Island of Prosperity During the Storm
The reason the survivor developers are still in the game is that even in the worst of times, these developers were able to generate profits in a select number of their projects.
Location Choice
The neighborhood is located in the center south region of the city of São Paulo. The residents are middle-class and upper-middle-class families. Most of the residents live in single-family homes currently because there are very few residential towers in the region. The neighborhood possesses important historical points of interest in the city, top-tier museums, the Independência Park and has strong generational ties.1 It is considered a very residential area, with excellent dining choices and its own Municipal Market. Its main street, where one of the subway stations is located, has very busy traffic; however, just a few blocks away from the station the area has a calm residential feel.
The neighborhood is very centrally located and has easy access to quality public transportation. Residents who depend on public transport to commute to work have three subway stations and one train station to choose from. For those who use a car, Avenida do Estado is very convenient as it directly connects the region with the center of São Paulo. The neighborhood is served by Alto do Ipiranga, Sacomã and Tamanduateí subway stations (line 2) and Ipiranga train station.
Neighborhood Description
The neighborhood has a population of 106,865 people and 41,253 homes – 53.2% of those are houses. Of the total homes, 28.5% are rentals. The age group with the largest population (29,214 people) is 30 to 44 year olds. More than 4,200 homes have a monthly income greater than R$10,000, placing them among the project’s target clients.
The project is well inserted within a micro-region that has a shortage of 2 and 3 bedroom apartments. The area is highly occupied by single-family houses. The population desires to move to apartments that offer security, leisure, and newer construction. This is a highly desirable area for larger apartments, but very scarce in terms of supply.
Project Information
– Project launched in the fourth quarter of 2016
– 280 units between 83m2 and 247m2 with 2 and 3 bedrooms, fully compatible with the target customer
– Unique product in the region in terms of infrastructure and amenities for residents
Purchaser Target Consumer Profile
– Age: 35+ years old
– Status: married, with one or two children
– Couple monthly income: R$15,000 to R$23,000
Sales Results
– More than 90% sold in 6 months
– Average down payment of 23%
– Customers are final users of the units (no investors)
– Prices were slightly below market, it was launched for R$7,500 per square meter and market was R$8,000. Developer gradually increased the price and last units were sold above market price.
Conclusion
Developer completed extensive research about the region and chose the right combination of size and price per square meter that matched the income in the region. Considering the final price and a mortgage of 20 to 30 years, the resultant installments were in accordance with the customer’s monthly income. The demand for the product was already in existence for the selected products, and the developer smartly created the right product in the right location for the right customers.
The land is unique in the region in size and location. The product was launched in the middle of the crisis when there was no competition – other developers were not launching. The neighborhood has few residential towers and part of the local population desires to move to buildings that offer security and leisure.
The down payment (23%) was high enough to inhibit future cancellations and demonstrated that there were customers in the region with income and savings to pay a high down payment. This clearly demonstrates a real demand in the region that was just waiting for the right product. In addition, this provides evidence that for the right projects there are enough people with the budget available to pay a high down payment during the crisis.
Key Takeaways from Successful Projects During Downturn
Demand exists in São Paulo even during the worst crisis of the market in recent memory. It is a matter of detailed analysis of the neighborhood and designing the right product for that specific area. When these rules are followed, the customers appear and sales will happen in a relatively fast time frame, even in the worst of times.
Demand Imbalances among Product Types
It is crucial to understand the supply-demand characteristics in the targeted micro-region. The rapid expansion and growth of the real estate market created significant real estate product imbalances in many neighborhoods that can be exploited.
Ability to Make Changes to Land Site’s Original Purpose
Often land sites were purchased with one objective in mind years ago. It is not unusual in today’s market that this land site could be retargeted to the current demand profile. The approval often does not need to change or is rapid and the redesign can be executed quickly.2
Land Basis and the Creation of Margin Cushion
An investor in today’s market must ignore what was paid for the land. It is important that the investor’s new cost basis does not require the highest price range of unit sales value in order to create a positive return. This margin of safety must be priced into the investment. This is an extremely important point of negotiation with the developer. Not all projects, even with this implicit initial discount, can provide appropriate risk reward in today’s market.
Competitive Pressure (Banks and Developer Behavior)
Undercapitalized developers can make very irrational decisions. For example, due to banks’ current requirement that 40% of the project is under contract and 20% of construction is completed, an undercapitalized developer will sell at a lower price just to reach this target sales number in order to receive construction financing from the bank. This can “burn” the market and reduce profitability for all. It is important to carefully select projects that are as far away as possible from developers that are financially troubled and are reducing value for everyone.
Sales Speed – Slow is Fast and Fast is Slow to Profits
It is important to have patience with the sales speed of residential development in the market currently. Rushing to sell can actually result in lower total profits. This has always been the case but is particularly true now. Why? In some regions there is limited supply of the desired product coming to market. Therefore, as the economy improves there is a potential to gain pricing advantage.
1 Many São Paulo neighborhoods have strong generational pulls where families tend to live multiple generations in the same area.
2Example: A developer who approved a hotel in the region of Berrini and during the crisis decided to change the project to a 1 and 2 bedroom residential project. There was demand for 1 and 2 bedroom in the region and the size of the land was appropriate for the new project. In this case it was not complicated to change a mid-scale hotel project into a 1 and 2 bedroom residential building.
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