Brazil pre-construction & off-plan property: Not always the best property investment in Brazil

The traditional “off-plan logic” is based on the assumption that an off-plan investor gets a discount as he is partly financing the construction of the property development which reduces the developers financing costs. The traditional logic assumes that the developer will then increase sales prices along with sales and construction progress, and the “pre-construction investors” pay less as they have bought into the development in the very early “off-plan” stages. In general this logic does indeed also apply for property in Brazil, but there are many other far more important factors that have a far bigger impact on the sales price of a Brazilian pre-construction property.

Two main factors that have a major impact on the cost structure and sales prices of an off-plan property development in Brazil are:

1. Construction costs in Brazil
2. Cost of land in Brazil

1.1 Construction costs in Brazil

The National Construction Price Index in Brazil, INCC ( Índice Nacional de Construção Civil ), is increasing every year that passes. Below can be seen the progress of the INCC index since year 2002 until end of year 2010:

2002: 12,87%
2003: 14,42%
2004: 11,04%
2005: 6,84%
2006: 5,04%
2007: 6,15%
2008: 11,87%
2009: 3,24%
2010: 6,66% by October 2010 – Estimate for full year of 2010 is at 7-8%

As can be seen, only in year 2008, the construction costs in Brazil increased by 11,87%. For the year of 2010, already by the month of October, the index has increased by 6,66% and once the year is over the total increase is estimated to be at 7-8% for the full year.

The growing economy in Brazil will have a steady impact on construction prices in Brazil and it is fair to except increasing build prices well into the future.

2.2 Cost of land in Brazil

Very much like the National Construction Price Index in Brazil, cost of land in Brazil has also increased sharply over the last 10 years. For land prices there is no official index for tracking this, but land prices in Brazil have increased by far superior rates than the INCC index.

Brazilian Homes has been marketing land for sale in Brazil for many years, and in many of the prime areas along the coastline in northeastern Brazil, land prices have increased by 3-5 times the last 5 years only. The land price increases have now entered a slower and steadier rate but the prime areas still suffer from an extreme shortage of suitable land for property development, something that will further increase land prices.

What does increasing construction and land prices mean for off-plan and pre-construction property investors in Brazil?

To answer this question, it is best done with a simplified example with two different scenarios as follows:

Scenario 1

- A property developer buys a 10 000m² plot in 2005 for the price of 40 EUR/m², with a total price of 400 000 Euros
- The development will occupy 25% of the plot and will consist of apartment blocks in two floors, with each apartment of 100m² built area
- Based on this, there will be 50 apartments in the development
- Land cost per unit is 400 000 Euros/ 50 = 8000 Euros
- The developer then applies for the building license which takes approx. 1 year
- In year 2006 the developer contracts a builder and agrees a build price with valid construction prices as of year 2006
- In year 2008 the property development is ready and units are delivered to the clients

Scenario 2

- A property developer buys a 10 000m² plot in 2010 for the price of 160 EUR/m², with a total price of 1 600 000 Euros
( 300% increase in land prices since 2005 )
- The development will occupy 25% of the plot and will consist of apartment blocks in two floors, with each apartment of 100m² built area
- Based on this, there will be 50 apartments in the development
- Land cost per unit is 1 600 000 Euros/ 50 = 32 000 Euros
- The developer then applies for the building license which takes approx. 1 year
- In year 2011 the developer contracts a builder and agrees a build price with valid construction prices as of year 2011
- In year 2013 the property development is ready and units are delivered to the clients

As can be seen from the very simplified example above, only the land cost per unit is 24 000 Euros more expensive in scenario 2 than in the first option.

One also has to add the impact of higher Brazilian constructions costs in 2011 compared to year 2006. The difference is well over 30 %, meaning that construction costs in 2011 are over 30% more expensive in 2011 than they were in 2006.

We can now factor in the impact of the construction costs by making an even more simplified example. Assuming that in 2006 the construction cost per/m² built was 400 Euros and in 2011 with a 30% increase in construction costs compared to in 2006, would mean it costs 520 Euros/m² in 2011.

In this simplified example this would mean that the 100m² apartment would cost 52 000 Euros to build in 2011 compared to only 40 000 Euros in 2006. In total the difference comes out at 12 000 Euros only because of increasing build costs in Brazil.

This is obviously a very simplified example, but in the end the price difference between the two scenarios comes out at 24 000 Euros + 12 000 Euros = 36 000 Euros. Hence, purely wanting to buy an “off-plan” property, could actually cost the investor 36 000 Euros more for the same size property.

Conclusion about built properties vs. pre-construction properties in Brazil

For Brazilian property investors, it means that waiting for "the next" off-plan investment property in Brazil might not be the best approach. Brazilian Homes has spent considerable time to source already built properties for sale in Brazil in prime locations, and many of them offer better investment potential than coming pre-construction properties.

The properties featured on our website are mostly brand new and ready built projects, which have been built on land sourced before the prices increased to today's level, and have been built when construction costs where lower than they are today.

Add to this the fact that the already built properties in Brazil also usually enjoy superior locations as the land was sourced many years ago, and coming pre-construction developments will have to settle for “second best” land parcels.

Property investors are adviced not to select a property only because it might be off-plan. What matters more when selecting the right property investment is value for money and getting the location right.