Key Takeaways
- Changes in Brazil's federal housing program Minha Casa, Minha Vida (MCMV) have been boosting housing starts and homebuilders' sales since 2023. Given additional changes to the program implemented earlier this year, S&P Global Ratings expects the operations of low- to mid-tier homebuilders to continue expanding and improving in 2024 and 2025.
- We expect lower construction costs and deliveries of projects that suffered from supply-chain disruptions to strengthen profitability in 2024. This, along with lower interest expenses and increased mid-tier home deliveries, should bolster cash generation.
- Improved operating metrics should help reduce homebuilders' leverage, despite our expectations of debt refinancing in 2025.
- São Paulo's housing program, Pode Entrar, will help lower homebuilders' cash flow exposure. In addition, the program's structure, including delinquency safeguards, coupled with lower marketing expenses, will improve the homebuilders' operations.
Chart 1
Recent MCMV Changes Should Continue To Bolster Operations In 2024
Housing starts among low- to mid-tier developers jumped by approximately 40% in 2023, while net sales increased by 32%. This stemmed from higher housing demand due to MCMV changes, which expanded potential homebuyers' access to the program. We expect housing starts to increase by 15% in 2024 and 9% in 2025 as homebuilders manage inventories and net sales. We forecast the latter to rise by 14% and 9% for both years, respectively.
These projections incorporate the latest amendments to the MCMV program, including the changes in the FGTS Futuro and the RET. In March 2024, the Severance Indemnity Fund for employees (Fundo de Garantia do Tempo de Serviço [FGTS]) Curator Council approved the FGTS Futuro. This program allows families with monthly incomes of up to R$2,640 to use the future FGTS monthly deposits for the settlement, amortization, or payment of MCMV's mortgage installments, enhancing access to home financing and boosting demand in the segment. Additionally, the Federal Revenue Service reduced the Special Taxation Regime (Regime Especial de Tributação [RET]) from 4% to 1% for home sales falling within the MCMV's Group 1.
Among the homebuilders we rate, MRV Engenharia e Participacoes S.A. (MRV) and Construtora Tenda S.A. (Tenda) have the largest portfolios in this program segment. Approximately 30% and 60% of their recent gross sales, respectively, fall within Group 1. We believe these changes should benefit companies heavily concentrated in this program segment, resulting in higher margins, demand, and cash generation.
For more details about the MCVM program, please see "Recent Developments Signal Favorable Trends For Brazilian Homebuilders", July 25, 2023.
Profitability And Cash Generation To Jump In 2024
The cost of construction materials skyrocketed in 2021 and the first half of 2022, given work stoppages due to the pandemic and supply-chain disruptions. As a result, homebuilders' EBITDA margins dropped by an average of 6 percentage points in 2022 and 2023.
However, given that a significant portion of projects affected by supply-chain pressures was delivered between fourth-quarter 2023 and the first half of 2024, we believe credit metrics will improve gradually from 2024 onward. We expect a 6-percentage-point increase in EBITDA margins in 2024, driven by companies recognizing the results of more profitable housing starts in 2023, and a 1.5-percentage-point margin rise in 2025. Additionally, the reduction in the SELIC rate (expected to reach 10% by the end of 2024 in our macroeconomic base line), lower cash exposure due to benefits from associative credit and home sales through the MCMV program, and a high volume of deliveries of mid-tier homes should boost cash generation starting in 2024. We project an average operating cash flow of R$121 million in 2024 and R$206 million in 2025 among the six rated low- to mid-tier homebuilders, compared with the loss of R$8 million in 2023 (excluding MRV).
Chart 2
Operating Improvements Should Help Reduce Leverage Amid Expectations Of Debt Refinancing In 2025
Approximately 60% of the debt among these rated homebuilders consist of debentures and other corporate debt instruments. The remaining portion is related to construction credit lines, which in addition to being directed towards each company's production, are linked to unit transfers to banks through real estate credit.
Chart 3a
Chart 3b
Out of the total corporate debt outstanding among the six rated low- to mid-tier developers, around 25% will mature in 2025, representing R$2.1 billion. Considering the expected cash generation in 2024, the cash-flow benefits from the MCMV program and associative credit, we believe that these companies will use cash to cover some of the amortization to reduce leverage.
However, a significant portion of corporate debt will likely need refinancing, prompting homebuilders to tap capital markets and financing from banks. Additionally, with the likely growth in housing starts, despite the slower pace than in 2023, we believe homebuilders will seek financing from capital markets to execute projects and acquire land. Therefore, given better operating metrics, coupled with the slower rise in housing starts, we expect companies reduce their leverage, resulting in average FFO to adjusted debt of 32.6% and adjusted debt to capital of 55.8% in 2024. This is in comparison with 20.6% and 60.6% averages, respectively, in 2023.
Regulatory Changes Facilitate Capital Raising At More Attractive Rates
The introduction of Resolution CMN 5,118 on Feb. 1, 2024, restricted the eligible collateral for the issuance of Real Estate Receivables Certificates (CRIs). The primary objective of this change is to prioritize the allocation of funds raised through CRIs to companies in the real state sector. As a result, the pool of potential issuers has significantly narrowed. In our view, this should reduce competition for financing, enabling companies focused on real estate to raise capital at more attractive rates.
Sao Paulo's Housing Program Will Strengthen Cash Flow
The city's Pode Entrar housing program, announced in 2023, aims to simplify access to financing for potential homebuyers, reduce the housing deficit, and address the demand previously met by the MCMV program. While home sales under the Pode Entrar program may yield lower gross margins than for those in private markets, the dilution of general and administrative expenses, along with lower marketing expenses, should raise homebuilders' EBITDA margins. Additionally, the program's subsidies covering 15% of the home value, along with payment flows up to delivery of keys, prevent homebuilders' cash burn during construction.
Furthermore, in case of mortgage delinquency for homes sold through the program for more than three months, companies have the right to cancel the agreement, retaining 20% of the payments made by the government, and sell the home under the MCMV program in the private market. This ensures companies won't face cash flow shortages, securing receivables even in case of delinquency from the city hall.
In 2023, Plano & Plano Desenvolvimento Imobiliario S.A. (not rated) sold 66% of homes through the Pode Entrar program, followed by Direcional (18%), MRV (12%), and Tenda (4%). Collectively, they sold 5,496 residential units, representing a PSV of R$1 billion. From our perspective, this arrangement will benefit companies' operational cash flow in the upcoming periods.
Potential Macroeconomic Risks for Low-tier Homebuilders
Despite the latest news mitigating potential macroeconomic risks for low-tier sector, a consistent and long-lasting increase in inflation may harm margins and cash flows of companies focused on the low-tier segment.
Potential Financing Shortage Despite The Government's Plans Supplement The 2024 Budget
Given the changes in the MCMV program carried out in 2023, demand for housing through the government program has shown signs of overheating since the beginning of 2024. Demand has surged that if it continues at this pace, it will require a budget increase in the second half of the year. The government has signaled that it will do so. Otherwise, we believe that new financing for purchase and construction of housing under MCMV could be frozen at the end of 2024, denting home sales.
INCC At Controlled Levels
The National Index of Construction Cost (INCC-M) increased 0.93% in June 2024, as a result of higher inflation of inputs, services, and labor in the construction sector. Nevertheless, the trend seems to point to a stabilization in construction costs, as indicated by the accumulated rate in 12 months of 3.77%, which remains close to the 3.68% in May 2024. These levels are much lower than 4.29% in June 2023. Although most of the rated companies in this sector have some cushion in their budgets to absorb possible increases in inflation, we believe that a substantial increase in this index may eat into margins of companies' projects with a higher percentage of completed sales, given difficulties in updating the monthly payments through the MCMV program.
Notes
MCMV. A Brazilian social housing program that aims to provide affordable housing to low- and mid-tier families in Brazil.
Low-tier homebuilder. Developers that sell homes that qualify under the MCMV program.
Mid-tier homebuilder. Developers that sell homes that do not qualify under the MCMV program.
FGTS. FGTS is a Brazilian fund created to protect employees dismissed without just cause. It consists of monthly deposits made by employers on behalf of their employees.
FGTS Futuro. A program approved by Brazil's FGTS Curator Council. It allows families with monthly incomes up to R$2,640 to use future FGTS deposits for MCMV's loan payments.
RET. The Regime Especial de Tributação (RET) is a special taxation regime in Brazil. It reduces tax rates for certain sectors, such as real estate, to stimulate economic activity.
Associative credit. The Associative Credit is a financing model aimed at residential properties still in the project phase, which uses resources from the FGTS. Companies, when planning a new venture, seek a minimum number of buyers, which allows the release of credit by the financial institution. As the construction progresses and contracts with consumers are formalized, the bank provides the construction company with financial resources proportional to the constructive progress made during that period.
This report does not constitute a rating action.
| 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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