The "Risk On" Trade...Brazilian Style

The new middle class in Brazil is growing…and spending their newfound wealth. Brazil is booming. And Brazil’s northeast is growing at a faster rate than the rest of the country.

The most exciting story to emerge from Brazil in recent years is the rise of the middle class. In the last eight years, Class C (Brazilians earning $650 to $2850 a month) grew quickly. Today, 94.5 million people fall into Class C. They are driving the Brazilian economy, buying cars, washing machines, vacations, and new homes.

Investors in stocks and shares are riding the wave of this newfound wealth, betting on Brazilian companies that target domestic consumption.

Drawn by hundreds of miles of beaches, it’s to the northeast coast that Brazil’s new, up-and-coming class comes to vacation and retire. This is good news for the rentals business here. Moreover, this is a great beach base for you if you’re a globetrotter.

Now, imagine your ideal retirement getaway.

Maybe you see the surf of a turquoise sea gently lapping a beautiful sandy beach.

You may simply want to escape the cold winters back home…or perhaps you’re in the market for a new full-time home. Maybe you imagine a life where you travel for six months and spend the other six at your overseas retreat.

Whatever you dream of, that life really can be yours – for much less than you’d imagine. In fact, your retirement escape could actually make you money. João Pessoa is a place where you can embrace this lifestyle without hurting your bank balance.

Coastline of Joao Pessoa

João Pessoa is the capital of the state of Paraíba. Surrounded by miles of beautiful beaches, this is where many Brazilians from southern cities come to retire, vacation and buy second homes. It’s one of the safest capital cities in Brazil…with a healthy outdoors lifestyle, centered on the beach and boardwalk. The city is popular as a retirement destination for senior civil servants.

The city has 1,730 acres of forest, providing a green backdrop to almost 25 miles of beach. João Pessoa has some of the nicest city beaches you’ll find anywhere. Moreover, beachfront properties are still affordable…and there’s a line forming of potential renters for your condo, when you’re not there.

While popular with tourists, João Pessoa doesn’t offer much choice when it comes to hotels. The four-star Verde Green is the city’s newest and nicest hotel. Not that it has a lot of competition…the other hotels are two- or three-star, and “tired.”

Yet according to my sources on the ground, estimated occupancy rates average 86% year-round. Rack rates in the Verde Green are in the range of $113 to $226 a night. Quality short-term rentals are difficult to find and command $468 per week for a small one- or two-bed unit.

The best place to buy for rental is the prime residential area of Cabo Branco. Development is limited here by the city’s 1,730 acres of protected forest to the back, and the boardwalk to the front. Cabo Branco sits between the ocean and the forest on a thin triangle of land.

You’ll find uncrowded stretches of beach, and the city’s nicest restaurants and boardwalk kiosks here. It’s a favorite with holidaymakers, younger retirees and second-home owners.

Riacho Verde, for example, is a small project of 55 units located a block from the beach in Cabo Branco. Unit sizes here range from 592 square feet to 1,431 square feet. Prices start at $146,207. The rental demand for this type of condo is strong. The building will be constructed as a condo building but with hotel-type amenities.

Projects like this sell fast. They are in hot demand. For short-term rentals, the average daily rate could be $73. Based on a 70% occupancy rate, that means $18,650 annually.

Property management fees run around 25% – leaving almost $14,000. Enjoy a couple of months here yourself in the low season and you can still enjoy a healthy yield.

“I cannot stress enough how strong the rental demand is for units like these,” John Curtis, a real estate agent in João Pessoa, told me recently. “We have a waiting list of companies and individuals looking for accommodation…”

About 700 kilometers up the coast from Joao Pessoa, the beachfront city of Fortaleza is also booming. Fortaleza is benefitting directly from the spending power of the new middle classes. It’s the top tourism destination for Brazilians. Passenger traffic through Fortaleza airport in 2010 reached 4.16 million passengers by the end of October. That’s an increase of 22.4% compared to the same period the previous year…and 2009 was a record year for passenger numbers.

Brazilians come to Fortaleza for the vibrant nightlife, excellent restaurants, and beautiful beaches. East and west of the city, white-sand beaches run for miles. On the east side, Brazilians tourists head to a giant water park (South America’s largest), a cluster of little beachside bars, cafes and clubs at Praia Futuro, and some amazing colored cliffs at Morro Branco.

West of Fortaleza, the beaches roll to the horizon…silky, fringed with coconut palms, and luxuriously empty. Many foreign tourists come here to kite surf. Forbes reckons this sport is the new golf for Silicon Valley executives. The fresh ocean breezes west of Fortaleza provide the perfect environment for kite surfers. Little beach towns like Cumbuco offer chic lodgings, and kite surfing schools. For the rest of us, those ocean breezes keep us cool in our hammocks in the afternoons…

You can profit from Fortaleza’s strong economic and tourism base. Mid-level executives relocating to the city, and tourists alike, face a shortage of hotel rooms, and suitable rental condos. That makes finding decent long-term and short-term accommodation difficult. But it means rental opportunities for property buyers.

So when you consider Emerging Market investments, don’t forget to consider Emerging Market real estate.


Ronan McMahon and Margaret Summerfield,
for The Daily Reckoning

The Daily Reckoning