Cheap land in Brazil: Not always the best land investment in Brazil

Introduction

Our intention with this article is to educate investors considering buying land in Brazil. Typically foreigners have an extremely weak understanding of the dynamics on the Brazilian real estate market, and perhaps this is even more evident for land than normal properties in the traditional meaning of the word. Land for sale in Brazil can on paper or on a website look exceptionally cheap to foreigners as they are used to land prices in their home country which often have price tags many times higher compared to similar sized plots in Brazil.

Before investors take a purchase decision, it is important to understand the basic market dynamics as well as the demand drivers for land and property in Brazil. Before going into the details, it is worth noting that any property that seems to be priced very cheap is always priced so for a reason. Demand and supply "regulate" market prices, and this is also the case in Brazil.

For some reason, many foreign investors seem to forget this fundamental fact when buying land in Brazil. Many times foreigners take the land purchase decision over the phone without even ever haven been to Brazil and only focus on the sales price. Just because a piece of land in Brazil seems cheap, it does not mean it turns out to be a profitable investment.

A brief background - International investors starts buying land in Brazil in early 2000

During the 1990:s and early years of 2000, the Brazilian economy was still very much a question mark. Brazil was perceived as a country with a property market that was a high-risk investment and most international land investors where focusing on other more established markets such as Spain, France and Portugal. These countries were witnessing an influx of foreign holiday homebuyers rarely seen before in history and along with a higher demand for holiday homes, the land prices started to reach price levels that became unattractive for land investors.

Many international land investors started to look for cheaper land that would be part of their land bank portfolio. Due to the low price level combined with a true tropical year around climate, one of the areas that caught the attention of land banking investors was Brazil, and in special the northeast of Brazil which is the part of Brazil with the best beaches, climate and also lowest price level for land.

Several big international real estate groups acquired big land parcels in Brazil along the coastline in northeastern Brazil. Significant part of the coastlines surrounding the state capitals such as Natal, Fortaleza, Recife, João Pessoa and Salvador was sold and many of the new landowners started to apply for building licenses for golf and beach resorts. Even though many groups did have intentions to actually develop real estate projects on the newly acquired land, many applied for licenses mainly for value adding purposes; a land with planning permission in place is always worth more than land without build permission.

Usually when a destination is deemed as having potential for becoming a growing holiday destination, the first wave of investors moving into the market tend to be land banking investors. In this early stage, land prices are usually very low as there has been very limited demand for land and property in the area. The land banking "wave" typically takes place many years before the holiday homebuyers arrive looking for a dream property in the sun.

What drives demand for land in Brazil?

Demand for land usually comes from two types of clients:

1. Individual people looking for land for building a house
2. Developers looking for land in an area they feel there is end-user demand for properties

An individual client is only interesting in buying a plot of land if he has a need/desire to build a property on the land in question. Likewise, a property developer is only interesting to buy the land if he thinks he can developer a real estate project and make profit by commercializing the properties he intends to build on the given plot. In both cases, what drives the demand is a real need/want for property on the land in question.

Clients that buy land in Brazil tend to do so either for residential living or vacation home purposes. In the first scenario the client is driven by a real need to own a property in the given location. In Brazil this is usually referred to "primeira residencia" which would freely translate to "first residence". Like in any other country, people need to have a property for living in. Price for Brazilian land close to the city centers is usually very expensive but as there is a very big demand combined with a very limited supply, the high prices are justified.

In the second scenario, what drives a client to buy the piece of land is a real desire to own a vacation home in the given location. In this case, the buyer wants a property in a location that offers him the holiday experiences he is looking for. For most clients it is not enough to merely have a beautiful beach in front of the plot. Majority of people want to enjoy comfortable holidays where they have access to bars, super markets, restaurants, tourist activities as well as a social atmosphere.

Not all areas in the northeast of Brazil fulfill the holiday home criteria

For people that know the coastline in northeastern Brazil, it quickly becomes clear that not all areas along the stunning coastline actually fulfill the criteria for holiday homes purposes. Many areas are simply too deserted and lack any type of infrastructure. The coastline in northeastern Brazil is very long and one finds hundreds of small fishing villages scattered along the coastline. Many of these have had no progress the last century and in many cases, it could take over 20 years or more for progress to eventually come their way.

The last couple of years some foreign "land groups" have launched land projects on the market where they offer small plots of typically 400-500m² for prices that might seem attractive for foreigners. These groups have typically sourced land in very remote areas close to the beach for extremely low prices. These projects are typically located in areas with bad access and lacking infrastructure. As these locations have no property market to speak off, land prices are very low and the investment potential is almost impossible to measure as there simply is no end-user market to speak off.

Buying a piece of land in such an undeveloped area can be considering as pure speculation. There is no evidence that there is any demand for land in the area and the chance is high that the area will remain undeveloped well into the future, which will also mean that there will not simply be any end-user demand for land or property in the area.

However, not all coastal villages are in undeveloped areas. The northeast of Brazil has during decades been a favorite tourist destination for the domestic market in Brazil. Some coastal villages have during time developed into very popular tourist areas and are today in high demand for people looking for holiday homes. Needless to say, land prices in such locations are also far higher than undeveloped areas. The following example will show why it makes sense to buy land in a desirable area.

Focus on the sales price of the final real estate product instead of merely a cheap land price

The following simplified example will show that it makes no sense to buy land simply because the price might look cheap. Let's look at the following two scenarios:

1. A client buys a 500m² plot in a "cheap" area for 20 000 Euros. He then decides to build a 200m² villa on the plot for a total price of 120 000 Euros. His total investment comes out at 140 000 Euros.

2. The same client buys a 500m² plot in a good location with an existing real estate market and a thriving tourism industry. The plots sells for 60 000 Euros which is 200% more "expensive" that in the first scenario. The client decides to build the same house on the plot for 120 000 Euros and his total investment comes out at 180 000 Euros.

In this simplified example, a novice land investor probably might think that it is far better to buy the plot in the first scenario for "only" 20 000 Euros. However, in reality the investor in the first scenario is really putting himself in a very difficult position. Cheap areas never have any existing demand for real estate, and to sell a house in such a location would most likely be virtually impossible unless the sales price is cheap enough to attract a future client. In other words, a potential client would only buy a property in the area if the sales price would be "cheap" enough. Not exactly the ideal setup for a investment property in Brazil. Even though 20 000 Euros might sound like a cheap price, in reality the plot could well be worthless as no end-user clients have a desire to own a property in the area.

The second scenario looks far more promising. As the area is popular as a holiday destination and has a steady influx of tourists, there is an existing demand for real estate and land in the area. The 200m² house could probably be sold for 250 - 300 000 Euros a few years down the line, and the owner could also generate some attractive income from his rental property in Brazil until the house is sold. As a bonus, the owner can also use the property for his personal holidays, which is yet another reason for buying land in a desirable location.

Conclusion

Investors looking to buy land in Brazil are advised to ask themselves why future buyers would want to buy the plot from the investor. Second, it is important to understand why a buyer would want to pay a higher price for the land, as without this taking place, the land investor makes no profit.

For novice investors with little know-how of Brazil, it might be easy to be lured by cheap looking land prices in project that are located close to the beach. However, a beach in itself means nothing for investment potential and there are far more important criteria for an area to be considered attractive. In order for a piece of land to have investment potential, the location must be right for the future buyer. If the location is not right, it simply makes no difference as virtually no one really wants to have a property in the location.

Buying land in Brazil needs to be done while remembering the basic market fundamentals that apply in any other market. Just because a plot in Brazil might look cheap, it does not mean it is a good investment.