Global comparisons

Despite some spectacular price growth in the last five years, Brazilian residential property appears good value when compared to the top tier of world cities (Graph 4).

A like-for-like comparison of the capital and rental costs of residential real estate for seven different households (the ‘Savills Executive Unit’ – see below) in each world city is shown in Graph 6. It shows that, despite having nearly three times the GDP per head of India, Brazil’s premier cities still have cheaper real estate than Mumbai.

Brazil’s economy is a similar size to France and Britain’s and far bigger than Australia’s, Hong Kong’s and Singapore’s yet the wealth generated by it does not seem to have been channelled into the real estate of its major cities in the same way as has occurred in those economies.

Another significant indicator of affordability in Brazil is the relationship of rental levels to capital values. We consider annual yields are a useful sign of how overheated capital values are in relation to underlying occupier demand.

Where the annual rent, expressed as a percentage of capital value, is near or below the rates of return available from bonds and other mainstream investments in a given country, we see this as an indication either that rents are low in relation to demand for housing or that capital values are high in relation to underlying demand for accommodation.

In cities where large quantities of investment capital have been pressing on real estate markets, these yields are often very low by global standards.

Not so in Brazil. Gross residential property yields for the SEU in Rio and São Paulo are higher than in many other of the ‘new world’ cities in recently emerged economies and on a par with London, New York, Sydney, Tokyo and Paris. This would suggest that there are sound fundamental reasons for income-investing in Brazil – especially by investors in regions where interest rates, and hence the opportunity cost of money, are low.

In terms of absolute rent levels, does Brazil look overheated? On the world stage, rents in its two major cities are less than 40% of the world city average and well below the cheapest world cities of Shanghai and Mumbai.

This is despite the fact GDP per head in Brazil is nearly 25% higher than in China and nearly three times as large as India. By this measure, Rio and São Paulo look cheap by comparison to other ‘new world’ compatriots.

What is the Savills Executive Unit?

In order to compare the cost of residential real estate across different global cities, we use the Savills Executive Unit (SEU), which measures the cost of housing an identical group of people in various different countries.

By comparing a group of real people, our cost comparison of residential real estate has a ‘real world’ relocation story at its heart. We take a typical ‘executive unit’, a group of people that might start up or expand a global business in any country, and then compare the residential accommodation that they would be likely to inhabit in each of the world cities.

The people who make up our SEU include one middle aged ex-pat CEO, one senior ex-pat director, a locally employed director and four locally-employed administrative staff. They each live in different types of household, some with children, some with partners and some without, and each member of the group chooses different types of locations and different types of property in which to live.

It is by comparing the accommodation costs of these people that we can truly compare the cost of residential real estate across some very different global cities.

Taken from
Spotlight: Brazil Residential Property Market