Not long ago, the raw material most requested by developers and investors, but now only a superfluous.
According to Valor Econômico Newspaper of May 16, 2016: “Rossi Residencial sold R$ 100 million in lands in 2015 and estimates to reach the same amount this year. Rodobens is selling three lands in the city of São Paulo. Tecnisa has sold more areas than bought, especially in markets outside São Paulo. Currently, the company is not acquiring new areas in the city, as the prices are still high. “
No doubt, the land will always be one of the main elements of a real estate development. We can not simply reject an area because of an economic situation. When it is well done, for sure it is a great investment, with satisfactory results in the medium and long terms.
But how to undestand the falling price?
Easily, we are able to judge that the decrease in the m²’s price due to some classical factors: Withdrawn demand, dissolutions, contracts cancellations. Certainly, the items are relevant and also contribute to this renegotiation of prices, but it would be frivolous of me not to take some historical facts that led to the current moment. As we should know: evaluating a contemporary result is a task for a commentator, but studying empirical data, is a specialist work.
In my opinion, many historical facts helped to land prices climbing, but two factors contributed directly to its speculation: the IPO of real estate developers and the social program Minha Casa Minha Vida.
September 21, 2005, the IPO of Cyrela Brazil Realty started up a new cycle in the Brazilian real estate market: the born of publicly real estate developers. It was the beginning of the boom of companies in the stock market, such as Gafisa, Even, Brookfield and Rossi.
In the very short term, the results were unbelievable high. Between 2005 and 2007, the equity captured in the stock market by the sector reached R$ 12 billion. And then came the main question: “What do we do with so much money?”.
They could have choosen to finance its projects with own resources, or simply could buy some lands.
Well, at that time, they instituted the typical brazilian way of develop its maket, as quoted by me in many others articles. They have invented their own model to conduct business: buyers became co-investors of the contracts with the banks, so the the amount raised by the companies were not invested in the project itself. The companies left up to invest in construction, objective which the developer was founded, and they decided to swell the machine with lands – a major administrative error, resulting in bursting of the bubble of dissolutions in 2015/2016. The lack of money in crisis is showing how weak the developers became: being immobilized on lands, than saving its money for critical moments.
Billions of Reais (R$) were injected into the market just to create a “land bank”.That time, many technicians, managers and directors were hired for that new sector, created solely to purchase areas. And the land prices started to adapt to the new reality of easy money and bustle.
Social Program Minha Casa Minha Vida
The year of 2009 started with dismay and ended in euphoria. Surrounded by financial crisis, the Brazilian Government announced on 25 March 2009 a bold plan to build 1 million residences: Minha Casa Minha Vida.
Once again, billion of Reais (R$) were earmarked for the construction of a significant number of houses. But this time, the land was bought otherwise. In the Social Program Minha Casa Minha Vida, the federal government paid the price of the land directly to the developer. Many companies took advantage of the situation and bought cheaper land, and than “resold” it more expensive. Other developers paied the price directly to the owner when the process was approved by the bank. They paid the owner with the money from a financial institution. Buying lands became faster and easier. After the approval, the bank was in charge to pay the owner.
There was no doubt that a new land price appreciation phase would begin. Billions of Reais (R$) available in the market, the lack of affordable housing, and the glimpse of the social program push the prices up. And the land that was already expensive, became a valuable article.
All financial power available in recent years has ended. Our current reality is a Minha Casa Minha Vida without resources, and weak real estate developers – slaves of the bubble of dissolutions.
The cycle started in 2005 has run out. It is over. In the short term, the result will be the adjust of the price of lands and the return to its normal prices. Everything that happened was the result of unrestrained and rampant speculation that resulted in enhancement of the first raw material of construction, increasing thus the price of real estate throughout the country.