Since the upturn of the Brazilian property market began in the last decade, Brazilian Property Receivable Certificates or CRIs (Certificados de Recebíveis Imobiliários) have correspondingly grown as an ever important source of wholesale finance – particularly in light of the fast diminishing level of national saving sources. Best defined as investment securities backed by property related receivables (predominantly in various forms of housing finance) both lending institutions and developers pass their packaged receivables to institutional or other types of private investor.
Yet according to a recent post on the Construção Mercado (“Construction Market”) the sector has not been growing to its full potential, notably demonstrated this year: the total volume of securitised Brazilian real estate credit (compiling residential, commercial and industrial property) is expected to have fallen by 30% by the end of the year in comparison to 2011 – reaching R$ 10 billion. The housing credit securitisation market specifically is expected to reach R$ 4 billion, also seeing a fall of 30% compared to 2011 (when R$ 5.6 billion was achieved). According to Onivaldo Scalco, president of CIBRASEC, the Brazilian Securitisation Company (Companhia Brasileira de Securitização) such losses have been attributed to the broad reduction of launches, slower construction activity and the broader effects of a slower paced economy.
Nevertheless, whilst stating that the focus in the segment has yet to become a “vital necessity” for investors and that, for developers, finance available with the banks is still plentiful and more well-recognised, Scalco stated that prospects still look promising – using the commonly referred to factor of aggregated housing credit lending levels being low as well as sound economic policy complemented by stable levels of employment (which should continue to encourage the demand for new housing). The fact that stock levels of Brazilian developers are decreasing, he believes, will result in a resurgence of launch levels and demand for financial resources for construction growth. Combined with the fact that traditional financial resources, particularly via the national savings, are depleting (not being able to keep up with impending demands) in addition to an emergence of other types of Brazilian real estate related investment strategies, such as land banking, interesting opportunities could be created due to much of activity in this area not being served by mainstream institutions. In 2010, Brazil´s Central Bank raised withdrawal limits and also the use of the Guaranteed Fund for Time of Service or FGTS (Fundo de Garantia por Tempo de Serviço) for the purchase of CRIs was also authorised – which has enabled the market to have a somewhat wider scope of interest.
When asked about the possibility of securitisation of receivables of off-plan construction project purchases, Scalco stated that the growth of such objectives is entirely possible but, at the present time, instruments such as Real Estate Credit Notes (Cédula de Crédito Imobiliário, CCI) have limited application (most of such transactions are based on promissory notes which have questionable legal status). Such contracts are also not standardised (i.e. not uniform) which, in turn, creates higher costs and a number of other administrative issues resulting in difficulty in executing such transactions in a streamlined manner. Adopting different amortisation systems as well as not incorporating insurance policy premiums and management costs, the real value only really comes to fruition at the point of securitisation which – within itself – places investors in a potentially risky position. Nonetheless, Scalco believes that interest amongst Brazilian real estate developers continues to grow amongst both the smaller and larger companies.
New Law 12.703 that enables Brazilian homeowners to pay off their debt and essentially swap to another lender is also, according to Scalco, resulting in investors being more cautious due to returns being subject to less secure oscillations. Institutional investors, for example, are in search of defined long-term cash flow receipts and even if a secondary market were to be created where such securities could be sold at a moment of real need, there would be a notable challenge of establishing a fair price. Scalco pointed out, however, that the practice of charging a penalty for lender swapping is somewhat compensating the expectation of a loss of profitability by the lender. He also stated that, as had gradually occurred in the United States, the real estate securities sector in Brazil should become more sophisticated in terms of developing risk-priced bases for valuations.
When asked about the effects of reduced national interest rates (SELIC) and the whether this will make the real estate securitisation market more attractive in relation to the government public bonds Scalco stated that, due to inherently incorporating sovereign risk, the latter is likely to prevail for those looking for safety – but at generally lower rates (a real estate security with an accredited investment grade is usually between 1.5 and 2 percentage points above those of Brazilian public bonds). He commented that the demand for Brazilian real estate securities has never been higher and – as institutional investors are often unable to meet their actuarial target levels solely focused in government bonds combined with the fact that there is no income tax on profits – a relatively healthy environment should be maintained despite the current market turbulence. Looking forward to 2013, Scalco expects that the demand for real estate securities should therefore increase. The government has also recently extended the income tax for foreigners investing specifically in infrastructure-related projects.