Brazilian Real Estate Industry

Brazil‘s rapid process of urbanization from the 50s changed the scenario for land use, with much of the population living in large cities. According to a study of the Brazilian Institute of Geography and Statistics – IBGE, in 1950 Brazil had 36% of its population living in urban areas, while, from 2010, the latest date of disclosure of this data, this percentage reached 84.35%. Geographically, Brazil is divided into five regions: South, Southeast, Midwest, North and Northeast. These regions show significant differences between themselves in terms of absolute population, population density, economic activity, development, per capita income and housing deficit.

According to IBGE information, the Southeast region, particularly the states of São Paulo and Rio de Janeiro, where our properties are located, is the Brazilian region with the highest percentage of population and economic activity, gathering more than 42.1% of the population of the Federative Republic of Brazil (“Country”) (IBGE 2010) and accounting for more than 55.4% of the national GDP in the last years (IBGE 2011).

The cities of São Paulo and Rio de Janeiro are, by far, the largest real estate markets in Brazil. The importance of these two cities can be noticed by the total ranking of office areas in which, São Paulo and Rio de Janeiro take, according to data from the property consultancy CB Richard Ellis (CBRE), respectively, the 1st and the 2nd positions, with approximately 13.5 million and 7.0 million sqm of ABL. The real estate market of the city of São Paulo is characterized by being fragmented, both geographically and economic sectors, while Rio de Janeiro stands out by the scarcity of land, hampered by the geographical features of the city with hills, lakes and beaches, and the few remaining lands have limitations and/or barriers to their development or values ​​of difficult economic feasibility, except for the new area called “Porto Maravilha” that will bring opportunities for new development after the implementation of the infrastructure designed for the regeneration of this area.

Both cities, however, can be divided into regions that include similar features as its occupants, technical characteristics and practiced values.

The metropolitan area of ​​São Paulo is composed of 38 municipalities and the capital and, according to the latest data obtained from the Secretary of Planning of the State of São Paulo, had a total area of ​​7947.3 km² and a population of approximately 19.8 million of inhabitants. According to the IBGE, the metropolitan area of ​​São Paulo is the region with the highest percentage participation in the Gross Domestic Product (“GDP”) of Brazil and has the highest percentage of population and economic activity in the country.

The city of São Paulo according to CBRE, is the largest office market in the country with approximately 13.500.000 sqm of GLA, of which can be divided into four main areas: (i) Central Region – which is the historical center of the city of São Paulo, (ii) Paulista Region – with Paulista Avenue axis and its surroundings, (iii) Jardins Region – including the surroundings of Avenues Brigadeiro Faria Lima and Presidente Juscelino Kubitschek and (iv) Marginal Region – considering Marginal Pinheiros.

Also according to CBRE, considering only the office areas with central air conditioning, the city of São Paulo has a total area of ​​approximately 8.5 million sqm of gross leasable area, and approximately 71.5% out of which is concentrated in the four regions mentioned above. The Central Region has most of the corporate buildings built before the 70s. After this period, the area fell into decline due to lack of renovation due to the technical characteristics of the buildings that did not allow certain facilities such as central air conditioning and raised floors. Also, another factor that characterizes the Central Region is the lack of land for new projects, compared with other regions.

As for Paulista Region, located at the highest point of the city, it began to develop in the mid 50’s as a natural migration as the Central Region could not accommodate the growth of businesses in general with respect to the best technical quality requirements of the buildings. During the 70’s and 80’s, Paulista Region was recognized as the financial center of Latin America. At the end of the 90s, many of these financial institutions and companies in other industries moved to more modern buildings in other locations, however, the demand for Paulista Region is still great due to the existing infrastructure, for example, of public transport and services.

In Jardins Region, the commercial real estate development began in the mid 70’s, with the construction of small buildings to meet the local demand around the first shopping mall of the country, Iguatemi Mall. With the depletion of land in Paulista Region and mainly to (i) expansion of Avenue Faria Lima and (ii) creation of “Faria Lima Urban Operation” that allowed the purchase of additional potential building for the land to be developed in the region, Jardins Region has gained a new momentum that allowed the emergence of some of the best quality buildings in the country, and currently Jardins Region – and especially the expansion of Faria Lima – is considered one of the noblest areas of the city with the most high standard and high technology corporate buildings, becoming thus the new financial center of the city.

Due to this growth, the areas along Avenue Presidente Juscelino Kubitschek also valued, which already has several new projects of good quality, as well as Vila Olímpia Region, subsector of Marginal Region bordering with Jardins Region.

The Marginal Region, which comprises, among others, the subsectors of Avenues Engenheiro Luis Carlos Berrini, Nações Unidas e Chácara Santo Antônio, has been developed from the 80s as it has considerable landbank subject to construction of large enterprises to house large corporations at lower cost to Jardins and Paulista Regions. The region has benefited from an urban operation, where the proceeds from the sale of additional potential building are being implemented to improve the local infrastructure.

Also, the Alphaville Region, in the city of Barueri, about 20 minutes from the West Zone of the city São Paulo, had its early development in the 90s, and hosted service sector companies, which sought low cost of occupation and tax benefits. With the availability of land in the area for new developments, Alphaville has increased its stake in the São Paulo office market and already has, according to CBRE, a total landbank of approximately 854,800 sqm gross leasable area.

New Stock, Vacancy and Rental Values of Corporate Buildings in São Paulo
Historically, and according to CBRE information, Paulista, Jardins and and Marginal Regions together had an average of approximately 75,000 sqm of GLA of new offices delivered per year from 1980 to 1994.

From 1994, with the stabilization of the economy provided by the Real Plan, the office market, as other segments of the economy, experienced a period of significant improvement. Thus, successive records were broken in the average volume of new corporate buildings delivered to the market each year, reaching the average, according to CBRE, 218,000 sqm of gross leasable area in the period between the years 2000 and 2004, with the peak reached in 2000, with almost 300,000 sqm of gross leasable area. From 2005, there was a marked reduction in the delivery of new stock, resulting in lower delivery in the last ten years, of only 90,000 sqm.

Between 2006 and 2011, according to CBRE, an average of 154.800 sqm per year was delivered and this average increased to 399,150 sqm, in the 4 main regions in the years of 2012 to 2013. In 2014, the new stock of the four main regions of São Paulo totaled 298,100 sqm. In 2015, until September 30, 2015, 261,400 sqm had been registered in the four main regions.

Regarding the gross absorption, the city of São Paulo accounted for an average of 645,000 sqm per year by the year 2011 and increased to 700,400 sqm and 806,500 sqm in the years 2012 and 2013 respectively. In 2014, the gross absorption reached 779,900 sqm and until September 30, 2015, 735,700 sqm. On December 2013, the vacancy in spaces with central air conditioning in the city of São Paulo accounted for 10.5%, while in the Alphaville region, the vacancy reached 27.7% due to the large production and new buildings and the relative low demand in the region. On December 2014, vacancies in the city of São Paulo and Alphaville were, respectively, 12.8% and 24.2%, and 15.5% and 16.5% on September 30, 2015, respectively.

The rental fees charged in 2015 reduced if compared to 2014, being inferior to R$ 140/sqm/ month, as the chart below.

The office market in Rio de Janeiro until the 60‘s was the main national market in terms of total gross leasable area. After that, it moved to the second place, which continues today, with a volume of around 7.0 million sqm of gross leasable area, considering spaces with and without central air conditioning, having as main feature the old age of its stock that has at least 35 years of age, according to CBRE. If we consider the stock with central air conditioning, we have a total of 3.687.200 sqm of GLA.

Even today, the city of Rio de Janeiro suffers with its limitations for renewal of the stock due to the scarcity of land in the downtown and the limitations imposed by law in the regions of Flamengo and Botafogo. Part of the renewal of the stock is being made through retrofits, that is, the regeneration of old buildings with the use of modern materials technology. These limitations are the result of the geographical constitution of the city, since the existence of different natural physical barriers such as hills and sea, hinders the business growth in other directions.

The geographical characteristics have an important limiting role on the renewal of its spaces, which features a market with few possibilities of new supply and therefore less competition from homeowners, since the demand is exceeding the supply by a wide margin in recent years.

With the development of the port area through the “Porto Maravilha” project, the prospects are that, in the medium term, this region will provide significant new developments of offices and trigger the production of new areas with updated technical specifications, as noted in the first projects delivered in the region.

The city of Rio de Janeiro can be divided into five main areas: (i) Central Region – being the historic center of the city of Rio de Janeiro, which also comprises Cidade Nova and Porto Maravilha regions, (ii) Flamingo Region and (iii) Botafogo Region – characterized by buildings located mainly in front of the edges of Flamengo and Botafogo Beaches, (iv) South Zone Region – comprised mainly of Ipanema, Leblon, Copacabana and Lagoa and (v) Barra da Tijuca Region – natural expansion of the city of Rio de Janeiro.

The largest stock of commercial real estate is in the Central region, totaling 62.5% of the total stock of the city with central air conditioning, according to CBRE. The region can be considered a typical CBD (central business district) not only by the high number of corporate spaces, but the transport and services infrastructure available in the region. The highlight of recent years in the region has been the delivery of some new high quality developments, which had not occurred for a long time.

Flamengo and Botafogo regions are very similar: they represent the expansion of the downtown area, but with major limitations of land and land use legislation. Thus, the total stock is very low with very little prospect of new ones.

The South Zone Region is characterized more by the existence of smaller offices that house mostly small businesses and self-employed professionals. There are few office buildings and this trend might be maintained.

Barra da Tijuca Region represents the natural expansion of the city of Rio de Janeiro. However, the lack of infrastructure, particularly in public transportation and road system, making difficult the connectivity to the major shopping centers of the city, hampers its corporate growth.

New Stock, Vacancy and Rental Values of Corporate Buildings in Rio de Janeiro
From the characteristics presented above of the main areas of the city of Rio de Janeiro, it is clear the existing difficulties in the production of new office developments in the city. Thus, the volumes are much lower than those of the city of São Paulo.

One of the effects of the difficulty of developing new projects reflects in the quality of the buildings, considered far short of the real needs of its occupants.

According to CBRE between 2000 and 2004, the average of the new spaces delivered totaled 49,474 sqm/year, and was surpassed in the following period, 2005-2009, by 32%, reaching an average of 65,493 sqm/year. This “increase” in the average was due to a single project, delivered in 2008, showing its unsoundness in the delivery of new products.

From 2009, there was a steady increase in the delivery of new stock, especially in the Barra da Tijuca region and downtown. In the period from 2009 to 2011, according to CBRE, an average of 118,600 sqm was delivered in the city of Rio de Janeiro, with 137,000 sqm delivered downtown. For the years 2012 and 2013, the delivery of office areas reached 123,900 sqm and 183,500 sqm respectively. In 2014, the delivery of new spaces was 159,100 sqm and until September 30, 2015, it reached 123,800 sqm. Regarding the gross absorption in 2012 and 2013, the city has absorbed an average of 276,400 sqm per year, and in 2014, the gross absorption totaled 250,100 sqm and 158,800 sqm until September 30, 2015. The vacancy on December 2013 was estimated at 8.5% and ended the year 2014 with 12.6%. Until September 30, 2015, the vacancy comprised 17.1%.

The rental fees charged in 2015 showed a slight decrease compared to 2014, as the chart below.

With the stabilization of the economy (Real Plan) since 1994 and privatization of the energy and telecommunications sectors in 1998, there was a large influx of foreign investment into the country and, finally, a period of international competitiveness in the logistics market with the restructuring of processes.

From 1998 on, with the first signs of crisis in the world economy that impacted Brazil, the movement of the market has been decreasing sharply, worsening with the currency devaluation and the extremely high interest rate policy practiced by the Federal Government. Many companies have changed their expansion strategies and in many cases have chosen to dispose of some real estate, which were available from the rationalization of their operations or outsourcing processes.

From 2003, after the stabilization of the national political framework, the industrial market became more active, with many industries intending to move to more modern plants, a direct result of the growth of the economy in general.

The logistics market was more active in this period and is still rapidly developing in view of the need of many industries located outside the metropolitan regions have distribution centers installed within or very close to their consumer markets.

The real estate market facing logistics properties has been developing over the last ten years, with a strong preference for regions located along major arterial roads, such as in Sao Paulo, Via Dutra, Castelo Branco and Anhanguera-Bandeirantes system, in that the latter has limited access. The best known area for this type of activity is the city of Barueri, in the neighborhoods of Alphaville and Tamboré.

After the downturn of the world economy of 2008, in which Brazil was more stable than the other countries, as well as due to the increased purchasing power of the population, the growth estimates in the short and medium term are very positive, promoting (i) the development and the industrial expansion; and (ii) the logistics nationwide.

In both cases, there is a need for new areas of warehouses with better infrastructure, either for industry or logistics.

Given the country‘s growth needs, the segment of warehouses and distribution centers tends to develop over the coming years, in the main highways connecting the major Brazilian cities.

According to the chart below (Cushman & Wakefield), delivery areas in the year of 2015 totaled approximately 711,000 sqm, with net absorption (job growth) around 454,000 sqm in the same period, resulting in a 20% overall vacancy by the end of the year 2015.

Rental fees charged in São Paulo in 2015 showed a slight decrease compared to 2014, in that R$ 21.05/sqm/month and R$ 20.54/sqm/ month, respectively.

In addition, our activities are subject to federal, state and local laws, as well as applicable regulations, permits and licenses, among others, for the construction, zoning, land use, protection of the environment and historical heritage and for the rental and condominium, which affect our activities.

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