The time to buy in Brazil is now as real falls to historic low
The news of a record low value of the real against the US dollar, previously set in 2003, came amid Standard & Poor’s downgrade of Brazil’s credit rating last week but also against prospects of higher interest rates in the United States. The news of a potential rise in US interest rates strengthened the dollar against most emerging market currencies, including the Brazilian real, but this is not bad news for international property investors!
Although the real has seen depreciation over the last year, much of its recent decline has been triggered by China’s equity turmoil and the devaluation of the renminbi (the official currency of the People’s Republic of China) which have focused market attention on emerging markets and particularly commodity currencies such as Brazil’s. The Central Bank of Brazil reacted to the news by injecting $1.5 billion into the financial system on Thursday, 10th September 2015.
However, it is important to underline that despite the downgraded credit rating from Standard & Poor’s, the two other main rating agencies, Fitch and Moody’s Investors Service, both still rate Brazil as an investment-grade credit.
And for overseas real estate investors who use the US dollar, the news of a falling real presents a unique and remarkable buying opportunity. If the real is trading currently at 3.90 to the dollar, this means that real estate in Brazil is now 66% cheaper than it was only one year ago (in 2014 real traded at 2.35 to US dollar).
However, if we go a few years back, to 2012, the difference in house prices for overseas investors is even more impressive. For example, an average house price in Natal is currently R$3,470 per m², which makes a 3-bedroom house of 95m², only US$84,526 (in local currency R$329,650). Nevertheless, in 2012, based on currency difference alone, the same house cost US$169,051 (in 2012, the real traded at 1.95 to US dollar). This means that the current saving for an overseas investor using the US dollar is a remarkable US$84,526, based on the real’s depreciation since 2012 alone. It even means that overseas investors can now buy two properties of 95m² in Natal for the price of one property in 2012 (transaction costs are not included), thanks to the real’s depreciation.
There is a widely held belief that the Brazilian real is presently significantly undervalued. Considering Brazil is one of the eight largest economies in the world, with strong long-term growth potential, the value of the real will almost certainly rise in the near future. In fact, if we assume a very realistic scenario that the real will appreciate once the Brazilian economy starts recovering, to an average 10-year value against the dollar, the profit gain will be once more highly impressive.
According to EIU (Economist Intelligence Unit) exchange rate series from 2005 to 2015 (where we inserted today’s value of real, as at 14th September 2015), the long-term average value of real is 2.20 to US dollar. Hence, the house in our above mentioned example can realistically appreciate in capital value achieving a price of US$149,841 based on the currency appreciation alone. And we believe that this is achievable within only couple of years’ time. Not to forget that this is a highly realistic prospect as the average 10-year value of the real is a credible assumption and that the real was trading at 2.35 to the US dollar only in 2014.
Luiz Fernandez, CEO of award-winning Brazilian real estate developer, Ritz-G5, comments,
“International investors should be far from worries about the depreciation of the real against the US dollar; in fact savvy investors will see this as the perfect opportunity is it to purchase a tangible asset in emerging destination that, over the long term, is only going one way – up!”
To find out more about Ritz-G5’s projects and how to take advantage in the current exchange rate and invest our properties please contact the team on +44 207 183 7565 or visit www.ritz-g5.com.