Sunday, March 18, 2012

Appraisal of a Planned Oceanfront Community near Natal, Brazil

View to the south of the city of Natal and the Redinha Bridge opening up development opportunities in the beach towns north of Natal

Ponta Negra beach on the south side of Natal.

This assignment was to value a planned community (“Palm Springs”) already under construction next the beach town of Muriu, a northern suburb of Natal, a rapidly growing city of 800,000 and capital of the northern Brazilian state of Rio Grande do Norte. Muriu is a fishing village that has grown to include a “Millionaire’s Row” of residences owned by wealthy citizens of Natal.
Lobster boats of Muriu

The completion of Redinha bridge (see top photo) on 11/20/2007 opened up development opportunities in the towns north of Natal (including Muriu), and further highway improvements have been announced for the bridge and the northern part of Natal (as reported in the Tribuna do Norte 3/13/12) which will reduce commuting time from Muriu to Natal from 35 to 20 minutes.

What is significant about this is that Muriu will no longer just be a community of weekend and vacation homes; it can now also serve as a bedroom community for upper middle class commuters to Natal. Professional people will now be able to commute to high-paying jobs in the city while simultaneously living at the beach.

As this is my second valuation assignment in Brazil so far this year, this illustrates the dearth of local project financing available within Brazil, where banks charge high interest rates and developers are forced to turn to the U.S. and Europe for capital. A residential project such as this is typically initially funded by cash deposits of 10 to 15% of purchase price by the end buyers, which limits the available upfront money needed to build infrastructure. This can create a serious shortage of capital needed to build the necessary infrastructure.

Other cities making highway improvements towards beach cities have seen property booms in those beach cities. For example, in the Dominican Republic, the extension of the freeway from Santo Domingo to the airport and beyond created a building boom in the beach town of Juan Dolio and a new resort community known as Costa Blanca. Buyers have predominantly been local professionals from Santo Domingo.

These further highway improvements to Natal, the construction of a new stadium, as well as the opening in 2013 of a gigantic new airport, the largest in South America, are being done in preparation for the World Cup games in 2014. Natal will be one of the World Cup venues.

Consequently, in addition to demand from local buyers, there will also be increased exposure to tourists who may also turn into buyers.

The Principle of Ruinous Competition

As can be expected, once the bridge was completed, many developers announced their own residential development projects in the beach towns north of Natal. One developer even locked up commitments in 2009 from David Beckham for a soccer academy and former princess Sarah Ferguson for an equestrian center for a 1350-home project in Caraubas, 50 km north of Natal. Development has still not begun.

Although it is customary in Brazil to not start development until enough monies are collected through lot sales, the British developer of Palm Springs wanted to boost his credibility by starting development right away, particularly to counteract the distrust that Brazilians have developed against other British developers who sell lots and collect deposits for years without starting development. (My previous post on Brazil featured a project that had been selling lots for 6 years without yet starting development.)

There have been so many announced projects, but only two, including the one I am appraising, have started construction, and the other one, the Natal Ocean Club farther to the north, has suspended construction as a result of a new federal law preventing development within 100 yards of the shoreline, which is a big setback for some beach projects.
Subject property

If this particular developer’s strategy is correct, he should have the only construction-ready project when demand for homes north of Natal escalates after continuing road improvements, a major new airport, and escalating tourism to this area.

I am dusting off the old “subdivision development method”, a discounted cash flow methodology that can only safely be used when a residential project can be considered economically feasible (something I have not seen for a while), but a favorable confluence of events seem to support this project.
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Anonymous said...

The Natal Ocean Club should have opened in 2010. Then 2011. Then 201. Now they promise the end 2013 but maybe 2014.
Their hotel management group has meanwhile removed them from their website, which is usually a very bad sign.

Anonymous said...

When you end up in court with the Federal Government you're in deep sh!t It can last up to 10 years.

This is the latest:

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