Brazil commercial rents to fall on excess supply, analysts say
SAO PAULO Dec 9 (Reuters) - Rental prices for Brazilian commercial real estate are set to decline in 2014 due to excess supply and declining occupancy rates, analysts said.
Prices in Sao Paulo, Brazil's biggest market for office space, have fallen 8.8 percent over the first nine months of this year, compared with an average 12 percent compound annual growth rate between 2007 and 2012.
The slowdown should extend into next year as supply continues to rise, analysts said. In the fourth quarter of this year another 205,000 square meters of office space will become available in Sao Paulo's central business districts, about 2.3 times the average of the last four years for the quarter, according to estimates from global real estate firm Cushman & Wakefield.
"Real estate firms have already had to renegotiate rents in order to reduce pressure on vacancy rates," said Marcelo de Costa Santos, vice president of capital markets valuation and advisory at Cushman in Sao Paulo.
Periodic mismatches between supply and demand are typical of the real estate industry, where new developments often take years to reach completion.
"The sector's cyclicality is typically driven by alternate periods of over- and under-supply, and we believe Sao Paulo city could be entering the decline part of the cycle," Credit Suisse Securities analysts led by Nicole Hirakawa wrote in a recent report.
Cushman estimates that new buildings delivered between 2013 and 2015 will account for almost 60 percent of available corporate office stock in Sao Paulo in 2015, ahead of Mexico City, Santiago and New York.
"A significant number of projects will be completed in Sao Paulo over the next 12 months. This, along with reduced demand, will drive up vacancy and exert downward pressure on pricing in existing buildings until 2015," Maria Sicola, head of research for the Americas for Cushman, wrote in a global report released earlier this month.
Cushman expects vacancy rates in Sao Paulo to close the year at 17.5 percent, rising to 21.3 percent in 2014 and 23.8 percent in 2015.
Not everyone sees a decline in rental rates as a symptom of oversupply.
Claudio Bruni, chief executive of leading Brazilian developer BR Properties SA, pointed to "more cautious demand due to the macroeconomic situation."
Bruni said prices at the company were "reasonably well protected" this year, hovering around 150 reais per square meter for triple-A quality properties in Sao Paulo, above the average of 133.5 reais in the third quarter and 146.4 reais in the fourth quarter last year.
"Our view is that the Sao Paulo market presented good demand for space from July on, principally in the regions in which we operate," Bruni said.
Some developers, such as U.S. real estate fund manager Paladin Realty Partners, said they are concentrating on Rio de Janeiro, Brazil's second-largest market for commercial real estate, where rental prices look more attractive.
Rio de Janeiro will also be affected by an increase in supply in coming years, according to Credit Suisse's Hirakawa, who forecasts an up to 70 percent increase in the inventory of high-quality office space in the city from now until 2015.
Hirakawa noted that while many developments in Sao Paulo are already nearing the delivery stage, many Rio properties will depend on the completion of the city's port redevelopment project, which "can take many years to occur."
"The new supply should be mostly of high quality buildings, representing a threat for lower quality inventory," she wrote.
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