B?RIC: Rio Real Estate Market Expects Volatility in Lead Up to World Cup & Olympics

“Buyers would just pour in until not too long ago,” says Lucia Faro, who has been selling new apartments in Rio’s beachside Barra da Tijuca neighborhood for five years. “Now, I have to chase them, and I’m offering bonuses in some cases to convince them to buy a unit.” For the past three years, Faro was kept busy by a flood of phone calls from people interested in buying apartments in Rio de Janeiro on the heels of oil discoveries, announcements that the beachfront metropolis nudged between green forests and the Atlantic Ocean would host the 2016 Olympics and the 2014 World Cup.  But, as of late, she has been the one doing the calling, as Rio De Janeiro’s booming real estate market – which has made it as expensive as  New York and Paris – begins to thaw.

With a new middle class arisen from demand for Brazilian commodities, Brazilians were eager to buy their own homes, which led to relaxation on mortgage requirements, according to Bloomberg.  But the volume of mortgage lending slowed to a tw0-and-half-year low in July. “We don’t expect to see over the next six months the same exuberance we’ve seen in real estate over the past five years,” says Marcio Guedes, head of investment banking at J Safra Banco de Investimento.

The broader economy in Brazil – heralded as one of the BRIC nation’s tasked to pull the world out of depression – expanded at only a rate of 1.6 percent in the second quarter due to weak demand for exports. Clearly, the US and Europe have softened their import demand due to problems in those countries. The 1.6 percent figure is down from 2.7 percent in 2011 and 7.5 percent in 2010. Currently, Brazil is growing less than Russia, India and China – other BRIC nations.

Brazil’s industrial production fell 2.9 percent in July from July 2011 due to declines in manufacturing and construction, while Brazil’s Bovespa stock index is down. Personal-loan defaults hit their 30-month high at 7.9 percent in August.

“In practice, the market is sort of healing itself,” says Thomas Shapiro, president of New York-based real estate investment company GTIS Partners, which has stake in Rio.

Rent in Rio was getting very expensive for a Latin American country. Ron Radnik, a Chicago native, rented a 3,550 square foot apartment in a seaside neighborhood outside of Rio for 19,000 reais ($9,300) a month. “Five years ago, maybe it would go for 11,000, 12,000 reais,” he says. “I’ve seen apartments that even the expats can’t rent because they’re so expensive.”

Rio has grown to become the 13th most expensive city in the world for expatriates. Sao Paulo is 12th, making Brazil a costly country for expatriates. But, prices are now falling in the most high-end neighborhoods, according to Radnik. In August, he knew of a couple that was looking for a modern 150-square meter apartment in Ipanema, Rio’s most famous seaside enclave, for up to 8,000 reais a month. But, it did not seem to exist.

The Olympics are expected to throw the market into a chaotic period, as thousands of units are set to be made available at the same time.  In the run-up to the Olympics, the city’s real estate market is expected to be dampened by $88.4 billion in construction to expand highways, trains and dedicated bus lanes.

“People were betting prices would explode here, and they did rise a lot, but now I think buyers are starting to realize many projects were overvalued,” Luiz Carlos Torres says. “I have clients who bought two-bedroom apartments here for 195,000 reais in 2010,” Torres says. “They’ve been trying to sell them for around 480,000, but everyone thinks that’s way too much.”