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Brazil: Land Of Opportunity For The Construction Industry

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<p style="text-align: justify;"><strong>Supply and Demand &ndash; An Overview of the Real Estate Deficit in Brazil</strong></p><p style="text-align: justify;">Bearing in mind the low/medium income brackets that buy properties via government incentive programs for home ownership, such as Casa Verde Amarela (CVA) and Sistema Brasileiro de Poupan&ccedil;a e Empr&eacute;stimo (SBPE), the housing deficit in Brazil remains very large - reaching 6 million units in 2021, according to BTG Pactual's report on the sector's scenario for the same year. The state of S&atilde;o Paulo has the largest housing deficit in the country, with approximately 1.22 million units (48% in the capital's metropolitan area alone).</p><p>Still, according to the same <a href="https://ri.btgpactual.com/en/main-information/annual-reports/">BTG Pactual report</a>, at the end of the third quarter of 2021, the total housing stock in the country was only 204,000 units, and sales until that period totaled 188,000 units, an increase of 23% per year, despite the high levels of unemployment - around 12% nowadays, but in a downward trend - which impacts household budgets.&nbsp;</p><p>Not to mention the potential demand in the infrastructure sector, with several promises of construction developments in sanitation, irrigation, and infrastructure auctions coming to fruition that will undoubtedly positively impact the results of the industries in the sector.&nbsp;</p><p style="text-align: justify;">Additionally, civil construction undoubtedly continues to be one of the main gears of economic expansion in the country, representing 9.7% of the country's gross domestic product (GDP), according to the Brazilian Institute of Geography and Statistics (IBGE). It is also the segment with the most positive impacts on employment and income generation.</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Obstacles to the Construction Sector and Market Optimism</span></h2><p style="text-align: justify;"><span style="font-size: 12pt;"><strong>Cost of Construction and Interest Rates</strong></span></p><p style="text-align: justify;"><span style="font-size: 12pt;">Several aspects have been impacting this market, with emphasis on the inflation of the cost of construction (such as cement, copper, and especially steel) in addition to the increase in interest rates, which impacts the ability of buyers to take out real estate loans.&nbsp;</span></p><p style="text-align: justify;"><span style="font-size: 12pt;">The year 2022 has already shown signs of cooling these numbers down, and the market is counting on new heating up in 2023, right after the elections that take place in September. (October)</span></p><p style="text-align: justify;"><strong>Lack of Skill</strong></p><p style="text-align: justify;">The lack of professional training was mentioned as an important obstacle for 89% of the companies in the sector, according to a survey by the National Confederation of Industry (CNI).&nbsp;</p><p style="text-align: justify;">This also impacts retail sales, which struggle to create value in products with new technologies due to the difficulty in attracting specific and professional markets for these novelties because of low qualifications.&nbsp;</p><p style="text-align: justify;">A recent example of this was the joint venture between two giants in the sector, Saint-Gobain and ArcelorMittal, which launched a training platform that already has more than 100 courses and training programs. This online platform, called Parceiro da Constru&ccedil;&atilde;o (Partner in Construction), has already been launched and has an initial estimated market value of R$40 million.&nbsp;</p><p style="text-align: justify;"><strong>Brazil Cost</strong></p><p style="text-align: justify;">Another extremely important point to mention is the negative impact of the so-called "Brazil Cost," a term that describes the set of structural, bureaucratic, and economic difficulties that make new investments more expensive and compromise new investments and worsen the business environment, has on industries located in the country.&nbsp;</p><p style="text-align: justify;">In 2019 the government released an accurate survey on the subject, as shown in the following graph, and announced the launch of the Federal Government's Continuous Competitiveness Improvement Program, where indicators in the 12 areas considered vital for the competitiveness of the business sector were listed.&nbsp;</p><p style="text-align: justify;">The diagnosis compares the cost of producing in Brazil to the average cost of the countries of the Organization for Economic Cooperation and Development (OECD) and will allow for priority actions to stimulate these points.</p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://kradminasset.s3.ap-south-1.amazonaws.com/ExpertViews/Marcuspic1.jpg" width="538" height="403" /></p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Conclusion</span></h2><p style="text-align: justify;">Brazil continues to be a fertile ground for investments in the civil construction sector, with several companies investing in it and the government continuously encouraging them.&nbsp;</p><p style="text-align: justify;">The obstacles in this market will be overcome with the joint effort between the government, through moves that have already been initiated towards de-bureaucratization, and the companies, through a commitment to deeper professional training initiatives in the area.</p><p style="text-align: justify;"><span style="font-size: 12pt;"><span style="font-size: 10pt;"><em>This article was contributed by our expert <a href="https://www.linkedin.com/in/marcus-silvestri/">Marcus Silvestri</a></em></span><br /></span></p><p style="text-align: justify;">&nbsp;</p><h3 style="text-align: justify;"><span style="font-size: 18pt;">Frequently Asked Questions Answered by Marcus Silvestri</span></h3><h2 style="text-align: justify;"><span style="font-size: 12pt;">1. Why is the construction industry booming ?</span></h2><p style="text-align: justify;">There are so many reasons for this boom. One of the main reasons is a considerable lack of home ownership that directly impacts the market and a great opportunity in the repair and renovation areas. And also, one of the most common ways for government to accelerate the economy is by subsidizing construction and the infrastructure, which is already expected by the market by the end of the elections and as soon as the new government takes place.</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">2. What is the most profitable type of construction ?</span></h2><p style="text-align: justify;">There is an ample opportunity for greener and sustainable alternatives and lightweight construction systems. The industry hasn't been able to communicate this with consumers adequately, and there is still a long way to go for construction to be properly industrialized in Brazil. This movement will impact the construction systems and the end user market for construction products.</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">3. What are the three major divisions of the construction industry ?</span></h2><p style="text-align: justify;">Residential constructions represent about 54% of the projects initiated or in the design phase, followed by commercial and infrastructure with around 30% of the market share. Industrial and other kinds of projects account for the remainder.</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">4. Will construction prices go down in 2023 ?</span></h2><p style="text-align: justify;">There are some good reasons to believe that it should go down soon. Firstly, inflation introduced by the pandemic seems to be decreasing, and the political agitation tends to stabilize with the newly elected government next year.</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">5. Will building supplies go down in 2023 ?</span></h2><p style="text-align: justify;">The supply chain is intrinsically related to external markets. There will be internal reasons for the prices to decrease, but we still have many external factors to consider. That being said, there is no way to predict this long-term.&nbsp;</p><p style="text-align: justify;">&nbsp;</p>
KR Expert - Marcus Silvestri