Stakeholder Behavior Analysis – São Paulo Brazil

Before

Now

Developers:

– Prices increased exponentially from launch to finished construction, significant economic value created during this period. Momentum covered up errors in cost basis of land (overpayment).

– High levels of sales at launch and early in the marketing process combined with a lower percentage of sales required from banks to release construction financing created significant momentum for developers. This momentum provided cash flow to execute multiple projects simultaneously. Intense competition in the market.

– With significant IPO proceeds and long-term debt, developers were able to create large land banks.

– Prices only slightly increase from launch to finished construction. This greatly increases the importance of proper underwriting, disciplined cost management, and requires excellent cost basis of land.

– Lower pre-sales of projects occur before construction and higher percentage of sales are required from banks. This environment is significantly more difficult for all but the most well capitalized developers. Less competitive environment in some micro niches and slower sales speed can lead to attractive gross margins provided buy-in basis of land is negotiated properly.

– Launches are strictly limited to only those projects where developers possess high confidence that, within a reasonable time frame, the project can quickly reach the percentage of sales required from banks to start construction financing.

Consumers:

– Credit analysis was much looser, and there was expectation of high appreciation of real estate after acquisition. This created a general feeling of exuberance. Buyers were less selective.

– Investors that sought a quick flip (small investors who purchase with the intention to sell before completion) were a large portion of the customer base.

– At many launches, particularly those with low down payments, small investors were a large portion of the market.

– Credit analysis has tightened, and expectation of price appreciation is approximately inflation. This creates caution about a purchase, patient decision, and greater focus on specific customer desire per micro subregion.

– Small investors are much more cautious due to higher prices and lower appreciation expectation. These small investors often never had the money to purchase the apartment once it was time for delivery. These investors are practically out of the market.

– Market focus now is actual homebuyers. Caution warranted as small investors were a large part of the cancellation problem.

Zoning:

– Car oriented, lower cost of air rights, no minimum number of units per site (enabling developments with larger units).

– Transit (public transportation) oriented, favors mobility, incentives for smaller unit developments, higher costs of air rights, incentive for mixed-use development.

Credit / Banks:

– Lower percentage of sales and completed construction required from banks to provide construction financing – 20% sales and 10% construction. These targets were relatively easy to meet due to strong demand.

– Less rigorous analysis in relation to the quality of the project and region.

– Banks offered credit at the holding company level.

– Higher percentage of sales and completed construction required from banks to provide construction financing – 40% sales and 20% construction. These targets take longer to meet in this market, making it difficult to sustain margins without proper capitalization.

– More selective in relation to project and region.

– No credit at the holding company level, only for projects.

Landowners:

– Land price increase expectations were much higher due to appreciation and high developer demand.

– With constant unit price appreciation and strong demand, landowners were in a strong position to negotiate for cash payment or for a large percentage of revenue or percentage of units.

– Air rights had lower influence on total development costs.

– Prices are stable. 3 years with very low liquidity in the marketplace has drastically limited real estate developers’ ability to purchase land.

– Almost all landowners must accept a non cash trade (permuta in Portuguese) for a lower percentage of the project revenues or units. Lack of cash and pressure on margins does not provide an environment for land prices to increase.

– Air rights have higher impact on total development cost, pressing land prices down. The total acquisition cost is the land costs + the air rights. If the air rights are more expensive, there is pressure to reduce the land cost to keep the total costs equal.