Brazil Housing Market Gains
Strength As Local Credit Grows

Brazilian real estate developers are still betting on a local housing boom, despite the worldwide credit crunch that originated in the U.S. subprime mortgage market.

"There is momentum for the real estate industry right now, but we are not living a boom and we are not even close to a boom, given the small credit portfolio in real estate," said Joao Claudio Robusti, president of the Sao Paulo Real Estate Association.

According to Robusti, total outstanding mortgage loans in Brazil are equal to only 2% of gross domestic product. By comparison, in the U.S the ratio is 69% of GDP and in Mexico 11%.

Developers, consequently, are still bullish, given the scope for growth in the country's domestic mortgage market.

A year-and-a-half after its debut on the Brazilian Stock Exchange, developer Gafisa SA (GFA) is ready for a new raft of projects, according to Gafisa President Wilson Amaral.

"Everything we imagined when we launched the IPO has materialized," said Amaral. "The main driver was positive macroeconomic conditions, with inflation under control and the continued reduction of the Selic base interest rate."

Brazilian inflation is currently running at slightly less than 4%. The Selic rate, while still high at 11.5%, has been pulled down systematically by the Brazilian Central Bank since its recent peak of 19.75% in 2005.

Gafisa debuted its shares on the Brazilian market in February 2006 when the company raised 927 million Brazilian reals ($470 million). One year later, Gafisa became the first, and so far the only, local company in the industry to list American Depositary Shares, or ADSs, on the New York Stock Exchange, raising another BRL1.03 billion.

The company used the expertise of one of its own shareholders in its initial venture into the global capital market. "We used the know-how of our shareholder, Equity International, which had a successful experience with Mexican home-builder Desarrolladora Homex (HXM)," said Amaral.

Equity International, a private-equity firm that focuses on real estate in emerging markets, was co-founded in 1999 by Gary Garrabrant, the current chief executive, and Sam Zell, the Chicago-based billionaire whose Equity Group Investments LLC scored major successes in the U.S. real-estate market starting in the 1970s.

Currently, Equity International holds a 13.8% stake in Gafisa.

Gafisa is not the only developer to tap the capital markets. Others which have listed in Brazil include Cyrela SA (CYRE3.BR), Rossi Residencial SA (RSID3.BR) and Company SA (CPNY3.BR), all of them citing opportunities arising from the systematic decline in the Selic base rate and prospects for economic growth as high as 5.0% this year in Brazil.

However, players acknowledged some risks in the Brazilian market.

Said Amaral, "We need to meet Brazil's housing deficit, but we also need to avoid exaggerations. We don't want to get into the situation of facing rising costs that result in buyer cancellations, for example."

But the broadly bullish view of the industry is shared by another important industry, Brazil's banks. They are the ones, after all, that will provide the money if and when Brazil's mortgage market really takes off.

"It is reasonable to expect growth in mortgage activity by the banks," said Alex Agostini, a banking analyst at the Austin Ratings consulting group in Sao Paulo. "In the medium term, I expect banks to form partnerships with local real estate companies and possibly even acquire some of the realtors' own credit portfolios."

On Wednesday, Brazil's state-run Caixa Economica Federal savings bank announced a new credit line, expanding the maturity of its mortgage loans to 30 years from 20 years.

"The Caixa Economica decision was unprecedented and highly positive for the real estate industry," said Amaral. "This will tend to increase sales, and make housing more affordable for a broader segment of the population."

Nor is the Brazilian real estate industry off the radar for foreign investors.

Starting in mid-2005, more that 25 real estate companies have debuted on the Brazilian Stock Market, raising more than BRL17 billion. According to the Sao Paulo Stock Exchange, foreign investors bought nearly three quarters of the shares on offer.

But there could be a downside from such interest, according to some analysts.

"This foreign investor appetite has left stock prices for the real estate companies too expensive," said Luiz Carlos Barroso Simao, a fund manager at local investment fund Mandarim, based in Rio de Janeiro.

For example, Gafisa's New York-traded stock, which has lost 26% over the last three months to trade at $24.13 - just below its March 2007 IPO price - still sports a sky-high 106 price-to-earnings ratio.

By comparison, Homex's current P/E stands at just 21. Its share price has held up well during the recent global market turmoil, rising 4.4% over the last three months and 18% over the last twelve to $7.05.

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