Your articles - Feb 2010

Bryan Train, MSc Logistics, Trade and Finance 2005

Low Income housing - How the Brazilian government’s residential leasing program could lift millions out of poverty and deliver a handsome return to investors

Brazil has undoubtedly had a lot to smile about in recent months. The economy is continuing to experience steady growth in the face of the global economic crisis, and on 2 October 2009, Rio de Janeiro was awarded the 2016 Olympic Games. This, coupled with the hosting of the 2014 football World Cup, will only reinforce Brazil as a country that is taking the leap from the developing world to a major world economic, political and cultural power. Little wonder that, following Goldman Sachs’ coining of the term “BRIC” in 2001, Brazil has never attracted so much interest from BRIC portfolio managers or global investors in general as it does today.

However, behind all the glitz and prestige that international sporting events bring, along with President Lula being feted on the international stage, Brazil still faces a massive housing shortage that needs to be addressed if the aforementioned leap is to take place. Currently, Brazil has a housing deficit of approximately 8 million units, of which 82% are in urban areas. Any visitor to Brazil will see first hand evidence of the disparities between the gleaming towers of Sao Paulo and the favelas of Rio de Janeiro (made famous by the film “City of God”).

One of the main contributors to the housing deficit was the lack of availability of mortgage financing. To put this into context, Brazil ’s mortgage penetration as a percentage of GDP is just under 2%. In comparison, mortgage penetration stands at around 9% in Mexico , 10% in China and 62% in the UK. As a result, the rate of construction has been anaemic in Brazil when compared to somewhat similar markets.

Mexico for example, with 57% of Brazil ’s population, manages on average to build four times as many homes per annum. In order to alleviate the housing shortage, the government of President Lula initiated the “Minha Casa, Minha Vida” programme (My House, My Life) in April 2009 committing R$34 Billion (US$20 Billion) to the construction of up to one million homes catered towards low-income families. By any measure, this is the biggest social housing programme in Brazilian history and the main initiative of Lula’s government during the last year of his presidential mandate. Such is the reach of this initiative that the current Minister of Cities, Mrs.Dilma Rousseff is tipped to become the next presidential candidate from Lula’s party.

Real Estate is also beginning to grow in relative importance in terms of Foreign Direct Investment, increasing from 2% in 2005 to 8% today. This proves to be an interesting paradox given the recent turmoil in the credit markets. Unlike the United States and Europe, where toxic assets have wreaked havoc on the balance sheets of many of the world's leading banks, the relatively new mortgage backed securities market in Brazil has continued to expand in a sustainable way in response to the introduction of favourable legislation. Furthermore, recently launched 20 and 30 year mortgage products are poised to help facilitate home ownership on a grand scale. No wonder the government targets to increase mortgage penetration five fold by 2015 to levels of 10% of GDP.

Many construction companies are vying to enter the low-income segment and are looking to expand their business through international investment, emulating the success of Belo Horizonte based MRV Engenharia. “The opportunities for growth are staggering”, says the head of one of MRV’s competitors. His company is diversifying into the low-income segment to complement their heavy construction business, which has traditionally focused on major projects such as airports, dams and ports. The company has been working with London based Ingenium Investments, founded by Cass graduate Bryan A. Train and Pedro Alves to raise foreign capital to develop further projects in the low income space.

To Mr. Alves, a former banker in London and Madrid and financial journalist in Africa, the opportunities speak for themselves. “Where in the world can you participate in such a socially rewarding initiative and still deliver target IRRs of 25% to investors?”. He adds, “Investors have been burned in developed speculative markets, particularly Spain and the UK , as well as developing ones such as Dubai. Brazil has solid economic and demographic fundamentals with huge long-term potential”. Ingenium is an investment advisory company that was created to provide international investors access to the Brazilian market.

Without doubt, the residential leasing programme will provide access to credit to those who were previously excluded from the Brazilian growth story. Not only will the programme create numerous construction jobs, it will improve living conditions of society’s poorest and enable Brazil to move towards its rightful place in the developed world.

Bryan A. Train graduated Cass Business School in 2005 with an MSc in Logistics, Trade and Finance and has held various international finance and strategy roles based in Spain, the United States, Canada and the United Kingdom prior to founding Ingenium Investments with Pedro Alves.  He can be contacted at bryan@ingenium-investments.com.