Real estate facts and opportunities
By Seres Baum, Grupo Work
As seen on CNN and other news media, over two million people from 176 countries around the world own extraterrestrial property.
To date, more than 300 million acres of land on the Moon have been issued to individuals and corporations, representing transactions amounting to over $6 billion (US dollars). While accountants, lawyers, and general consultants are still struggling to find the best approach to such investment accountability, juridical classification and the best valuation method, psychology and real estate specialist are trying to figure out why people have been investing in real estate (on our planet for a while).
1. Why do people invest in real estate?
It is common sense that people invest in properties (even in the moon) for different reasons. However, many people invest in real estate for these reasons:
- Status/Competition - Investment is done in order to 'show off' (the more properties they have, the more other people will be impressed).
- Increase Net Worth - Investment is done to increase their net worth. Said differently, people invest in real estate because they want to become 'rich' and go on vacation without losing "wages".
- Opposition to the financial markets - For people who do not like investing in the financial markets, investment in real estate is the only other option for them. It is either real estate or stuffing their money underneath their mattress.
- Buy real things - Some people are motivated to invest in real estate because they want to purchase material things.
- Follow the crowd - People invest in real estate because they watch from a distance and come to the conclusion that it is good. As a result, they jump feet first into real estate by watching others and just by simply following the crowd.
2. International Approach for Real Estate
Heading 380,000 km back to humankind's homeland, it is found that, no matter the reasons why people decide to invest in real estate, buying a property has been a real choice for more and more people.
According to the Global Property Guide's house price indices survey published by June 2012, The world's housing markets moved clearly down during the year up to the first quarter of 2012. House prices fell in 24 countries, of the 36 countries for which quarterly house price statistics are available, and rose in only 12 countries.
During the latest quarter, the downturn appears to have accelerated, with house prices declines in 26 countries and house price gains in only 10.
The experts' explanation for this phenomenon involves, arguably, the global economic crisis, which generates a lack of consumer confidence, unemployment and concern with the high indebtedness of the rich countries.
In Brazil, what we see, on the contrary, is an extremely favorable situation. As shown in the table above, during the year 2011, the real estate price increase was beaten only by India.
Compared to other countries, our economy is healthy. Employment levels are the best of the last few years. The Central Bank goes through a cycle of interest rate reductions, which is positive for the housing market. Additionally, we have incentives in the construction sector.
Exemption from taxes on products and housing programs for the disadvantaged, keep growing the market at its base. Thus, the demand for real estate is very strong. And the prospective is that this situation will be maintained.
There is space for home loans to expand. In Brazil, the total loans for real estate purchases total close to 4% of GDP, while in countries such as Mexico it goes up to 18% and 11% in Chile. In addition, loans in Brazil are still expensive, in which it costs at least 11% a year, compared with 4% abroad.
Alongside the increase in the cost of labor, another point that also tends to pull prices up is the "fight" for land, among real estate developers, especially in large metropolitan cities.
Despite the arguments questioning a possible housing bubble, in practice, what is seen as one of the reasons to keep the real estate recovery is the lack of commercial real estate in Brazil. The country is growing and there is a lack of commercial offices, warehouses, and different types of installations.
3. Real Estate in Brazil
Essentially, issues relating to real estate property in Brazil are governed by the Brazilian Civil Code (CCB). As a common definition, immovable property encompasses land and anything that has been naturally or artificially incorporated thereto. Brazilian law further confers certain rights with the status of immovable assets for legal purposes. This is the case with inheritance right to property through succession.
Land ownership rights, according to the CCB, do not encompass mineral deposits, mines and mineral resources, potential hydroelectric power sources, archeological sites, or other assets as referred to in specific laws. It thus makes a clear distinction between land ownership and rights to such elements of the subsoil (mineral and hydroelectric resources) that are considered Federal Government property.
3.1 Real Estate Registry System
Under Brazilian law, ownership of real estate property is constituted upon the registration of the public or private instrument (deed) whereby the sale was accomplished at a Real Estate Registry in the jurisdiction where the property is located.
However, an instrument involving real estate property that has not been duly registered at the respective Real Estate Registry is only binding between the parties to the purchase/sale agreement and, thus, is not enforceable against third parties. Likewise, any action that modifies, extinguishes, transmits, or creates rights relating to immovable properties must be registered with the competent Real Estate Registry.
3.2 Real estate for non-residents
Foreign individuals or foreign-owned companies may acquire real estate in Brazil under the same conditions as Brazilian individuals or companies. However, non-resident individuals or organizations must be registered with the General Register of Corporate or Individual Taxpayers (CNPJ or CPF) prior to purchasing any real estate in Brazil.
Furthermore, special conditions apply to ownership by foreign individuals or companies of property located in coastal or frontier zones, as well as in certain specifically designated national security areas. Rural areas can also be acquired, provided that certain restrictions are observed.
3.2.1 Rural Land
A foreign individual residing abroad cannot acquire rural property in Brazil. This restriction is not applied only in the case of legitimate succession (a foreigner is entitled to acquire rural property as a legal heir of the previous owner).
18.104.22.168 Restriction related to size of rural property
According to the rules currently in force, foreigners who have permanent residence in Brazil Are free to acquire or lease ONE rural property not exceeding THREE modules for indefinite exploitation (MEI) , however especial authorization from the National Institute for Colonization and Agrarian Reform – INCRA is required for areas bigger than THREE and smaller than FIFITY MEI; Foreigners cannot acquire or lease rural real estate exceeding fifty (50) MEIs.
22.214.171.124 Restriction related to each municipality
Additionally, the total area acquired or leased by foreign entities or individuals must not exceed 25% of the total area of any given municipality. Also, foreigners of the same nationality (including foreigners who control Brazilian entities) cannot hold more than 40% of those 25% of the area of the municipality.
126.96.36.199 Restriction related to the purpose of property
For property over THREE MEIs, Brazilian law provides that foreigners who have permanent residence in Brazil can only acquire or lease rural property for the purpose of implementing agricultural, cattle-raising, industrial, or settlement projects. In addition, in the case of foreign entities, such projects must be contemplated in their articles of association. These projects must be approved by the Brazilian Ministry of Agriculture, Livestock and Supply (MAPA) and, depending on the type of project (industrial, colonization, agricultural project, etc.), other federal government bodies in charge of the respective activities may be called upon to review the application as well; Congress must authorize the acquisition, or the lease of areas exceeding one hundred (100) MEIs must have Congress authorization – specific Law.
Similar restrictions to those applicable to foreign individuals with permanent residence in Brazil are applied to foreign legal entities.
All the restrictions described above also apply to transfers of rural real estate as a result of transactions involving corporate restructuring (such as mergers, spin-offs, acquisitions, changes in corporate control, etc.).
Brazilian companies with foreign equity control are subject to the same regulatory framework as that imposed on foreign companies.
3.2.2 Real Estate Investment Funds
Both individuals and corporations residing or domiciled abroad are entitled to acquire unlimited shares on Real Estate Investment Funds. Provided that the funds resulting from the investment are duly registered with the Central Bank of Brazil, the investment and respective gains can, at any time, be remitted abroad.
3.3 Taxation on Real Estate
The taxes and charges levied on real estate can be structured in three different phases, as the Purchasing phase, Maintenance phase, and Selling phase.
Each of these phases has different taxes and charges respectively supported by the seller and buyer.
However, the scheme below shows what is normally due by the purchaser in an economical transaction related to real estate in Brazil.
3.3.1 Taxation of Real Estate Investment Funds
According to the law in force, capital gains resulting from such investments are subject to income tax (IR) at a rate of up to 20%, assessed upon disposal or withdrawing of Real Estate Investment Fund quotas.
By Seres Baum, Partner
Grupo Work, Rua Alcides R Neves 12, Brooklin, CEP 04575-050, São Paulo, SP, Brasil
T: + 55 11 4062 1515