Understanding the full regulations relating to purchasing real estate in Brazil is important, enabling a comprehensive knowledge of the commonly referred to ‘ease of purchasing process’. Here we attempt to provide a greater insight to potential buyers of the processes involved, providing increased clarity for personal assurance.

It has been mentioned several times that there are no restriction on foreign purchases in Brazil. While this is correct for the average investor wishing to buy a holiday home or apartment, yet some restrictions do apply on rural land.

If purchasing rural land through a company, the use of the land needs to be directly related to the company’s functions, such as agriculture or industry. Foreign individuals purchasing rural land in Brazil are required to migrate within three years of acquiring the land.

Another area of clarification is the compulsory use of a legal representative. While it is not a compulsory requirement by law, it is highly recommended. The extensive amount of documentation to be checked through, ensuring a property fully complies with legal regulations is best clarified by a Brazilian based lawyer.

Many real estate and investment companies promoting developments in Brazil will have contracted the services of an independent legal firm, prior to releasing the projects to the clients. These legal due diligence reports can involve many processes that the agents pay the legal firm to carry out. The fact that the legal firm has carried out an extensive report, having full knowledge of each particular project, is why many agents recommend particular legal firms. This will allow the buyer to have access to a lawyer who understands all the pro’s and con’s of units on each project the client wishes to purchase.

While the full extent of the documentation to be studied can vary depending on the location of the unit to be purchase, the main checks will include:

-Company registration documents of the developer
-Land title certificate
-Planning permission
-Building license
-All documentation outlining the planning and construction regulations of the project
-Any debts against the property
-Bank guarantees, building insurance and financial payment security for buyers, such as escrow accounts
-Land surveys

The lawyer will also be able to arrange a CPF number for the client if they do not already have one. A CPF number is a legal requirement for carrying out all types of transactions in Brazil, from buying a house to applying for a job, even for obtaining a mobile phone contract. CPF stands for Cadastro de Pessoas Físicas and is an independent taxpayer number. While the application can be made without the use of a solicitor, the process is far simpler obtaining assistance. Non resident foreigners will need to submit the application at a Brazilian consulate in their place of residence, or apply through a lawyer based in Brazil. The process takes approximately two months to complete, requiring proof of identity, such as a passport, with an officially notarised copy.

Once the CPF number has been obtained, it is a legal requirement to submit an annual tax statement, or tax exemption statement. If the tax statement is not submitted, the CPF number will be cancelled. While all of the necessary processes can be carried out without contracting the services of a legal representative, the sheer volume of processes required in a relatively short space of time can be mind boggling. Not forgetting the restrictions of the language barrier, as all legal documentation in Brazil is submitted in Portuguese. Contracting the services of a qualified solicitor specialising in Brazilian real estate is a small price to pay, considering the substantial loses one stands to face from even the smallest oversight if carrying out the processes alone.

Understanding the processes involved will assist individual buyers in ensuring that the work carried out by their contracted legal representative are concise. This can enable a feeling of increased stability and ease of mind in foreign property investment markets.

In October 2003, Goldman Sacks published a research paper titled, “Dreaming with BRICs: the Path to 2050.” The paper states that Brazil, Russia, India and China, commonly referred to as BRIC, may rank among the world’s most dominant economies by mid century. By 2041, China’s Gross Domestic Product (GDP) could possibly be greater that the United States and larger than everyone else except Japan by 2016. The BRIC economies together might be larger than the G6 (US, Japan, UK, Germany, France and Italy) by 2039. Obviously, there are execution risks, but the trends are in place for this to occur.

This has enormous implications. As these countries develop, just think of how their people will benefit and the opportunities that will be created. Demand for items that developed countries middle-class have come to expect will be tremendous. Consumer items such IPODs and DVD players will be of interest, but that will pale in comparison to the demand for housing with indoor plumbing, electricity, basic appliances and cars. In Goldman Sachs follow-up report released in 2004, it states that between 2005 and 2015 over 800 million people in these countries will have crossed the annual income threshold of $3000. By 2025, approximately 200 million people in these economies will have annual incomes above $15,000.

So, how can we as investors benefit from the industrialization of BRIC? I would like to propose two approaches: direct and indirect investing into the emerging economies. Direct investing requires an in-depth knowledge of companies in complex and diverse countries. This is far too time-consuming for the average investor. A much simpler approach would be purchasing single-country exchange traded funds (ETFs). I realize this is a mouthful. Let’s start by defining exchange traded fund (ETF). It is a fund that tracks an index, but can be traded like a stock. Thus, it provides the diversification of a mutual fund, but is not hampered by trade cut-off times and early redemption fees. A single-country ETF is linked to a country’s index that reflects the value and composition of its specific stock market. ETFs of the BRIC countries include: Brazil (EWZ), Russia (TRF), India (IFN), and China (FXI). Their year to date performance (YTD), as of 6/30/2006, is 17.2%, 27.4%, 16.3% and 24.6% respectively. This produces an equally-weighted return of 21.8%. Trouncing the US Major indices returns of 4.0%, 1.8%, and -1.5% (DOW, S&P 500 and NASDAQ respectively).

The second approach, indirect investing, consists of investing in companies that supply materials and equipment that the BRICs will need to industrialize. Imagine the number of highways, bridges, railways, factories and skyscrapers that will need to be built. This is impossible without commodities such as iron and carbon that are combined to form steel. Modern society requires copper for electricity and information technology. Can you imagine how much cement and concrete will be consumed? The demand created for these and other commodities will be phenomenal.

To leverage this approach I have created a basket of 12 stocks. It contains proven industry leaders that produce or supply to companies that extract base metals from the earth. Base metals include Copper, Aluminum, Nickel (stainless steel and nickel metal hydride batteries), Zinc (anti-corrosive coating in galvanized steel) and Lead (lead-acid car batteries). Companies that mine base metals include: diversified producers – BHP Billiton (BHP), Falconbridge (FAL), Rio Tinto (RTP); aluminum producer Alcan (AL); copper producers – Freeport-McMoran (FCX), Southern Copper (PCU), Phelps Dodge (PD); nickel producer Inco (N); iron ore producer – Companhia Vale Do Rio Doce (RIO). The suppliers of equipment, parts and services to these companies will profit as well. Thus, I have included two heavy equipment manufacturers in the portfolio: Caterpillar (CAT) and Bucyrus International (BUCY). The final company is not a base metal producer or supplier, but countless tons of cement and concrete will be necessary for the build-out. Therefore, I have included cement and concrete producer – Cemex (CX) in the basket. This indirect approach, using an equally weighted portfolio of the above listed stocks, has outperformed the direct approach 27.2% vs. 21.8% year to date.

In closing, I would like to share a couple of implementation details with you. The above portfolios are intended to be traded as a basket meaning that all should be bought and sold at the same time. Cherry-picking a couple of stocks may not produce better results – the diversification reduces company or country specific risk. It is also important to choose the right brokerage to employ this strategy. I have found that FolioFn lends itself well to this strategy. It enables complete automation of the process by supporting single-order basket trading as well as automatic dollar cost averaging. I highly recommend combining this strategy with dollar cost averaging. For more information on the benefits of dollar cost averaging, refer to my article on “Double Digit Gains with Dollar Averaging.” Commissions on a large basket can be cost prohibitive. Foliofn address that with its various commission plans including one that allows up to 600 window trades per month for $30. Consequently, fees on accounts of $40K would be less than 1% per year using this plan. This puts fees of basket trading in-line with fees of ETF and much better than mutual funds.

There is a tremendous opportunity to make money investing in the BRIC thesis. What are you waiting for?

Reference:

“Dreaming with BRICs: the Path to 2050.”