Minha Casa, Minha Vida

What is it?
Why is it good for investors?
Why is it in place?
How can I share in the profits being earned?
What does the future look like? Will demand remain strong?
How does it work in detail?
MCMV Update: The ground realities in 2013

What is it?

There's a severe social housing shortage in Brazil, in both quantity and quality, currently estimated to be between 7m and 10m homes.  The Minha Casa Minha Vida programme (MCMV)  is a major part of the Brazilian Government's Growth Acceleration Program, launched in 2009, and is intended to rectify the shortage of good quality housing in the medium term.

Why is it good for investors?

The Government is funding construction for these new homes. The Federal Government has allocated US$43mn of Brazil's US$375m foreign exchange reserves to investment in infrastructure and housing, and is providing mortgages to developers and house buyers through the state banks,  Caixa Economica Federal and Banco da Brasil. Caixa Economica Federal is the largest public bank in Latin America and leads the Brazilian mortgage market.

Why was it started?

The MCMV programme has four main objectives:

  • Principally, to improve housing for the majority of the Brazilian population.
  • To use the wealth being created by the sale of oil and raw materials in the growing Brazilian economy, by converting that wealth from raw material assets into strong housing stock.
  • To encourage inward investment to assist in this huge MCMV programme by using public money as gearing to attract private finance, and
  • To provide a core economic activity of continuing residential house-building to stimulate the economy in the medium term.

As a result, the programme is now exceedingly popular with lower middle class Brazilians, and is a vote winner for politicians with the burgeoning middle class.  So it can be expected to continue for the foreseeable future, irrespective of which party wins elections.

This stability of intent is why construction companies are looking for private investors to finance these social housing projects

The programme is creating a virtuous circle of mutual benefit:

  • Middle class house buyers receive new homes
  • Country invests its wealth and gains an improved housing stock
  • Private investors receive good returns in an asset-backed, secure investment and
  • The Government receives both praise for making a step change in the condition of the middle class voters, and achieves business activity to underpin economic growth.

How can I share in the profits being earned?

You can invest in this scheme, helping local Brazilian families to gain a much improved quality of home, and make a good return on your investment.

The scheme was devised to create a virtuous circle whereby investment was encouraged to help the Government fund such an extensive programme.

Not only are individual projects profitable but the repeat investment opportunity will give continuing growth of the invested funds.

Looking ahead

Standing back from the national issues, it is clear that the housing deficit is a substantial structural social problem across the country. Such a challenge needed a large and visionary scheme to solve it.

MCMV is just such a scheme, attracting substantial foreign capital, delivering profitable schemes for developers and investors with returns close to 30% per year on the invested funds, and thereby encouraging repeat investment for the future.  So far MCMV is delivering the goods

Investment options can take various forms:

  • for High Net Worth investors, a share investment for profit sharing, or
  • for any property investor, a fixed rate of return of 20% p.a. over a shorter 1 year period, or
  • a property investment to benefit from the continuing property appreciation, where 4:Property manages the tenanted properties throughout the period.

Investment can be between £20,000 and £300,000, according to the approach that suits the investor.

What does the future look like? Will demand remain strong?

This programme will continue. Why? The median age in Brazil is 25, so family formation is occurring rapidly and without this programme the housing deficit would increase quickly. This would not be popular. There is still a deficit of nearly 8m when comparing families seeking to buy a home  with the number of homes for sale.

Currently many young people are forced to live with their parents until relatively advanced ages due to the lack of available housing.  Here too, this programme is a vote winner. The programme will continue and demand is confidently expected to remain strong.

How does it work?

For the nation: The programme is being implemented in all the major cities across Brazil, to provide much improved accommodation in areas where there is accessible employment. The key locations are the suburbs of the cities which are well connected to the city centre and/or have substantial established industry to provide employment. Thus, those of us who are part of the programme use that clear criterion as a key part of site selection so that our sites all qualify for the MCMV programme

As the programme is mainly directed to the low-income population, the government funding of over US$4bn per year is provided through the two state banks, Caixa Economica Federal and Banco da Brasil to give the people confidence in the programme. The Government-owned federal banks offer facilities where families can go to be means tested and are given a certification of the mortgage that they can have to buy a property. This is at an attractive (subsidized) interest rate for both the buyers and builders.

The program is very well subscribed and the challenge is now to keep up the supply. The main beneficiaries will be those families with gross income up to 10 times minimum salaries and this section of society will dominate the residential market over the next 5 years. By 2016, the demand for this class is expected to be approx. 10.4 million new homes.

Announced in March 2009, Minha Casa Minha Vida is the solution that the Federal Government has found to promote access to housing for millions of Brazilian families who would hardly have access to it otherwise.

MCMV was initially committed to building 1 million homes for low-mid income families by 2011, 3m by 2014, and 27m by 2029. In 2013, it is behind that timetable in these early years, but gaining momentum. Obviously, the structural and long-standing problem is far from solved, but a good start has been made and life has been transformed for many.

For the middle class Brazilian families who are buying: The MCMV program facilitates housing credit for households that otherwise would not have access to regular credit institutions. Mortgages were not available to the middle class at all prior to 2007, so a state funded mortgage is seen as a blessing.

Buyers can acquire a mortgage for the first time, whereas in the past they could only buy homes for cash, so now more funds are available to them. This means that they can now buy a house for the same cost as renting a property.

Financial support is greater for poorer families and ranges from 25% grants for the poorest, through to subsidised mortgage interest rates, loan-to-values up to 100%, waived arrangement fees, credit insurance, down payment loans at almost zero interest and payment protection.

Households with income above three minimum salaries a month are responsible for enrolling into the program for which they qualify and the scheme is available to those with family incomes of up to 10 times minimum wage.

The family selection process is made by the government banks and it is possible to buy the property without an initial down payment, the main requirements are that the family buyers must
• not be homeowners or participate in any other finance program
• not exceed the program gross income patterns
• commit to spend at least 10% of their gross income

The program will finance property purchase up to a stated ceiling mortgage value in any local area, the value of which varies in the different states and regions across the country.  So the maximum mortgage given depends on where you live. In Rio and Sao Paulo it's as high as R$130,000 whereas in cities with more than 500,000 inhabitants e.g. Aracaju or Fortalezza the limit is nearer R$100,000.  For smaller cities the cap is R$80,000.  Qualification is means-tested based on a family's total income to minimum wage ratio.

MCMV Update: The ground realities in 2013

As always, there are mixed reports, with successes and problems.  The 20 year programme is still in the early years.  It is showing all the issues of start-up, and different successes and problems have appeared in different places. On balance, the programme is well received and thought to be a milestone in improving housing for the middle class Brazilian population.

Successes

The principal beneficiaries are the families gaining much improved accommodation.  The main successes have been at the macro/national level and are seen to be in the provincial cities across the country, where house construction has become more active and quality much improved by the new units.

The program was successfully launched and nearly 1m units were completed by the end of 2012, which is a year behind plan, but the momentum is growing. Take-up is increasing and the delivery has been accelerating, but construction is a two to three year cycle,  so in the first three years start-up problems have hampered delivery and catch-up will be progressive.

For buyers : The main aim of the programme is to improve the quality of housing for the lower middle class, and it is expected to do that substantially.  That is being achieved, slowly but surely, and will continue to deliver if the MCMV Program runs its full course.

For the Government : Improved housing and access to extra capital as a Public Private Partnership (PPP) has been successful. This popular, vote winning, economic stimulus to maintain and underpin growth from investment derived from natural assets (the oil, iron, food and the generated FX reserves) is being achieved.  State Funding of R$4bn per year is attracting substantial foreign investment into Brazil.  The two state banks, Caixa Economica Federal and Banco da Brasil are operating the scheme well and demand is far outstripping supply.

For municipalities and state capitals : There is a short supply of these approved new homes across the country. The states and the municipalities cannot grant construction permits fast enough to keep up with demand. Each municipality is given an allocation of funds for the pre-defined income brackets.

For developers : The developer will find a site,  achieve planning permission for a scheme, then handle the full marketing and sales activity, signing up buyers before construction.  The developer knows exactly how much profit they will make before they start construction and they trade some of this profit in exchange for rewarding the capital provided by the third party investor.  The developer normally receives the first Caixa payments within 3 months of building starting and payments from the buyers and the bank each month against architect’s certificates.  Once the site is completed, the property deeds are transferred to the buyers and the developer and investors receive their original investment plus profit.

For investors : MCMV provides the security of site ownership in an appreciating market, a very favourable planning environment, good returns, and a known exit route for their investment.

Problems

The main problems are both those common to any new program, slower start-up than planned, and notably significant problems have occurred in the teeming cities of Rio and Sao Paulo.  The funds are huge, and so temptation is greater and there have been examples of bad practice amongst building companies and corruption amongst public employees. Here, where the issues are larger, some political mischief has led to complaints from the opposition party.

Quality : Nationally, the programme has been well received but locally there have been examples of poor quality and delivery, often related to activity in Rio and Sao Paulo.  In or near these big cities there have been numerous examples of hasty development, leading to problems with inappropriate locations, construction of poor quality and on cheap land to increase profits, with apartments of less than 42 square meters, far from centres of commerce and without proper transportation.

Financially : There has been journalistic comment and a growing concern that the Brazilian Government is giving away billions of Reals as sub-prime mortgages, which may cause a later sub-prime problem.  However, given the current deficit of available (let alone good) housing, the increasing wealth of the country, the raw material reserves and likely future world demand, and the low % of middle class home owners in Brazil currently with a mortgage (below 3% nationally), this quality housing programme is unlikely to give rise to such problems in the foreseeable future.

Delivery : The overall programme has been slower to start than planned. The program has also already completed two years without delivering any residential property in Sao Paulo City to the families at the lower end of the target population, ie. those who earn less than three minimum salaries. The reason for this is that the high costs of land and infrastructure there make it practically impossible to build homes to be sold for below 52.000 Reals, the Government specified price.  This pricing was too low in Sao Paulo to generate profitable construction business, but steps are now being taken to rectify the situation.

Fairness : People from some smaller municipalities also complain that the program denies them the chance of buying their own house. As a result, these people are encouraged to move to bigger cities, a decision that will significantly increase the population in these areas, as well as the unemployment level.  Also, families of two are allocated the same size apartment as a family of ten or twelve. However, these implementation difficulties are being addressed.

On balance

So, on balance, there are successes and failures, but the successes are the general rule, with the disappointments being either teething problems, or in localised areas as a result of specific issues or normal developing nation bureaucracy issues. 

The expectation is that this programme will go from strength to strength for many years yet.

Looking ahead

Standing back from the national issues, it is clear that the housing deficit is a substantial structural, social problem across the country.  Such a challenge needed a large and visionary scheme to solve it.  MCMV is just such a scheme, attracting substantial foreign capital, delivering profitable schemes for developers and investors, with returns close to 30% per year on the invested funds, and therefore encouraging repeat investment for the future.  Although in its early stages, MCMV is delivering the goods.

Building improved homes for Brazilian residents