Investing in Real Estate in Emerging Markets

While the economy in the US and Europe continue to melt, savvy investors are turning their eyes to "alternative" investments, such as gold, venture capital, and foreign real estate. Today, I want to talk about one of these alternative investments, which readers of this blog are now familiar with: foreign real estate.

Every emerging country is different and the one I'm following more closely is Brazil. Just watching the stock prices of Brazilian home builders -- many of whom IPOed or raised more money in the last couple of years such as Gafisa, Mills and Rossi -- and their underlying fundamentals, it becomes apparent that they're making money, and a lot of it.

But there is no need to watch the stock market for this if one is attuned to what's happening with the real estate market. Brazil has a strong economy where the lower class is getting richer, thanks to a solid economic policy in the last couple of years and a myriad of government subsidies and protectionist laws (the latter two of which, by the way, have their many downsides in the long run, but that's another story).

Good deals don't last long, but they're happening everywhere. I'm aware of new high-end beach houses in gated communities in the south, commercial buildings in the financial town of Sao Paulo all the way to low-end popular apartments in Rio de Janeiro, right where the World Cup 2014 and the summer Olympic games 2016 will take place.

Out of these, the popular apartments in Rio caught my eye. One particular set of buildings is planned for 2012. The builder is offering very low financing, according to government rules to incentivise the low middle-class to buy their first home, and financing is eligible for such government credits. It's as sweet a deal as the cash for clunkers was in the US. These are modest two-bedroom, one bath small units about 10 minutes from the beach, right where the bulk of the Olympic games are supposed to take place.

The risks:
1. Too many investors and speculators driving up the price to the point they can only resell to other investors and not to their target audience. That's the basis to form a bubble.
2. Overbuilding. This shouldn't be a problem for at least the next two years or more, since Brazil has a shortage of homes and pent-up demand. But the market is local and each area has a given capacity for building and demand that are unique. Those with first-hand knowledge of their region will have the upper hand.

The benefits:
1. The upside is tremendous. Some investments are returning anywhere from 20 to 60% a year.
2. In the worst case, investors can rent their units. Demand exists.
3. Qualifying for credit in Brazil is tough, but when buyers are approved, they really are creditworthy and chances of investors getting the short end of the stick are low.

Unfortunately, none of the opportunities I mentioned above are available anymore. Good deals don't last long. But others will come up. Readers interested in finding out about upcoming deals and similar opportunities should get in contact through the comment section below.

Disclaimers: No shares in companies mentioned. I own real estate in Brazil.

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