Brazil_141217_r4

CORPORATE REAL ESTATE RESEARCH REPORT - BRAZIL
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C O R P O R AT E R E A L E S TAT E
R E S E A R C H R E P O R T
By Beth Mattson-Teig
BRAZIL

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For many multinationals, Brazil is simply too big to ignore. The
country is home to a population of nearly 200 million people, making
it the fifth largest country in the world. It also has the seventh largest
economy in the world with a 2013 GDP that topped US$2.3 trillion.
That represents an attractive market for companies across industries
from manufacturing to telecommunications.
For example, Jaguar Land Rover recently announced plans to build
its Discovery Sport model vehicles in Brazil. The British automaker
is building a new plant in Itatiaia that will be ready for production in
2016.The facility will have the capacity to build about 24,000 vehicles
a year. Paris-based Sanofi also has announced that it will triple the
size of its global manufacturing plant in Paulinia for its animal health
division, Merial.The US $25 million plant is scheduled for completion
in early 2015.
Brazil has come a long way since its financial crisis and
hyperinflation that hit the country hard in the 1980s and early 1990s.
A number of factors have landed Brazil in the global spotlight. Certainly, all eyes were on Brazil in 2014 when
it hosted the World Cup. And the country is poised to take center stage again when it hosts the 2016 Summer
Olympics in Rio de Janeiro. Beyond that, Brazil has garnered corporate attention over the past decade for its
economic growth, abundant natural resources and a sizable consumer market with increasing spending power.

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A key turning point was the launch of the Real Plan in 1994. The
Real Plan was essentially a series of fiscal policies and measures
put in place to stabilize the currency and control inflation. Brazil has
undergone significant economic growth and development over the
past decade. But that expansion is not without growing pains. Brazil
remains an emerging market with many of the same challenges that
other emerging markets face in terms of insufficient infrastructure,
high business costs and still high poverty rate.
This report is aimed at providing an update on the current
economic climate in Brazil, as well as offering some perspective on
the opportunities and challenges that exist for those organizations
doing business in the country.
CORPORATE REAL ESTATE (CRE) PERSPECTIVE:
Below are some insights on the Brazil market from a CoreNet Global
member currently working for a Fortune 500 company operating in
São Paulo.
What do youseeasthebiggest challengestodoingbusiness
in Brazil?
I would say the reduced stock of AAA buildings and lack of
public transportation infrastructure in the city. Mobility is a big
discussion. The market is concentrated in São Paulo and Rio,
and somewhat Belo Horizonte and Brasilia. But outside São
Paulo and Rio there is not much supply of corporate buildings
and infrastructure – services, transportation, mobility – to create
hubs. The vacancy rates and prices also present challenges. In
São Paulo vacancy is very low and the city is one of the most
expensive real estate markets in the world.
What advice can you share with your CRE executives about
locating in Brazil?
With those challenges it’s key to have a good long-term plan,
to be able to make decisions when the market is favorable
and invest in partnerships with municipalities to help foster the
environment you are in.
“Brazil has garnered corporate attention
over the past decade for its economic
growth, abundant natural resources
and a sizable consumer market with
increasing spending power.
”

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The country’s GDP per person grew at an average rate of 2.5 percent
annually from 2003 to 2014, more than three times faster than the 0.8
percent annual growth from 1995 to 2002, according to a report by the
Center for Economic and Policy Research (CEPR) inWashington,D.C.1
In 2010, the Brazilian economy reached a high point of 7.5 percent
annual GDP growth.
That growth at a time when other countries were still struggling
under the weight of a deep recession helped to draw even more foreign
investment to the country. Between 2009 and 2013, FDI to Brazil
reached US$80.8 billion,which surpassed that of both Russia and India,
and was behind only that of China and the U.S.,according to data from
TheWorld Bank.
In particular, Brazil has attracted considerable interest from U.S.
companies that were looking for growth opportunities outside of their
home country during the downturn. Brazil is home to dozens of U.S.-
based corporations including the likes of Exxon Mobil,Walmart,General
Electric, Microsoft and Dow Chemical to name a few. “They invested
in Brazil because it was an aspiring economy. It was hot,” says David
Persons, MCR, an associate at DTZ Americas in South Florida. In
fact,builders couldn’t keep up with all of the demand,he adds.
But that momentum stalled.That slower growth indicates that Brazil
was not entirely immune to the effects of the global recession. The
economyhasbeennegativelyimpactedbylowerdemandforitsexports
from China, Europe and the U.S. GDP growth dipped to 0.9 percent in
2012 before climbing back to 2.3 percent in 2013, according to the
GROWTH COMES IN
FITS AND STARTS
The Brazil economy began to accelerate and attract greater foreign investment in 2004 thanks in large part to the
stabilization in its economy and its wealth of natural resources. The country has significant oil and gas reserves,
minerals and a strong agricultural sector. “Brazil is a huge natural resource exporter,” says Milton Jungman,
managingdirectoratAccentureWorkplaceSolutionsinLatinAmerica.Thecountryalsoisseeingexpansion
ofotherindustriesincludingmanufacturing,servicesandfinance,headds.
1 The Brazilian Economy in Transition: Macroeconomic Policy, Labor and Inequality. Mark
Weisbrot, Jake Johnston and Stephan Lefebvre. September 2014.The Center for Economic
and Policy Research,Washington, D.C.
2 Analysts Cut Brazil Economic Growth Estimate to 0.24%. Nov. 10, 2014. Latin American
Herald Tribune.
3 “Doing Business in the Brazilian Real Estate Market”, CoreNet Global Brazil Chapter,
CoreNet Global Washington DC Summit, 2014
World Bank.Although theWorld Bank is forecasting GDP growth to slow
to 1.5 percent in 2014, other economists are predicting even lower
levels between 0.24 and 1 percent.2
Fortune100CompaniespresentinBrazil.Also,ifwewantedtomake
thislistintoourowngraphicthatwouldbefinetoo.3

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That is the narrowest margin in Brazil’s nearly 25-year electoral
history.The current RulingWorkers’ Party has been in office for the past
dozen years,four under Rousseff and eight under her predecessor Luiz
Inácio Lula da Silva.
The challenge for the government now will be finding ways to revive
the economy.“If you look only at the economy of Latin America, Brazil is
50 percent of the economy of South America,” says Jungman. However,
the growth rate of other smaller countries is much higher recently. For
example, Caribbean countries are expected to post a combined GDP
growthof3.4percentin2014comparedtoBrazil’s1.5percent,according
to theWorld Bank.“So,another discussion is that the government needs
much better incentives to attract international investors,”he says.
In addition, government intervention in the economy over the past
three years, such as trying to control energy and gasoline costs, has
had a negative impact on international corporations, says Jungman.
The government needs to have more orthodox policies in place,similar
to what the country has had in the past, to bring back more stability
andsustainablegrowth,hesays.Thosediscussionsarelikelytohappen
now that the election is over,he adds.
ELECTION SLOWS
EXPANSION ACTIVITY
The fact that 2014 was an election year for Brazil also has had a cooling effect on the economy as some corporate
expansion decisions were put on hold until after the election. To a certain extent, companies were waiting to see if
the current administration maintained control, or if a new political party would assume office. Dilma Rousseff won
asecondterminBrazil’spresidentialelectionon26Octoberbyjustthreepercentagepointsagainstheropponent.
“The challenge for the government
now will be finding ways
to revive the economy.
”

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Likeanycountry,Brazilhasitsownuniquelawsandprocessesthatinternationalcompaniesneedtounderstandand
navigate. The country originated as a Portuguese colony and was under monarchy rule for much of the 1800s until
theDeclaration oftheRepublicin1889.Becauseofthis start, onecouldsay thatthefigureofthepresidentinBrazil
replacedthatoftheemperor.
FEDERAL LAWS INFLUENCE
REAL ESTATE
The history lesson is important
to explain why the federal
executive government in Brazil
plays such an important role
in spite of the existence of the
classical three powers division –
legislative, judiciary and executive
within federal, state and municipal
spheres, says Gustavo D’Acol
Cardoso, a lawyer and founding
partner of D’Acol Cardoso
Advogados.
The most important and
comprehensive laws, applicable
to the entire nation,are mandated
by the Federal Congress. For
example, Federal Lease Law
8,245/91 governs all leases in the
country from the capital city of
Brasilia to São Paulo. States and
municipal spheres do have some
legislative capability, such as
zoning laws and the issuance of
operating permits. But, they will
not legislate on how a lease or a
land subdivision should be made,
notes Cardoso.
MainBusinessCities4

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1st
• Sugarproduction
• Coffeeproduction
3rd
• Meatproduction
• Fruitproduction
6th
• Aluminumproduction
10th
• Railnetwork
11th
• Industrialoutput
16th
• Serviceoutput
Brazilis...5
Legislation sets the major obligations for both
parties in typical agreements and contracts and “fills
in much of the gaps” that lawyers under a common
law system typically have to include, he says. For
example, the federal lease law defines how the
tenant could leave the premises if they need an early
termination.
As such, a typical lease agreement in Brazil is very
shortascomparedtoleaseagreementsincountriesthat
would adopt the common law system. Recent changes
to the Brazilian Lease Law have even included the
build-to-suit sort of leases, what has also simplified the
procedures to put these kind of projects in place, notes
Cardoso.
There are specific laws that dictate precisely how
ownership title is transferred, including recording the
title with the appropriate real estate registry office in the
jurisdictionwherethepropertyislocated.Althoughthere
are no restrictions or limitations on purchasing urban
properties, there are limitations on purchasing rural
properties. Currently, foreign entities and individuals are
not allowed to purchase substantial amounts of rural
property without specific government authorization or
approval.That is a fairly new change, handed down by
the Federal Attorney General within the last two years,
but that still remains to be challenged within the courts
says Cardoso. This guidance has had a significant
impact on FDI as it has effectively frozen most foreign
investment in rural property in Brazil,he says.
Property owners also assume legal liability,
including paying property taxes and assuming liability
for environmental issues such as pollution and soil
contamination.“This is a very sensitive matter in Brazil
currently,” says Cardoso. Government expropriation
is also possible in Brazil as in most countries. The
government does have the power to seize property
at any time for public purposes. In general, Brazil has
a stable legal system and a strong set of laws and
regulations which makes doing real estate business
pretty fair and clear cut,he adds.

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GROWING CONSUMER
MARKET
6 Connecting Brazil to theWorld:A Path to Inclusive Growth.Heinz-Peter Elstrodt,James Manyika,
Jaana Remes,Patricia Ellen and César Martins.May 2014.McKinsey Global Institute.
There is already a long list of MNCs that have a presence in Brazil. They are coming largely for the agriculture, the
naturalresourcesandthelargeconsumermarketthatiscontinuingtoemergeinBrazil.Forexample,Brazilreportedly
has the fifth largest mobile phone market with some 164 million users and another 67 million internet users. The
spending power for the 200 million Brazilians is rising along with the growing economy, as well as credit that has
becomemorewidelyavailable.
Twenty and thirty years ago, Brazilians did not have access to
mortgages and auto loans.Credit is more widely available and is fueling
spending in Brazil for homes, cars and other merchandise such as
appliances and electronics. For example, people can go out and get a
5 or 7-year auto loan to purchase a car. One concern is that people are
buying things that they can’t necessarily afford, which could become a
bigger problem in a slowing economy,notes Persons.
AccordingtoarecentreportbytheMcKinseyGlobalInstitute,household
debt has grown from 20 percent of income in 2005 to 43 percent of
incomein2012.Inaddition,highrealinterestrates,including145percent
on credit cards,create a heavy financial burden for consumers.6
However, Jungman does not see that the credit will be a problem
in the future. “The bank system in Brazil is very mature, one of the
most mature in the world,” he says. Brazil’s currency crisis in the early
1990s resulted in soaring inflation of 80 percent per month at its peak.
The banks learned some hard lessons from that crisis and are very
effective today.For example,there are a lot of loan guarantees required
of borrowers today. In addition, the Real Plan of 1994 created greater
currency stabilization. In the past 20 years, the annual inflation rate
averages 7.5 percent and that rate is even lower at 5.2 percent looking
at just the last decade. Brazil also received an investment grade rating
in 2008,which was key to sparking additional international investment,
according to Jungman.
ItalsoisimportanttonotethatthepovertyrateinBrazilhasimproved
significantly over the past decade,due to both the improving economy
and government spending on social programs. Over the last decade,
some 31.5 million Brazilians have been lifted out of poverty, nearly
half of which have been lifted out of extreme poverty, according to
the CEPR report.
“It also is important to note
that the poverty rate in Brazil has
improved significantly over
the past decade, due to both the
improving economy and government
spending on social programs.
”

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WHERE TO
LOCATE?
Brazil is a very large country in terms of total land mass. It is the fifth largest country in the world by total square
kilometers, and it is nearly comparable in size to the U.S. or China. That being said, the majority of its population is
concentratedontheeastcoast.SãoPauloandRioaretwoofthemaincitiesinbothsizeandeconomicimportance,
but there are also a number of other key coastal cities. The cities of São Paulo, Rio de Janeiro, Curitiba and Belo
HorizontecombinedaccountforoverhalfoftheGDPfortheentirecountry,whichincludes26states.
SãoPaulo
São Paulo is the main economic hub for the country. With nearly
12 million residents, it is also the largest city in Brazil, as well as the
largest city in South America. However, it wasn’t until 1986 that the
country’s first AAA building was built in São Paulo. After that, the real
estate market development quite rapidly. “So, we have a very young
real estate market,”says FabioTalero,managing director and partner at
Ocupantes Consultoria Planejamento e Construções Ltda.
The total office market in São Paolo,including all types of corporate,
AAA and small office space,spans some 129 million square feet.What
is notable is that there is a building boom underway even as demand
for space has cooled. There is an estimated 13.6 million square feet
of new AAA,AA and A office space construction that will be added to
the market by June 2015. As such, vacancy rates are poised to rise.
In particular, the new construction is concentrated largely in new AAA
and AA buildings.
Those sectors are expected to see the biggest increases in the
vacancy rate at 15 and 25 percent respectively, according to data
from Ocupantes Consultoria Planejamento e Construções Ltda. The
new surplus will create ample opportunities and more favorable rates
for companies that are looking for space.
One of the challenges of São Paulo is extreme traffic congestion. It is a
problem that can frustrate foreigners, but most São Paulinos are simply
used to it as a way of life. “It is a complicated problem, and it won’t be
solved in the next 15 to 20 years,”saysTalero.For example,it takesTalero
about an hour to drive the 10 miles from his home to his office each day.
A solution that has been a priority for the government is to significantly
expandthesubwaysystem.Currently,themetronetworkspans63km,and
that is complemented by a 260 km suburban network operated by CPTM,
according to data from UrbanRail.net.
RiodeJaneiro
More than just beaches and nightlife, Rio is another key economic
center for the country. It is the central location for the petroleum industry,
including the headquarters for the state-owned Petrobras, which has a
monopoly on oil and gas operations in the country. There are a number
of international corporations related to the petroleum industry that are
located in Rio to service Petrobras and the petroleum industry in general.
“The petroleum industry has a lot of opportunities in Brazil. A lot of new
investments have been discovered,” says Talero.
One of the challenges of locating in Rio is that the existing commercial
sectors of the city are land-locked by the mountains, the sea and a
protected forest reserve. “There is no space to grow,” says Talero. That’s

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Racing to Get Ready:Rio 2016 Olympics.Mike Sheridan.May 5,2014.Urban Land Magazine.
why new development is happening in the Barra deTijuca area and the
new downtown project of Porto Maravilha, he adds. Rio served as the
capital city until it was moved to Brasilia in 1960.As a result, the city is
still home to a number of old government buildings. Currently, there is
a lot of focus on demolishing the older buildings to create new space,
including the Porto Maravilha project,notesTalero.
The inventory of AAA,AA and A office buildings currently spans about
12.2 million square feet with about 7.5 million square feet of new space
underconstruction,includingbothnewbuildingandpropertyrenovations,
according to data from Ocupantes Consultoria Planejamento e
Construções Ltda.That new construction will raise vacancies amongAAA
buildingsto14percent,24percentforAAand21percentforAproperties.
Rio will host the 2016 Summer Olympics, which has produced
considerableconstructionspendingoneverythingfromsportscomplexes
and hotels to new residential towers. Brazilian authorities have said that
infrastructure spending alone could top $2.3 billion.7
For example, the
government plans to expand one of Rio Metro’s two underground lines
more than seven miles (11 km) and add six more subway stations.That
project is expected to be completed by December 2015.
BeloHorizonte
Belo Horizonte is the third most important economic center behind
São Paulo and Rio. It is home to about 2.5 million people. It is a hub for
mining,industrial services and infrastructure,and it also is a processing
center for agricultural products.
Brasilia
Brasilia is the current capital city and government center. The
population spans nearly 3 million, and much of the economic activity
is related to governmental activities.A number of communications and
financial services firms also are located here, including the country’s
main Central Bank.
Curitiba
The city is home to nearly 2 million residents, including a large
immigrant population from Germany and Italy.It is a very important city
for auto manufacturing in the country.For example,bothAudi andVolvo
have operations here. Curitiba also is a commercial processing center
for agriculture and cattle.
Fortaleza
Located on the northern coast, Fortaleza is mainly a tourist city.The
city itself is home to about 2.5 million people, and there are a number
of service business and shopping malls, as well as some agricultural-
related businesses.
PortoAlegre
With a population of 1.5 million people, Porto Alegre is the largest
city in the south of Brazil. It lies at the junction of five rivers, which
have made it an important port, as well as one of the most important
industrial and commercial centers in Brazil, according to data from the
Embassy of Brazil inWellington.
Recife
Recife is a historical city with a population of more than 1.5 million
people.About 70 percent of the income of the city comes from services.
However,there are a number of IT related businesses that have located
here such as IBM,Microsoft andAccenture.
Salvador
As the first capital city of the country,Salvador is a historical city and
a major tourist destination.The population is approximately 3.5 million.
SimilartoRecife,about70percentoftheeconomyisservicebased.The
city also is home to a major production plant for Ford Motor Company.

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BUSINESS
CHALLENGES
Brazil does have a good labor market, including a strong base of
educated workers. However, companies also have to understand that
it is a very employee-friendly country where employees have a lot of
rights, notes Persons. For example, employers are required to reserve
one-twelfth of an employees pay and then pay them that at the end of
the year as a “13th salary”. Employers also are required to provide a
month’s paid vacation, pay for employee transportation costs, as well
as subsidizing lunches.
Brazil also has strict labor laws. For example,there is an employment
contract for workers that sets terms of working hours, such as a 40- or
50-hour week. So, if a worker finishes a typical day from 8 am to 5 or 6
pmatnight,allworkissupposedtostop.Thereisnocheckingorsending
email from home after hours. Some companies actually turn off their
e-mail serversafterhourssothattheiremployeescannotsendorreceive
emails,saysPersons.“TheseMNCsareafraidthattheymightgetaudited
andfinedfortheiremployeesworkingformorethantheircontracthours,”
hesays.ThatcanhinderoperationsforMNCsthathaveoperationsaround
theglobeintheU.S.orChinaandneedtocommunicateoutsideofnormal
businesshours.So,thataspectcanmakeBrazilachallenginglocationfor
doing business internationally,adds Persons.
Ultimately,Brazilfacesmanyofthesamechallengesofotheremerging
markets such as developing its infrastructure and public transportation
network and introducing reforms to make it easier for companies to do
business in the country. The McKinsey report makes the argument that
the key to accelerating economic growth will be“finding a new formula”
that involves strengthening its position as a global trade partner, as well
as focusing on advanced skills,knowledge and innovation to diversify its
economy.
Certainly, there are many examples where that progress is underway.
For example, General Electric opened a new research and development
center in November at the Rio de Janeiro Federal University Technology
One of the biggest challenges to doing business in Brazil is its tax and regulatory environment. Brazil has opened
up its import and export market. However, the taxes are quite high. “Brazil is actually a very expensive place to do
business,” says Persons. In the World Bank’s 2014 Doing Business index, Brazil ranks 116th out of 189 countries in
termsofitsregulatoryburdenandranks159thfortaxation,accordingtotheMcKinseyreport.
Park. The R&D center will be aimed at developing innovations in
areas such as oil and gas, energy, aviation and turbines. The Brazilian
government also has made some progress, albeit uneven, in reforming
trade laws and regulations. According to McKinsey, some sectors, such
as auto manufacturing remaining heavily protected and taxed, while in
aerospace the government has taken steps to reduce import tariffs on
aircraft components to foster growth in that sector.
At the end of the day,Brazil is still an emerging market.So,while there
are many opportunities in that large and growing market, companies
also need to recognize the challenges and business risks that exist.
The Brazilian government also continues to face the very large task of
broadening its industry base, creating a climate that is more inviting to
foreigninvestorsand,ultimately,acceleratingandexpandingitseconomic
growth.“Growthistinyrightnow,”saysJungman.“Thebiggestchallenge
for Brazil right now is to bring back the growth.”
Many thanks to the following contributors
for sharing their perspective:
Gustavo D’Acol Cardoso,
D’Acol Cardoso Advogados
Milton Jungman,Accenture Workplace
Solutions, Latin America
David Persons, DTZ Americas, South Florida
Fabio Talero, Ocupantes Consultoria
Planejamento e Construções Ltda.

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