From 2006 to 2013, there was a significant expansion of credit in Brazil. In addition, due to the high demand, banks were lenient by Brazilian standards with construction loans. For example, a developer could receive financing for 80% of construction costs upon selling 20% of the units under contract and completing 10% of the construction (importantly, currently as the banks have tightened up, the developer must deliver as much as 40% of sales under contract and 20% of construction to receive financing). Finally, due to government intervention in the economy, interest rates hit a record low in Brazil of 7.25% in 2013, which significantly lowered the costs of working capital for companies.2
Source: ABECIP (Brazilian Credit Association)
In addition to project-level credit and mortgage financing for consumers, banks also lent to developers at the holding company level. At first, this was a boom to these developers as it funded high-cost marketing efforts pre-launch and was used to expand the developers’ land banks. Later this credit became quite expensive as projects were delayed due to execution issues, termination of sales contracts that limited cash flow to repay loans. Due to construction debt’s short maturity, this debt would become a nightmare.
Latent demand
Until 2006 there was no significant long-term mortgage financing for individuals. Therefore, only the upper class could purchase apartment units. Construction financing was mostly done through pre-sales as there was little bank financing to finance construction. This lack of credit created a significant “housing shortage” or strong pent-up demand.
2. This low-interest rate environment created excesses in multiple areas of the economy.
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