Sao Paulo real estate prices are near the bottom, builders say

[SAO PAULO] Real estate prices in Sao Paulo, Brazil's biggest market, have bottomed out and should remain near that level until at least next year as Brazil's recession plods on, according to two of the city's largest real-estate companies.

The outlook is a dismal reflection of business activity in the city, the country's major financial hub and third-biggest contributor to economic output after its surrounding state and the state of Rio de Janeiro.

Brazil's spiraling economy has hit the real estate industry at its core, with two consecutive years of contraction, unemployment above 10 per cent and high inflation. Consumer confidence has tanked, and banks are refraining from offering credit.

Builders have been offering discounts amid a glut of new apartments, a high level of canceled sales and tighter credit, said Eric Alencar, chief financial officer at Cyrela Brazil Realty SA Empreendimentos e Participacoes.

"Prices are now below what they were in the past and below what they will be in the future and this represents an opportunity for clients," Mr Alencar said on a conference call with journalists. A third of Cyrela's units are for sale in the city of Sao Paulo, according to the company.

The rate of growth in the average price of a square meter for residential real estate in Sao Paulo has slowed tremendously in the past five years, from a year-over-year rate of 26 per cent in April 2011 to a rate of 0.8 per cent last month to 8,623 reais (S$3,374) according to the FipeZap index, which follows the advertised price of units for sale. Sao Paulo is the second most expensive city in Brazil in terms of property. Rio de Janeiro is first.

While property prices may not decline further, they won't rise either, and with inflation at about 9 per cent annually, real estate values will be under pressure until the economy improves next year, said Emilio Fugazza, CFO of Eztec Empreendimentos e Participacoes SA. The builder, which focuses on higher-income customers, concentrates more than 90 per cent of its portfolio in the city.

"We reached the worst moment for prices at the end of last year,'' Mr Fugazza said in an interview.

"As inventory ends and new buildings rise up, the prices will recover to incorporate the higher cost of new construction.''

Presales Down

Eztec reported an 85 per cent drop in presales in the first quarter and announced its first new project since June 2015, to be built with Cyrela in the Sao Paulo neighborhood of Moema. Both companies said they remain focused on selling older units.

Eztec said it will wait for better market conditions to get new projects off the ground. Net revenue dropped 35 per cent in the first quarter while net income fell 45 per cent to 73.6 million reais, the company said last week. In the two years ending January 2016, Eztec slashed its workforce by 40 per cent to 850, Mr Fugazza said.

Cyrela reported a 28 per cent drop in presales in the quarter and a 39 per cent decline in net income to 61 million reais, according to a statement last week. Of the six new projects the company started in the first quarter, four are in Sao Paulo state.

The country's political crisis, with the suspension of President Dilma Rousseff last week, on top of the recession, has driven down consumer confidence, Mr Fugazza said.

"If supermarket sales are falling, of course this will reflect in the real estate market," he said.

"If the consumer isn't able to buy mozzarella, just imagine him getting a 30-year mortgage.''

BLOOMBERG