Real-estate developers will end 2017 with more launches and sales than last year, but earnings of several companies are still under pressure due to weak operating performance in recent years. Considered a year of recovery for the sector, 2017 was also marked by cash generation among many companies and by creditors’ approval of judicial recovery plans of PDG Realty and Viver Incorporadora. The market expects the operating improvement to consolidate next year, but reflected only in the 2019 balance sheets.
“This year was of transition and adjustment. In 2018 there will be effective cash generation and, due to the industry’s cycle, earnings will start recovering by 2019,” says Santander’s real-estate analyst, Renan Manda.
Developers avoid setting targets for launches in 2018, but some of them such as EZTec and Tenda expect raising projected sales (VGV). Until September, the launch of publicly traded companies increased 28%, and net sales rose 25%, according to Valor data. Seasonally, the fourth quarter is the most heated for the industry.
Sales started to show improvement in the second quarter, Mr. Manda says. Most developers were able to generate cash in the third quarter as the number of deliveries fell, pushing down contract cancellations. Cash generation tends to keep growing in 2018 and help cut debts.
“Inventories have been falling every quarter. Sales are starting to pick up,” says another industry analyst, although he also warned that prices probably would stay flat next year because companies reduced launches faster than they cut inventories. Mr. Manda, with Santander, also expects prices to keep stable or follow inflation. “I don’t expect any price pressure,” he says.
Next year will present a more favorable environment for the middle-class and high-middle-class income ranges, and also for developers working with government housing program Minha Casa, Minha Vida, says Luiz Mauricio Garcia, a senior real-estate analyst with Bradesco BBI. But the segments will recover “from different levels.”
“The low-income segment has a better supply-demand balance,” says the Bradesco BBI analyst. A new expansion will only occur when employment indicators improve. “Low income concentrates nearly 80% of demand,” Mr. Garcia says.
Developers focusing on middle-class and luxury properties will benefit from macroeconomic shifts and more readily available mortgages. “Net sales increased as cancellations fell. Gross sales also tend to improve,” says the Bradesco BBI analyst, who stresses that they still are one of the most challenging markets.
Developers are already recovering in São Paulo but not in Rio de Janeiro’s market, says Brasil Brokers president Claudio Hermolin. “Launches sold faster in São Paulo this year than in 2015 and 2016, but were still slow in Rio,” he says. The executive points out São Paulo properties are still selling slower than in 2013 and 2014.
Flávio Amary, president of developer trade group Secovi-SP, expects launches and sales to rise in the city next year but declines to provide a specific forecast. “The scenario is pointing to a better market,” he says. Launches of residential properties in São Paulo could rise between 5% and 10% this year, Mr. Amary says, with sales increasing from 20% to 25%. Early this year, Secovi-SP estimated growth between 5% and 10% for both indicators in 2017.
For Rubens Menin, president of the Brazilian Association of Real Estate Developers (Abrainc), the industry’s biggest challenge now is housing credit. “We hope LIGs [covered bonds] take off in 2018. The securities were regulated in August, and the Central Bank is considering the rules,” Mr. Menin says.
Abrainc’s president believes LIGs will complement the Workers’ Severance Fund (FGTS) as funding sources for the industry. “LIGs could surpass R$200 billion in three to four years,” Mr. Menin says. LIGs are covered by both the lender who issued them and a property portfolio big enough to back the entire issue.
According to Gilberto Abreu, president of the Brazilian Association of Mortgage and Savings Entities (Abecip), mortgages financed by savings accounts will rise 15% in 2018. Abecip estimates that mortgages financed by savings funds will total R$45 billion in 2017, from R$47 billion last year. When FGTS loans are taken into account, the overall new mortgage balance this year is R$117 billion, from R$116 billion in 2016.
“Banks will grow more interested in mortgages over the upcoming months but nothing compared to the peak in 2014, says Santander’s Mr. Manda.
Ricardo Ribeiro, vice-president of Direcional Engenharia, expects state-owned lender Caixa Econômica Federal to set the tone of 2018. “If Caixa is unable to keep lending to mid-standard developers, it will get very tough,” the executive says. He is also concerned about potential lending restrictions in Minha Casa, Minha Vida to families earning more than R$4,000 a month.
Caixa is the largest mortgage lender in Brazil and needs to adjust its capital ratio to Basel III rules. The Senate passed with a few changes a bill allowing FGTS to help capitalize the bank. The proposal still needs to pass the Chamber of Deputies again and would let Caixa swap about R$10 billion in 15-year bonds issued to FGTS with perpetual notes. Mr. Ribeiro says the mid-income sector faces good prospects if the issue is solved and savings accounts start getting net inflows again.
Source: Valor International