First off, apologies to regular readers of this blog for the slight slowdown in activity – the time I usually have to spend on updating this blog was focused on the base of the pyramid housing interviews for the Global Entrepreneurship Week (click here for the finished result). I am actually in search of bloggers (with experience in the sector) who can help me maintain this site, as my time is becoming increasingly pressured. If interested please feel free to get in touch with me at email@example.com.
In the meantime, below is some interesting commentary directly extracted from the Bolha Imobiliária (Property Bubble) blog – exploring the performance of three of Brazil´s leading real estate developers: MRV, Rossi and Cyrela. Note the text is not entirely reflective of my own market opinions:
MRV – Quarter 3 2013
Launches and Gross Sales – launch levels dropped by 41.6% (due to elevated existing stock already on the market). Gross sales grew by 16.3% in unit terms and 35.2% in Brazilian reals terms – representing a record for the period. MRV are proudly announcing that they do not have competition and control 84% of total Minha Casa, Minha Vida (“My House, My Life”) sales.
(i) 3 real estate developers (PDG, Tenda and Rossi) suffered badly in 2012 with high volumes of cancellations for their so-called “low income” housing units – so, in truth, they are not actively competing with MRV because of the lack of market feasibility. Questions have been raised in relation to the abnormal level of “false sales” occurring, where buyers are accepting the units but cancelling prior to the handing over of keys (the units, however, are classified as being “sold”);
(ii) Phase 1 of the Minha Casa, Minha Vida has a delinquency rate of 20% at the Caixa Econômica Federal (CEF). If the CEF become obliged to work more strictly within internal underwriting procedures, due to this excessive level of fiscal exposure, what is likely to be the impact for MRV?
(iii) From a broader economic perspective, with low GDP growth expected to continue and inflation adding further concerns – higher national interest rates (SELIC) is likely to push unemployment upwards. With debt levels already high amongst the low income groups, the implications for MRV – in the form of abrupt falls in sales and growth in pre-acquisition delinquencies – is unnerving shareholders. Should quantitative easing in the US and/or slower growth in China continue, such issues may be further amplified.
Total Stock – R$ 4.08 billion (market value), the equivalent of 12 months of sales – a figure that is high but, in relation to other developers that have over 2 years of unsold stock, is not of major concern (but the situation could worsen in light of the abovementioned threats).
Cancellations – 2,387 units, equal to 23.29% of gross sales in the period. As was seen in the same quarter of 2012, MRV have been omitting such cancellations in official shareholder reporting.
Liquid Profit – R$ 131 million (Q3 2013) compared to R$ 151 million in Q3 2012, representing a drop of 13.2%
Liquid Debt / Company Net Worth (DL/PL) [measures the percentage of capital participation via third parties in relation to a company´s own level of financial resources] – 33.8%
Cyrela – Quarter 3 2013
Launches and Gross Sales – 52.1% drop in launch levels owed to the oversupply of housing stock on the market. Unit sales volumes fell by 39.5% (20.1% in Brazilian Real terms). Strategy in relation to launches and sales has been confusing and inconsistent – in the first quarter of 2013, focus on the “popular” housing segment represented 67% of sales (almost all of this was via a development of 2,000 Minha Casa, Minha Vida units in the interior of São Paulo). Following this, activity within this segment decreased significantly – in the subsequent quarter launch levels rose by over 70% followed by 50% drop in the third quarter.
Total Stock – R$ 4.89 billion, the equivalent of 9 months of sales (one of the lowest on the market)
Cancellations – the developer continues to omit such figures in official reporting
Liquid Profit – R$ 175 million in quarter 3 of 2013, 16% higher than in the same period of 2012
Liquid Debt / Company Net Worth (DL/PL) – 35%
ROSSI – Quarter 3 2013
Launches and Liquid Sales – launches decreased by 17% in Brazilian Real terms, whereas liquid sales rose by 47%. Gross sales saw a small variation from R$ 607 million to R$ 616 million – therefore the cause of the rise in liquid sales were attributed to cancellations, which fell from 52% of gross sales in quarter 3 2012 to 29% of gross sales in quarter 3 2013.
Total Stock – rose from R$ 3.39 billion in quarter 2 of 2013 to R$ 3.42 billion in quarter 3 of 2013 (0.88% in Brazilian Real terms) –the equivalent of 3.5 years of sales, based on liquid sales of cancellations over the last 12 months.
Cancellations – valued at R$ 323 million in quarter 3 of 2012 (equivalent of 52% of gross sales), the figure fell to R$ 177 million in quarter 3 of 2013 (equivalent of 29% of gross sales). Whilst the drop has been perceptible, the rate of cancellation is still abnormal – reflecting the continued practice of false sales prevalent across the sector.
Liquid Profit – R$ 2 million in quarter 3 of 2013 compared to R$ 19 million in the same period of 2012 (representing a drop of 89.47%). This has been a reflection of the need for Rossi to apply discounts (reaching up to 35% of the open market value) to be able to dispose of surplus stock and prevent cancellations.
Liquid Debt / Company Net Worth (DL/PL) – 124%, representing growth of 2.2 percentage points in relation to quarter 2 of 2013. Whilst asserting a quarter 2 2013 expectation of a DL/PL reduction to between 105% and 115%, such objectives were not achieved due to delays in receiving Habite-se (“fit to live in”) approvals on housing units that, in turn, led to debt repayment problems. The developer has found itself in a difficult situation due to having excessively launched developments without diminishing existing stock levels – added to this has been the rise in construction costs and the need to apply discounts, collectively adding further negative effects on cash flow.