This report does not constitute a rating action.
Key Takeaways
- Given Brazil's currently sluggish economic growth and high interest rates, S&P Global Ratings expects greater cash burn among domestic homebuilders. However, the government's recent initiatives and the likely decrease in interest rates should mitigate potential short-term liquidity pressures for developers.
- We expect margins across most of the rated companies to recover as of the second half of 2023. This would stem from recent changes to Brazil's federal housing program Minha Casa, Minha Vida (MCMV) and the update in the construction cost index's calculation methodology.
- Mid- and upper-tier developers should benefit from recent changes in the city of São Paulo's Strategic Master Plan that increase the land availability and the construction coefficient (area constructed by the area of the land).
- Consequently, we expect operating figures, cash flow, and credit metrics to improve during the next few quarters for the majority of the rated Brazilian homebuilders.
Changes In MCMV Could Mitigate The Impact Of Inflation-Fueled Price Hikes On Low-Income Housing Builders
Companies operating in this segment took a hit from inflationary peaks in 2021 and 2022 because they were prevented from increasing their prices given the MCMV program's price ceilings, while the operating and construction materials costs rose sharply.
In July 2023, the federal government introduced some changes to the program. These included raising the home price ceiling to R$350,000 from R$264,000, higher subsidies for homebuyers, and lower mortgage rates for qualified families with a monthly income below R$2,000. (Along with other planks, the MCMV program consists of various brackets, which set the minimum family incomes and maximum home prices to qualify for government funding for mortgages and construction.) Prior to the change, homes worth above R$264,000 didn't qualify for the program, forcing buyers to use the SBPE financing, which often has higher interest rates than mortgages through MCMV. (Homebuyers can take out mortgages funded by the special consumer bank savings in the Brazilian System for Savings and Loans [known by its Portuguese initials as SBPE]). More specifically, for a mortgage amount of R$350,000, the initial installment could be 13.4% lower through MCMV than through SBPE (see chart below). In this context, a family with a gross monthly income of R$8,000 would be able to buy a home through MCMV, compared with an income of R$9,100 under the SBPE financing.
Another important factor to be taken into account is the lesser necessity to apply for pró-soluto credit (financing granted by the homebuilder to the homebuyer), given the possibility to increase the amount to be financed through MCMV. Consequently, we believe some of the homebuilders may decrease the share of pro-soluto financing from 20% to 10%-15% of the home unit's value, decreasing the developers' exposure to homebuyers' credit risk.
In our view, these changes will allow more families to access the MCMV program--expanding the pool of potential homebuyers--margin recovery on newly sold home units, and lower demand for pró-soluto credit. We expect these factors to bolster homebuilders' financial results, which will strengthen their credit profiles in the upcoming quarters.
Supply-Chain Pressures Dented Margins Of Mid- And High-Tier Homebuilders
During 2020 and 2021, the construction material costs jumped, affecting projects launches, and consequently denting the homebuilders' gross margins. Moreover, these increases were not reflected in the National Index of Construction Costs (known under its Portuguese acronym of INCC), which mid- and high-tier developers use to adjust the prices for units sold during the construction phase. However, the INCC index methodology was revised in July 2023 and will now follow closer the homebuilders' real costs, which should mitigate the mismatches we saw in the past, and consequently, better protect developers' margins.
The Rise In Number Of Launches, CDI Rate-Linked Capital Structures, And High Basic Interest Rates Drained Cash Flows
Brazilian homebuilders increased significantly the volumes of launches in the first half of 2021 and contracted more debt to support this growth. However, basic interest rate soared to 13.75% from 2%, causing the companies' interest expenses to jump as CDI rate-linked debts averaged 60% of their funding as of first quarter of 2023. As a result, low-income housing developers' average adjusted funds from operations to debt ratio fell to 6% in 2022 from 13% in 2021. Meanwhile, the ratio among their upper-scale peers dropped to 11.4% from 28%.
In our view, builders will continue to report weaker credit metrics until mid-2023, but which will start improving gradually in the last quarter of the year, once Brazil begins the monetary easing cycle and developers deliver the high number of recently completed home units. We expect basic interest rate to decrease from 13.75% to 12.5% by the end of 2023 and to 9% in 2024.
Changes To São Paulo's Strategic Master Plan Should Spur Residential Construction
On June 26, 2023, the city of Sao Paulo (the country's largest housing market) unveiled amendments to its Strategic Master Plan for its development and growth. The changes to the plan increase the construction coefficient (area constructed by area of the land) by 50%, expand the area on which tall buildings can be constructed, and raise the number of potential parking lots. As a result, we believe the land availability for construction will increase in the city, which together with higher construction coefficient, should benefit the local developers, especially the mid- to high-tier players.
Housing Developers Should Post Healthier Cash Flows In 2024
We expect low-income housing builders' cash flow to strengthen in the upcoming years as a result of the MCMV program's new parameters and given that their sales portfolio comprises mostly MCMV financing and crédito associative, resulting in cash flow generation during the construction phase. Operating cash flow of their upper scale peers should also improve from the drop in inflation that we're currently expecting to occur in the second half of 2023, lower interest rates, and the rise in the employment rate.
| Rated Brazilian Homebuilders | |
|---|---|
| Company | National scale rating |
|
Direcional Engenharia S.A. |
brAAA/Stable/-- |
|
BRZ Empreendimentos e Construcoes Ltda. |
brA-/Negative/brA-2 |
|
Construtora Tenda S.A. |
brBBB-/Negative/-- |
|
Cury Construtora e Incorporadora S.A. |
brAA+/Stable/-- |
|
Cyrela Brazil Realty S.A. Empreendimentos e Participacoes |
brAAA/Stable/-- |
|
Emccamp Residencial S.A. |
brA+/Stable/-- |
|
Even Construtora e Incorporadora S.A. |
brAA+/Stable/-- |
|
Kallas Incorporacoes e Construcoes S.A. |
brA+/Stable/-- |
|
MRV Engenharia e Participacoes S.A. |
brAA-/Negative/-- |
|
Tecnisa S.A. |
brA/Stable/-- |
|
Trisul S.A. |
brA+/Negative/-- |
| Primary Credit Analyst: | Valeria R Marquez, Sao Paulo 55 (11) 3039-4843; valeria.marquez@spglobal.com |
| Secondary Contact: | Wendell Sacramoni, CFA, Sao Paulo + 55 11 3039 4855; wendell.sacramoni@spglobal.com |
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