Rio de Janeiro 5
INTERNATIONALPLANNING AND DEVELOPMENT PRACTICE
InternationalPlanning and Development Practice
Although the majority of the capital that enters theinternational real estate has an opportunistic risk or rewardstructure, it is expected that the next few years would see the valueadded and core strategies would be integrated as real estate expandsand portfolio risk reduction becomes easily attainable. Theinternational real estate market as in the domestic real estatemarket is driven by the same logic on investments (Lynn & Wang,2010, p.12). Before breaking into an emerging market, it is importantto understand that the international dimension provides a number ofadditional factors. These factors include the potentiality to investin emerging and expanded the universe of real estate market and therequirement to match asset holdings internationally following theincreased liability exposure of the multinational real estatecorporate funds.
While investing in real estate in emerging market is not withoutrisks, investing in particular sectors of the property market, forexample, for development and investment in particular cities involveadditional risk factors: economic and political. For economic risks,it is more concerned with the stable nature of the exchange rates andthe economic performances (Montgomery, 2003, p.380). Political risks,on the other hand, are more concerned with the policies, governmentstructure, leadership and stability, tension, conflicts, and war, andbureaucracy.
The paper focuses on Rio de Janeiro, an emerging real estatemarket. The basis of the report is as a result of the Global RealEstate PLC, which is a subsidiary of the major real estatedevelopment and investment group headquartered in Belfast. Being aplanning and development analyst, the paper is an appraisal of thetarget market report and a series of recommendations preparation formarket entry strategies. The report is based on a plan to expand intothe emerging real estate market in Rio de Janeiro.
Background:the Brazil Real Estate Market
Real estate forms a section of the property market, and in general,is characterized as embryonic and growth-oriented. Brazil, forinstance, exhibits such characteristics as industry potential whichsubstantially exceeds the current volume, accelerating market growth,and a rapid growth in a number of unsophisticated players in the realestate. The Global Real Estate PLC, as part of its internationalplanning operations into the Brazilian market, more specific in Riode Janeiro, will have to understand that entry into this particularmarket appears to be easy (Montgomery, 2003, p.380). However, theprocess of exiting is difficult. Reasons for this are because of theweak legal structure with fewer market players.
Rio de Janeiro is forecast to be among the fastest growingeconomies in the world. Brazil and most importantly Rio de Janeiro,it is predicted to be the fifth largest economy in the world by 2050.The city possesses sizable labor pools, vast natural resources,growing productivity, and increasing investment rates (Lynn &Wang, 2010, p.14). It is important to know that unlike othereconomies in the Latin American, there is improved debt positionconsidering moving from the largest market labor, and in 2008, tobeing a net foreign creditor.
Since the late 2000s, Rio de Janeiro, and most importantly Brazil asa whole, has made great strides towards proper growth foundationswith emphasis on attaining macroeconomic economy. According to Lynn &Wang (2010, p.14), Brazil`s economy as a whole indicates that thegrowth rate continues to lag behind that of India and China in partdue to the stabilization measures that have dragged the economy.However, it serves as a strong and firm foundation for the futuregrowth.
SocioeconomicBackground: Rio de Janeiro
Rio de Janeiro is a story of emerging dualization within thehistorically unmatched city (Johnson, 2015, p.5). The Rio de Janeirometropolitan area has a population of over 6.5 million people as of2015 spread over 18 municipalities and is expected to grow at therate of 1.1 percent from 2015-2030 (Johnson, 2015, p.5). As a sectionof the city`s population move to medium-sized cities around Rio, thecity`s outer regions continue to grow quicker than the central areas.Based on the census data, it shows the less-educated, poor, andnon-white individuals concentrating on the periphery while thefavelas are spread all through the metropolitan area. The white andeducated population is concentrated around Rio`s city center.
During the 2010-2015 periods, there has been an increase in incomeconcentration. The poor continue to be more concentrated at thecity`s periphery the indigent poor population is concentrated in thecentral sections of the city while the rich folks continue toincrease their total income shares. At the same time, the salariedindividuals become scarcer, and others at the lower section of theincome scale moved to the city to take advantage of emergingopportunities in the service sector (Montgomery, 2003, p.381).Subsequently, the large real estate companies continue to intensifypolarization levels in Rio`s city center, transforming the southernzone into a more exclusive citadel, which is fortified by the city`ssteep hills and the presence of both the public and private police.Additionally, Rio terminated the housing finance system, and inrecent years, the city experiences the upper-middle-class surge anddesire to live and reside in the exclusive zones and have in turnmade the city`s elite housing the most viable in the real estatemarket.
Economically, Rio de Janeiro is considered a growth-oriented marketirrespective of the above social-economic imbalances facing the city.The city presents an ample opportunity for the real estate market toinnovate and build strong market share. According to Johnson (2015,p.6), Brazil, in general, represent a huge opportunity however, thecountry faces a number of risks considering it has to do with thelocation, marketing strategy, and timing in real estate investing.Specifically, real estate investment, based on social alignment, hassince been focused on the primary markets Rio de Janeiro provides(Tauil & Chequer, 2016, p.3). Again, of importance is to notethat the Brazilian largest city has secondary markets, which offercompelling force in real estate growth dynamics.
It is important that the Global Real Estate PLC plan to break intoRio`s real estate market understand the dynamics making up thefor-sale industry. For instance, the for-sale residential marketcontinues to boom and it is projected that healthy fundamentals willincrease as demand overpowers housing supply (Johnson, 2015, p.7).The mass development in housing within the for-sale category isprojected to grow further considering most Brazilians experiencelittle propensity to engage in the rental market. In Rio, thisindustrial sector is full of owner occupiers and is located in thecity`s submarkets.
Again, the potentiality Rio has for the real estate developers aredepicted by the size of rests and movement of people into the city,annually. Of importance to note is that rests remain resilient in thecity of Rio, more so during the downturn. According to Johnson (2015,p.6), an increase in rents was over 25% in 2010 in the city`s market.
LegislativeFramework regarding Ownership of Firms and Property
Acquiring firms and property in Rio de Janeiro starts with theoffer that is addressed to the seller/owner of the firms andproperties. Once the non-binding offer is approved, the partiesinvolved often execute the binding sales and purchases agreementsubject following a due diligence carried out by the parties. Lynn &Wang (2010, p.15) cautions that real estate properties and firms`acquisitions must carry out due diligence on the firms and propertiesof sellers and other previous owners if there are any regardless ofthe firms and properties` value.
It is important to note that the Brazil`s real state ownership, andmost importantly in Rio, benefits from proper funding mechanism, forexample, the Fundo de Investimento Imobiliário
(FII) funds, which are considered as securities by real estatereceivables. The Brazil`s legal framework guides the investors intohaving sound collateral, for example, the fiduciary lien that permitsthe seizure of firms and property in the event of ownership default(Montgomery, 2003, p.382). Additionally, property buyers in Rio arerequired to seek assistance from the city`s real estate consultingfirms towards evaluating the technical aspects involving theproperty. This includes the potential for the real estateconstructions and the necessary city permits and licensingrequirements.
The legal framework behind owning firms and real estate ownership inRio de Janeiro is done by filing up a Public Deed of Purchase andSale of Property with the city`s real estate registry. Again, thePublic Deed has to be executed in front of a notary public, and theseller, on the other hand, must present the tax clearancecertificates while the buyer has to pay the Imposto SobreTransmissão de Bens Imóveis (ITBI), a real estate transfer tax(Johnson, 2015, p.9). While the real estate transfer tax can eitherbe covered by the seller or the buyer, it is Rio`s standard practicefor the buyer to pay for the expenses.
The legal framework demands the verification of ownership title ofthe real estate property being acquired. In Rio, some of the realestate properties are owned by the federal government. The federalgovernment entitles individual firms to have a free firm title forthe particular real estate. Such particular cases will require, apartfrom the ITBI, the purchaser is required to pay the fee for the freefarm, which according to Tauil & Chequer (2016, p.6), oftencorresponds the 5% transaction value.
Additionally, firm and property ownership in Rio can only bepurchased indirectly following a successful purchase of the legalentity stock, which holds the title to the firm and property.Foreigners companies and individuals interested in owning firms andreal estate property in Rio, for example, the Global Real Estate PLC,are allowed to acquire them under the Federal Law 4,691/62 (Tauil &Chequer, 2016, p.7). Following the enactment of a number of realestate laws, for example, real estate investment trusts, specialspace rules, and fiduciary property, the foreign investors have sinceviewed the Brazilian legal environment regarding real estate becomepositive in comparison to other foreign competitors.
Actors,Agents, and Institutions involved with Real Estate Development,Public, and Private Organizations
The boom in the number of actors, agents, and other real estateparties began at the end of 2005 and was encouraged by excess liquidcapital in wealthy countries, saturation of real estate properties inthe North-American market, and high amount of interest rates in Riode Janeiro. One of the actors, institution and agent leaders includeEquity International Properties Ltd, which is Rio`s privately ownedinternational real estate agent. Another of Rio`s leadinginstitutions includes Sam Zell`s Equity Group Investments.
This real estate company is approximate $50 million in value. Again,there is a Canada-based real estate investment company, Fairview CorpLtd, which is privately owned and manages shopping malls and retailcenters across Brazil, but is based in Rio (Tauil & Chequer,2016, p.8). The Brazilian city has also experienced the emergence ofother new specialist real estate firms, for example, the ABN AmroAsset Management and Brookfield Asset Management, which specificallytargets the retail property across the city.
RealEstate Development Process, Planning System, Principal PlanningStrategy, and Control Procedures
For a foreign company, and, in this case, the Global Real EstatePLC , to enter Rio`s emerging real estate property market, there asto be a proper development process, well-crafted planning system, aprincipal strategic planning policy, and control procedures. GlobalReal Estate PLC entry into Rio`s emerging market will be forced toformulate a development process that will solve emerging challengessuch as low liquidity, tight working capital, capital-intensiveoutflows, and slow payback (Johnson, 2015, p.13). The developmentalprocess will, in turn, require a proper planning system.
The proper planning system for Global Real Estate PLC includes thereal options planning model. The planning model will work towardscarrying out Rio`s real estate investment analysis, which will, inturn, determine the optimal investment strategy (Lynn & Wang,2010, p.19). The optimal investment strategy in the city of Riorequires principal planning strategy to be used in determining theprojects` risk management. While quantifying maximum prices GlobalReal Estate PLC would pay for the exclusivity of rights for allserviceable real estate rights the company will have to acquire.
It is understood that in recent years, the control procedures havechanged immensely. For the smooth introduction of Global Real EstatePLC into Rio`s emerging real estate market, the real estatedevelopments, as a result of control measures, cautions that realestate developments have not been constructed in a simultaneousmanner, but in a number of phases to reduces exposure to investmentrisks. Part of the principal planning strategy for the Global RealEstate PLC into Rio`s real estate market will require conversion ofthe acquire property into urban real estate developments.
Evaluationof Market in Demand and Supply Terms
Fundamentals of supply and demand vary widely based on officesubmarket, and that Global Real Estate PLC`s entry into Rio`s marketshould be closely considered. Currently, the vacancy rates in Rio areat low levels. According to Lynn & Wang (2010, p.18), vacancyrates in Rio are traditionally lower, which constrictedgeographically smaller in market terms. It is important that thecompany, Global Real Estate PLC, realize that the vacancy rate in Riofell to 3.7 percent in the last quarter of 2012, the lowest onrecord, according to Tauil & Chequer (2016, p.6). In Rio deJaneiro, prime properties having credit-worthy tenants, are likely tosucceed in both the medium and long-terms strategies.
In Rio de Janeiro, Global Real Estate PLC should be aware ofseveral uncertainties, which are related to demand and supply of realestate properties, which in turn increase the local and foreigninvestors. Therefore, it is necessary for Global Real Estate PLC tohave quality expertise involving rent, project licenses, and taxes(Montgomery, 2003, p.385). For example, the company should know thatbuildings with occupancy permits are revoked even after the licensesissued are a lot in the real estate sector.
Real estate demand and supply are determined by a number offactors, including the economy and government laws. With the abovefactors determining foreign ownership real estate, Johnson (2015,p.10) noted that foreign buyers are mainly interested in thecountry`s northeastern parts Rio de Janeiro, because of obviousreasons. These reasons include the presence of beaches dining andnightlife.
Again, Rio de Janeiro currently experiences a surge in demand forproperty by foreigners, which in turn, lowers supply to accommodateeveryone. Lynn & Wang (2010, p.21) noted that prices are goingdown, which means high demand for property. In recent years, Rio hasexperienced a surge in growth for residential property, and in turn,has resulted in doubling of prices, something which Global RealEstate PLC should put into consideration before entering the emergingmarket, according to Capital Economics, a research firm.
Between 2007 and 2009, Rio de Janeiro went into a real estatemoments of recession with demand for property doubling betweenmid-2009 and at the end of 2011 (Tauil & Chequer, 2016, p.7). Rioappeared to have overbuilt during the period, and most probablybecause of the anticipated 2014 World Cup games in Brazil. Duringthat time, the prices appeared to decline, but it still manages toavoid a burst and hard landing. Rather than bursting, the marketappeared to soft-land. The discovery of oil field in Brazil in 2007jacked up the industry`s high demand for residential property andoffice space in Brazil`s major cities including Rio. Since then, thedemand for residential and property increased. Again, theconstruction frenzy continued through 2014 following the announcementthat Rio de Janeiro would host the summer Olympic Games of 2016.
The past two years have seen inflation mounting in Brazil. At 8.2percent in March 2015, the rate is recorded as the highest since2004. Again, the benchmark interest rate for the country continue toescalate, and with the country`s central bank recording a six-yearhigh rate of 12.24% towards the end of 2015 (Johnson, 2015, p.13). Itis clearly a hard time for the Rio residents, for instance however,buyers, including Global Real Estate PLC, targeting the city, aremore likely to take note. The continued weakening of the country`seconomy, which will also affect the city under study – Rio deJaneiro – coupled with higher interest rates in propertyacquisition, will create imbalances between demands and supply, meansthat it belongs for both the buyers and tenants.
SignificantVariances from Northern Irish Practice and Implications of this forDecisions of Global Real Estate PLC Company
Variances from the Northern Irish practice revolve around a surgein real estate practices and the collapse of the overshooting sectionof the long-term prices projected from the late 1990s to 2014. Theperiod also referred to as the Celtic Tiger, peaked with thecombination of a rise in speculative constructions of real estate andalso on the rapid rise in prices. The Northern Irish practice gambledwith an increase in prices and housing numbers regarding loans thatare approved. The significant variances indicated a rise in prices by35% ad towards the end of 2013 it also saw a fall by 73% (Tauil &Chequer, 2016, p.8). Additionally, the fall in commercial anddomestic property prices resulted in the Irish crisis in the bankingsector. In Dublin, the house prices recorded a drop by a point to 56%and the apartment prices indicating over 63% rise.
For some time, the Northern Irish Practice indicated propertyprices to the levels of the 20th century, while the approval levelsdropped. Towards the end of 2013, over 28% of the Irish housingmortgages were considered as arrears or are restructured, which stoodat 18% (Tauil & Chequer, 2016, p.11). Variances indicate that asearly as 2014, the property prices in Northern Ireland started torecover with the property prices rising by 19% in Dublin from theirnadir. Most important is the real estate property rates determined bythe European Central Bank, which is led by low inflation rates withinthe Eurozone.
The implications of the above variances for decisions of Global RealEstate PLC to enter an emerging real estate market like Rio deJaneiro revolve around the impact created by prices, supply anddemand, and other contributing factors. First, the implications ofthe above variances for Global Real Estate PLC include taking a hugecaution over the rise in prices before it enters Rio`s real estatemarket. For example, the company will like to be implicated overRio`s high urban valuations drifting towards the rural hinterlands.Here, the implication of this variance is the eventualinfrastructural pressure the real estate market would exceed both thecity`s development and provision property services. Again, theimplication of the above variances would prompt Global Real EstatePLC to enter Rio`s real estate market with the intention of changingthe city`s property ownership structure.
Global Real Estate PLC should first look closely at Rio deJaneiro`s real estate market before plunging head-on. Some of thethings the company should look out for in the Brazilian city includereal estate trend in terms of prices, construction and propertyspace, congestion, and urban property trends. This recommendation isbased on the fact that the new real estate investments in the city,according to Tauil & Chequer (2016, p.5), are based on thepresence or lack of land that either spur or reduces property prices.
Secondly, Global Real Estate PLC should also check on the city`sreal estate interest rates and whether the company has enoughfinances. This is in regard to whether will be in a better positionto compete favorably with other Brazilian real estate companies overthe city`s limited property market. Of importance is that thecompany, Global Real Estate PLC, ought to pay attention to the city`sproperty revenues, which essentially depends on the severalparameters. These parameters are important in that they define thesuccess of the company`s international planning and developmentpractice.
Finally, Global Real Estate PLC should study the city`s property andreal estate laws and regulations guiding the property ownership. Forinstance, it is important that the company study the Federal Lawsgoverning property acquisition and ownership, for example, theFederal Law No. 7,786 of 1980 (Lynn & Wang, 2010, p.15). There isalso a need for the company to understand everything behind thePublic Deed of Purchase and Sale of Property and what is required bythe Real Estate Registry regarding all the target properties.Additionally, the company should also study foreign regulations toproperty ownership in Rio before plunging into the city`s emergingmarket.
The international planning and development practice targeted atreal estate is characterized by rewards structure and opportunisticrisks. This is especially so when an international company plans toenter an emerging real estate market. In this case, the companyinvolved is Global Real Estate PLC, a subsidiary of a real estatecompany headquartered in Belfast. Considering this is a report paper,a number of factors are involved in the proper analysis of everythingreal estate. For instance, the city under study is Rio de Janeiro,Brazil. Being an emerging real estate market, different factors comeinto play, including the city`s socio-economic background.
Again, other prospects include the city`s legal framework,guidelines towards owning firms and real estate property. Here, thepaper discusses a number of laws governing real estate ownership inRio. The parties involved in this industry include real estate agentsand actors, institutions taking part in the development and realestate investment, and both the public and private organizations.Some of these institutions include Equity International PropertiesLtd and Sam Zell`s Equity Group Investments. Additionally, the city`splanning system and principal strategic planning result in the closeevaluation of Rio`s real estate market regarding supply and demand.The paper also touches on significant variances resulting from theNorthern Irish practice and the implications of the company`sdecisions.
Technical Appendices A
Rio de Janeiro’s total population, which is over 6.5 million people as of 2015.
Rio’s expected to grow at rate of 1.1% from 2015 to 2030
Rio’s city rents as of 2010 increased by 25%
Brazil’s 8.2% inflation rate as of March 2012
Rio’s vacancy rate dropped by 3.2% in the last quarter of 2012
Significance in variances indicated a rise in prices by 35% ad towards the end of 2013 it also saw a fall by 73%
In Dublin, the house prices recorded a drop by a point to 56% and the apartment prices indicating over 63% rise
Towards the end of 2013, over 28% of the Irish housing mortgages were considered as arrears or are restructured, which stood at 18%
Fig 1: The above table is Rio de Janeiro’s real estate analysisover the years and the projection in the next 15 years. The tablealso shows significance in variance for the Northern Irish practice
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