The swelling ranks of Brazil’s middle class are turning shopping malls like Rio de Janeiro’s Riosul into magnets for the country’s increasingly affluent consumers.
Less than 500 metres from one of the city’s hundreds of shantytowns, Riosul offers shoppers a secure, air-conditioned oasis that keeps street thieves, sticky heat and tropical rains at bay.
Developers are reproducing this shopping experience throughout Brazil at a steady clip: By the end of 2012, the country’s shopping mall count will be 40 per cent higher than seven years ago.
Brazilians have a growing appetite for consumer goods and shopping. They spend two to three times as long in malls as North Americans – and more and more now have disposable income.
While the middle class in Latin America’s largest economy grows by leaps and bounds, Brookfield Asset Management, a Canadian company with deep roots there including shopping mall and real estate developments, is positioned to reap the benefits.
An estimated 30 to 40 million have joined Brazil’s middle class since 2003, their living standards enriched by a run of strong economic growth, higher minimum wage laws and an ambitious program of income supplements for the poorest. By 2030, this pool of consumers is expected to have grown again by just as much – or more.
“You’re talking about another 40 million to 45 million more coming into the middle income market over the next 20 years,” said Brookfield Incorporações S.A. chief executive Nicholas Reade, whose Rio de Janeiro-based firm builds residential units.
“That’s a population the size of Spain.”
These new consumers covet more than tennis shoes and watches.
They want to own a home. Housing has become more affordable in recent years, thanks to a lengthy absence of the crazy hyperinflation of the 1980s and early 1990s, as well as a government home subsidy program for low-income families.
Banks have become more comfortable with expanded credit offerings, and they’ve lengthened the terms of mortgages offered – from 10 years to up to 25 or 30 years – making it vastly easier for home buyers to accommodate monthly instalment payments.
All of this has been a boon for Brookfield’s interests in Brazil, which include the Brookfield Brazil Retail Fund, focused on commercial shopping centres, as well as Brookfield Incorporações, now the country’s fourth-largest real estate developer by revenue.
Brookfield has added nine shopping malls to its portfolio in Brazil since 2003 and today owns 12 – including Riosul – with two more under development.
In Brazil, mall operators have learned to cater to a markedly different shopping culture.
Brazilians devote a lot more of their day to shopping centre trips and visit them more frequently, according to Bayard Lima, a managing partner with the Brookfield Brazil Retail Fund.
“They spend two or three times as much time inside a shopping centre as a North American,” Mr. Lima said.
“A Brazilian goes to a shopping centre two or three times a week, as opposed to North America where people go once a month or once every two weeks.”
Leisure is the biggest reason for mall visits in Brazil and that’s why movie theatres, not big-name stores, are often the anchor tenants at Brazilian malls. “People decide where they will go shopping based on where they want to see their movie,” Mr. Lima says.
That explains why Rio’s Riosul mall is overhauling and expanding the cinema complex that sits atop the shopping centre.
Brazilians like malls because they’re air-conditioned – unlike street vendors – and relatively safe, patrolled by much larger numbers of security guards than in North America. At Riosul, for instance, there are 100 security guards working in three shifts.
The expansion of easy credit in Brazil has dramatically changed how consumers purchase goods; almost 60 per cent of all retail sales are conducted using credit cards, debit cards or loyalty cards.
“Up until 5 years ago there was very little consumer credit for Brazilians. All the retail sales were done mostly on bank cheques and pre-dated cheques. You would buy a refrigerator in monthly installments by issuing bank cheques to the store,” Mr. Lima said.
He rejects the notion that Brazilians are gorging on personal credit, saying in his experience consumers take time-outs during the year to pay off their debt.
Brazil’s housing market has been booming along with the rest of the economy and companies such as Brookfield Incorporações have adjusted their real estate development mix to reflect the growing middle-class demand. Today, 60 per cent of its business is focused on the middle-income market and they’ve diversified their presence to places such as Brazil’s capital, where civil servants represent a stable market.
Today, the big challenge for Brookfield Incorporações is managing growth: dealing with a huge increase in customers as the company grew in part through mergers. “Today we’ve got 27,000 active clients. We’re delivering 11,000 homes this year. We take 20,000 phone calls a month,” Mr. Reade said.
“Five years ago, we were a beachfront developer at the high end of the market in Rio. The CFO probably knew the names of the buyers, at least of the penthouses, and he probably knew what payment terms had been agreed to with each.”
Mr. Reade rejects the notion that a property bubble is building up in Brazil, noting that the annual rate of housing production has only recently surpassed the level it was at 30 years ago when hyperinflation hit the industry hard.
“We’re basically playing catch-up. How many other industries do you invest in where consumption is still what it was 30 years ago?”