Real Estate Development

Brazilian Real Estate Development Model

The development activity refers to coordination of the real estate venture. The developer identifies the best lands to be acquired, develops architectural projects, promotes their launching and marketing actions, provides funding and coordinates their construction, making sure they are delivered on time. The characteristics of a real estate venture, marketing approach and construction process varies according to the target public's income profile. Ventures destined to medium and high standard consumers, for instance, are different concerning product concept, construction style, service range and advantages offered in a certain project, as well as a privileged location in a prime area of major cities.

Most of the story of the Brazilian real estate market has been based on the country's great economic and regulatory volatility. Over the years, a lack and deficit in essential factors such as: economic stability, high inflation, high interest rates, credits and access to home loans, legal framework of the sector, among others, have caused a severe impact on the development of the real estate market in Brazil.

By virtue of a long period of lack of funding to both production and final purchaser, the Brazilian real estate development market has created its own methods to make fundraising possible for the construction of ventures according to the self-financing model, which consists in combining anticipated sales and self-financing to the final purchaser. This characteristic confers a dynamic feature to the Brazilian market, making it different from other markets in the world.

This way, units are sold from the launching of a venture, before construction begins. Until construction is over, the developer receives an average of 30% to 50% of the total amount, depending on venture and purchaser profiles. By receiving resources in advance, the developer reduces the necessity of contributing with equity or depending on bank financing.

In this scenario, the speed of sales in the launching period becomes one of the main factors that determine venture's profitability, as well as the necessary capital to enable its construction. The capacity of increasing unit sales in launching is closely related to brand recognition and credibility of the developer. Among the main determinant factors, there is punctuality in the delivery of works, finishing quality in works and an adequate service for purchasers.

Nowadays, because of the great interest financial institutions show on real estate financing to the final consumer, many companies choose to transfer receivables from customers to these institutions after the venture is delivered (a process known as refinancing), obtaining financial resources in advance.

Real Estate Market Overview

Brazil has one of the largest real estate market in Latin America. Still, this sector presents a great potential for growth due to an increase in financing opportunities, population growth and an expansion in household income, among others.

Over the last decade, with maintenance of an economic stability and benefits from the virtuous economic scenario of the period, a major development cycle was initiated in Brazil's real estate market, based mainly on the following factors:

  • a greater credit offer to the sector, to both producer and consumer;
  • economic stability, which enables the offer of better-paying jobs and an increase in the purchasing power of Brazilian families;
  • reduction in interest rates to historically lows levels;
  • establishment of method to foster and stimulate the real estate market, in an attempt to reduce housing deficit and enable development in the sector, with the creation of incentive programs, such as Minha Casa, Minha Vida.

The decrease in interest rates in Brazil is extremely important to the real estate market, whose primary characteristics include the great amount of investments necessary to conduct ventures and its business cycle wide range, since there is a period of two to three years between products launching and effective delivery. In this sense, the development scenario has been widely boosted in recent years, as evidenced by the substantial increase in property finance.

This development in financing includes incentive measures from the public sector. A major program concerning this aspect in Minha Casa Minha Vida, which reached, in December 2012, 1 million houses delivered. In this same month, the federal government has also announced a set of measure to support the construction sector, reducing payroll taxes (INSS contribution of 20% is replaced by the one of 2% on profits), reducing RET (Special Tax Rulings) taxes from 6% to 4% and increasing "RET Socia" (taxes of 1% for low income housing units) to R$ 100 thousand.