Update: Fortaleza Is Still Booming

Wednesday, Oct. 29, 2008

Dear International Living Reader,

I’ve just returned from our most recent Real Estate Trend Alert scouting trip to Fortaleza on the northeast coast of Brazil. It was over three months since my previous trip. Three months in which the world fundamentally changed. This was before every day offered up a new catastrophic metaphor for financial markets. I wondered what impact global events could have on the real estate market in Fortaleza. Trusted contacts assured me the market was as hot and fast moving as ever. I wanted to see for myself.

If you have been following my Postcards, you know how bullish I am about the stretch of coast around the city of Fortaleza in northeast Brazil. This stretch of coast is seeing the most incredible convergence of trends that I have seen in my 10 years of international real estate investing.

The domestic economy is booming. We are seeing the momentum event of foreign investment. Direct flight access from the U.S. is opening up. Brazil—and Fortaleza in particular—is getting serious about marketing to foreign tourists. Fortaleza is already one of the biggest domestic tourist destinations in Brazil. The World Cup is coming to Brazil in 2014, with Fortaleza likely to be a host city. Multibillion-dollar infrastructure projects are underway. The domestic mortgage market is opening up and Fortaleza is becoming increasingly popular as a retirement destination for people from southern Brazil and Europe.

Having spent a week on a scouting trip with members of Real Estate Trend Alert, the good news for those of us invested in this part of Brazil is that it’s business as usual...with one exception: Big Brazilian developers from Sao Paulo and southern Brazil continue to snap up land and accelerate their entry into the market. These groups have strong cash reserves and very little debt. At a retail level, local demand continues to grow and the European demand is holding up. Big European groups that are planning mega-resorts have indicated that their plans remain unchanged.

Remember, the private mortgage market only represents 2% of GDP in Brazil. Compare that with 60% in the U.K. or even 11% in Mexico. Capital has been very expensive and very limited in availability. That means today there is less exposure to capital markets.

Global deleveraging has, however, resulted in a big selloff in the Brazilian stock market; the BOVESPA is down 52% this year and its currency, the real, has declined 30% against the U.S. dollar. The reasons why Brazil was well on its way to becoming the darling of the BRICS remain the same. The world needs food and energy...successful countries will need to produce real things, not complex derivative structures. A forecast by The Economist has Brazil still growing at 4.6% in 2008 and 3.4% in 2009. Not bad, considering what we’re seeing in the Western world. When the global economy recovers, Brazil will be set to take off.

Meanwhile, I’m continuing to invest in real estate in Brazil (as I did last week on my trip), and consider the weakness in the real an opportunity to move funds to Brazil to meet future obligation for the real estate I have purchased there.

Tune in tomorrow when I will fill you in on what I consider to be the best way for the retail investor to maximize his return on investment in this market today.

Ronan McMahon

Editor’s Note: Make sure to take a look at our Halloween Bookstore sale, where you can get 20% off our best titles.