Why Brazil Is Attractive from a NYC Real Estate Perspective

• Capitalization rates, yields, and returns in the USA and Europe will be weaker over the coming years, affecting mostly the younger generations as savings will be harder to manage
• U.S. and EU equity markets have grown 7.9% over the past 30 years, fixed income in the U.S. 5.0%, and 5.9% in Europe respectively
• Possible solutions would be to take a deeper look into emerging market assets once again

Bloomberg recently published that people today will have to work seven years longer or save almost twice as much to end up with the same nest egg as those of roughly a generation ago. McKinsey and Co reached a similar conclusion: the end of the golden era of exceptional inflation-adjusted returns, driven by a confluence of factors that will not be repeated.

The Declining Rate Environment and Its Implications

In the USA, Fed Funds rates have been declining since the 1980s, currently at or near-zero percent. We see this trend just as aggressively, if not more so, in Brazil. With declining rates come declining cap rates, declining cost of debt, and in turn price inflation in real estate prices, bond prices, and acquisition prices of companies. The same mechanics that drove NYC real estate from 2010 through 2016 are present in Brazil today.

With currency rates at their weakest since the Lula election in 2003, the Brazilian real has seen meaningful appreciation from R$4.03/USD, while Petrobras bond yields in USD moved from around 15% in September 2015 to around 7.5%, representing tremendous capital gains for those who invested during the distressed period.

The NYC Real Estate Parallel

Buying a building in Manhattan during the middle of the U.S. credit crisis was thought to be foolish. Cap rates in 2010 were averaging 5.94%. Had you bought at those cap rates and sold at the 2-2.5% cap rates of 2016, the appreciation would have been extraordinary. If we were to compress Brazilian cap rates to similar levels from their current elevated starting point, the same dynamic applies.

The future of returns in developed markets will depend on various factors, but with compressed yields everywhere in the U.S. and Europe, investors facing declining returns on equity have a structural incentive to look at emerging markets with higher starting yields and comparable yield compression trajectories. Brazil is a potential destination and solution to the challenge our generation is going to face in building adequate savings.