middle classes, the real estate market in Fortaleza is still buoyant.
Distressed or crisis opportunities
Crisis investing means buying when everyone wants (or needs) out. There are no buyers on the ground...and the few that remain are afraid. You get to name your price. This happened in Argentina during its financial crisis in 2001. Today, you'll see distressed deals, mainly in Europe and the US. Banks are fire-selling units at prices as low as 30 cents on the dollar. You need to be careful if you are considering this play. You need to focus on quality, and finished units.
The market in Fortaleza however is strong. Prices are rising and there are a lot of buyers. This isn't the type of market where we see distressed or crisis sales.
These four strategies don't just apply to Fortaleza. You can (and should) use them when investigating any real estate purchase overseas, especially when you are buying for investment.