The Brazilian capital markets have grown in recent years - not only due to significant new financial products that have increased the options available to investors, but also because of a period of economic stability, a reasonable long-term interest rate and the creation of new forms of liquidity for different sectors of economic activity.

A strong demand for residential, commercial and industrial real estate ventures has led the civil construction sector to seek alternative funding options outside of the banking system. In turn, this has led to the securitisation of assets or mortgage-backed securities - a national innovation in the financial market created by economic agents to finance the real estate market without bank intermediation or limits.

The regulatory framework for the real estate securitisation of receivables is based on the main US securitisation rules. The concept of securitisation is linked to credit risk transfer and financing to facilitate the anticipation of resources with low cost and no impact on the borrower's bank indebtedness.

In Brazil, only securitisation companies acting as non-financial institutions are responsible for the purchase of receivables from builders and realtors. These special purpose companies then issue standardised securities (certificates of real estate receivables (CRIs)). CRIs are debt securities which are sold to the market by public offerings, including with limited underwriting efforts or direct private placements. Thus, securitisation helps to:

  • give more strength and credibility to the operation;
  • evaluate the claims that serve as ballast to CRIs; and
  • give contractual guarantees to encourage the housing market through innovative and effective forms of financing.

The numbers of securitised real estate loans and issued CRIs are increasing every year, thereby assuming a greater representation in the capital markets. However, curiously, despite the significant growth, their use is limited and the number of investors and issuers is restricted to a select group.

The combination of several factors, such as a fast-growing middle class, a considerable deficiency in real estate, easier access to credit and a number of new government initiatives, has placed the real estate sector at the top of the investment list, particualrly for foreign investors. The stable economy, the granting of investment grade, a 40-year low interest rate and an increase in institutional investment allowances for real estate assets from 8% to 18% are all promising examples of Brazil's real estate investment expansion. Furthermore, Brazil is hosting the 2014 World Cup and the 2016 Summer Olympic Games, which traditionally are regarded as great sources for real estate investment and infrastructure development.

The creation of a public offering with limited underwriting efforts, as well as the recent regulation of real estate funds, has reduced the time, costs and red tape involved in offering securities in Brazil.

The securitisation market is also presenting itself as a useful tool for the real estate sector, particularly through CRIs, which are backed by real estate credit receivables (the Brazilian equivalent of mortgage-backed securities), and investment funds designed exclusively for real estate investment, which allow for considerable tax benefits to investors.

For further information on this topic please contact Carlos Eduardo Peres Ferrari at Lobo & de Rizzo Advogados by telephone (+55 11 3702 7000), fax (+55 11 3702 7001) or email ([email protected]).