Mortgaging the future

Continued domestic demand and a growing mortgage lending market are fueling robust investor interest in Brazil's affordable housing market. By Eva Poon

Private equity real estate firms are eyeing Brazil's growing residential housing market – thanks to an aggressive mortgage lending program by the country's banks.

As the residential sectors in the US and UK have weakened in the midst of the credit crunch, Brazil's market is proving robust, particularly in the affordable housing arena.

According to Philip Fitzgerald, managing director of Paladin Realty Partners' emerging markets division, virtually every bank in Brazil – including foreign-owned banks – over the past two years have “stepped up and created aggressive residential mortgage lending programs” with a good percentage of new mortgages being spent on affordable homes.

The growth of mortgages in Brazil can be seen in the recent results of Brazilian bank Unibanco, which reported that its home mortgage portfolio grew 25 percent from a year ago.

Los Angeles-based Paladin is one of a handful of private equity real estate firms to take advantage of the changing nature of Brazil's mortgage industry. Just last month, McLean, Virginia-based private equity firm JER Partners announced it was opening two new offices – in Brazil and Mexico – to take advantage of the “tremendous opportunity” that exists in the region, which would include the residential sector.

And with a rapidly growing consumer base, economic stability, low home-ownership rates and the country's debt recently being upgraded to investment-grade by Standard and Poor's, the demographics of Brazil point to a boom in demand for housing.

Previously qualifying for a mortgage was difficult with Brazilian developers often being the first mortgage lender as well. Until recently, the main mortgage lender in Brazil was the Brazilian Central Bank. However the growth of the economy has seen increasing numbers of banks, particularly foreign institutions, actively enter the market.

“There is a lot more interest in the affordable housing segment – particularly the lower income segment. That's the part of the market everybody seems to want to be in right now because it's the largest part of the market,” says Fitzgerald.

He argues that the lower income segment of the market is where the majority of the housing deficit is – and, with a rapidly growing middle class, where the buyers are.

“You're seeing a lot of push from the top down,” adds Fitzgerald. “Developers that were previously only interested in the upper-middle income are now in the middle-income and the ones that were in the middle-income are now going into the lowermiddle income. You're seeing developers start to reach further and further down trying to capture market share in what is the greatest demand segment.”

The challenge is that “net profit margins are thin,” says Fitzgerald. It's not a business, he says, where you do just one or two projects: “You have to have scale.”

But with a strong mortgage market, financing these projects should not be a big obstacle going forward. “I don't know of any bank who's not lending into the residential market now,” says Fitzgerald. “It's the most interesting and the frothiest part of the real estate market today. And now that Brazil just got upgraded to investment grade by Standard and Poor's, I would expect to see that trend continue, perhaps pretty dramatically.”

Despite the fact that much of the interest has been centered on the Latin American markets of Brazil and Mexico, investors have also been looking at other countries in the region. Some firms have been looking at Colombia, for example, says Fitzgerald, although “nobody seems to have pulled the trigger on anything.”

Nonetheless, Fitzgerald expects continued investor interest to focus on Brazil. “Brazil is such a large economy – it's such a big market – any private equity firm or fund would probably be the most efficient to stay in that country and try to make inroads there. So I think you're going to see more interest going forward in Brazil than any other market just because of scale.”

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