Brazil

Sao Paulo, BrazilBrazil is the world’s fifth largest country in terms of population (204m inhabitants) and the eightH largest world’s economy in terms of GDP (USD 3,192 Bn). It has shown robust consumption growth, following the stabilization of the economy, with more than 60m people ascending to the upper classes and 19m people rising from poverty levels in the past 10 years.

Brazil boasts several traits that have made it a top target for international brands: a burgeoning middle class, a high consumption rate, and large urban populations in major capitals like Sao Paulo and Rio de Janeiro. Rising incomes are fuelling demand on less saturated second and third-tier markets. Retailers present in mature cities are changing focus and developing new strategies.

There are additional 13 cities with over 1million inhabitants. Additional characteristics retailers find appealing about the population is its relative youth; more than half of the country is under the age of 30 and its fascination for the international brands and concepts. In contrast to other BRIC nations, the cultural and socio consumption levels are similar to those of the average European and American consumers.
In addition, real estate laws typically favor tenants, there are few restrictions for international companies entering the market.

ECONOMIC SUMMARY
ECONOMIC INDICATORS*20152016F2017F2018F2019F
GDP growth -3.8-4.00.01.92.7
Consumer spending -4.0-4.3-0.41.82.4
Manufacturing production -8.2-7.12.12.72.7
Investment -14.1-13.5-3.12.24.8
Unemployment rate (%) 8.510.510.810.59.8
Inflation 9.08.75.94.84.3
R$/€ (average) 3.74.55.15.55.6
R$/US$ (average) 3.34.24.85.15.0
Interest rates 3-month (%) 14.214.211.911.911.9
Interest rates 10-year (%) 16.515.414.213.813.0

Note: *annual % growth rate unless otherwise indicated. E estimate F forecast
Source: Oxford Economics Ltd. and Consensus Economics Inc

ECONOMIC BREAKDOWN
Population 204,259,812 million (2016)
GDPUS $3,192billion (2015) / -3.8% (2015x2014)
Primary Surplus 0.6% of GDP (2014)
Government PartyLabor’s Party (PT)/ Brazilian Democratic Movement Paty (PMDB)
Head of StateMichel Temer (Interim)
Ministry of Finance Henrique Meirelles
Election DayOctober 2014
RETAIL SALES GROWTH:
% CHANGE ON PREVIOUS YEAR
BRAZIL20152016F2017F2018F2019F
Retail Volume-4.2-3.9-0.21.82.4
Retail Value3.33.75.26.66.7

LARGEST CITIES (2014)
CITYPOPULATION
São Paulo11,895,893
Rio de Janeiro6,453,682
Salvador2,902,927
Brasília2,852,372
Fortaleza2,571,896
Belo Horizonte2,491,109
Manaus2,020,301
Curitiba1,864,416
Source: IBGE
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Brazil Largest Cities

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Sao Paulo: -23.548943, -46.638818
Rio de Janeiro: -22.903539, -43.209587
Salvador: -12.970382, -38.512382
Brasília: -15.780148, -47.929170
Fortaleza: -3.718394, -38.543395

Major Domestic Food Retailers

Grupo Pão de Açucar, Makro, Atacadao, CIA Záffari, Sonda Supermercados

Major International Food Retailers

Walmart, Carrefour, Casino group

Major Domestic Non-Food Retailers

Restoque Group, Riachuelo, Centauro, Renner, Track & Field, Etna, Lojas Americanas, Ponto Frio, Saraiva, Magazine Luiza, Marisa, Renner, Riachuelo, Casas Bahia, Natura, Fototica, O Boticario, Siberian

International Retailers in Brazil (a selection)

Zara, Sephora, Decathlon, C&A, Carrefour, GAP, Forever 21

Food & Beverage Operators

McDonald’s, Burger King, Starbucks, Hooters, Pizza Hut, Subway, Outback, Applebee’s, Baked Potato, Viena, Vivenda do Camarão, America, Bon Grille, Casa do Pão de Queijo, Wendy’s

TYPICAL HOURS
MONDAY - SATURDAY SUNDAY & HOLIDAYS
10:00/22:00 (later for cinemas and restaurants)14:00/20:00 (later for cinemas and restaurants)

The shopping center industry in Brazil is the strongest in the retail sector mainly due to the country’s culture and lifestyle. Hot weather (air conditioning is key in a tropical country) and the lack of security of street retail make shopping centers the preferred format. Shoppers are also drawn to the entertainment options and conveniences of shopping centers.  Brazilian consumers are very fashion and price conscious but also focused on brand loyalty. 

The competitive landscape has grown and competition has become more aggressive between the various players in Brazilian retailing. This is explained by the development of multichannel strategies, which see retailers present in various sales channels, from the traditional brick-and-mortar stores to internet retailing and even direct selling.

Brazil is the world´s 11th largest shopping mall market based on the number of malls in operation. The country’s 547 shopping center sites represent 14,9 million sq.m of GLA. However, with 9.2 sq.m per every 100 people, the opportunity for further growth is apparent when compared to more mature retail markets. The U.S., for example, has more than 224 sq.m of shopping mall space per 100 people.

For the first time in the industry history, the percentage of malls opened outside the capital is greater than the shopping malls in the capital. Some 41% of malls are concentrated in municipalities that have up to 500,000 inhabitants, which confirms the internalization of industry trend.

Some 70% of GLA and 86% of malls are located in the Southeast and South regions.

Street retail serves the middle class and the lower consumer tiers in the majority of the Brazilian cities. Sao Paulo and Rio de Janeiro are the only cities with upscale street retail featuring luxury brands.

With 25 new projects now in operation and an average of 444 million monthly visits, in 2015 the Brazilian shopping center market registered a growth rate of 19% in sales compared to the previous year, reaching a total of R $ 151.5 billion. The sector’s expectation for 2017, however, is 0.5% growth.

Total existing stock of shopping center space in Brazil totalled over 14.9 million sqm GLA as at 1 July 2016.

New Entrants to the Market

Wendy’sSephoraKiehl'sAppleKiko Milano
Ralph LaurenMichael KorsThe Body Shop

TOP SHOPPING CENTERS BY SIZE
NAMECITYSIZE (GLA SQM) YEAR OPENED
Leste AricanduvaSão Paulo247,0251991
InterlagosSão Paulo145,0001988
Novo ShoppingRiberão Preto126,4891999
Parque Dom Pedro ShoppingCampinas121,0002002
Riomar RecifeRecife101,0002012
União de OsascoOsasco97,0002009
Iguatemi EsplanadaSorocaba93,9761992
RioMar FortalezaFortaleza93,0002014
Nova AméricaRio de Janeiro82,7061995
Salvador ShoppingSalvador82,5002007

KEY FEATURES OF LEASE
ITEMCOMMENT
Lease TermsUsual lease terms are 36 to 60 months. With a 60 month term, the tenant has renewal rights as provided by Real Estate Law. In some cases (atypical leases such as supermarkets and built to suit projects), lease agreement can reach periods of 10 to 20 years. The conditions depend directly on negotiations with the landlord. For typical leases for areas located within malls, the lease period is 5 years. As for commercial locations in streets (including high streets), the landlords try to negotiate lease terms of less than 5 years, which do not give renewal rights to tenants. In most of these cases, in order to renew the lease, tenants would have to provide key money payments. Therefore, the recommendation is to have a lease term of 5 years.
Rental PaymentRental payments are made monthly, usually at the beginning of the month (until the 5th day of each month). The amount paid refers to the previous month that the tenant used the property (rent is due after and not up front). All tenants provide lease guarantees. The standard is a Bank Guarantee (Letter of Credit) equivalent to 12 months rent, plus usual expenses. Other types of guarantee are Insurance Guarantee, Bank Deposit equivalent to three months of rents (unusual) and Grantor. In new leases, it is standard to obtain a free rent period that covers base rent but not expenses or tenant allowances. The total free period varies according to the total leasable area but usually is negotiated from 1 to 4 months in the beginning of the lease. A rent free period is not considered in renewals.
Rent ReviewAll Leases should be annually readjusted by an inflation index (the standard for most leases is IGP-M/FGV). Brazil has several inflation indexes that are issued monthly by institutions related to the government. The governmental target is to have the inflation between 4.50% - 6.50% per annum (although in 2012 this inflation index was 5.84% and in 2013 it was 5.9%). The Brazilian Real Estate Law provides that either party can review the rent rate every 36 months after the last agreement between the parties in order to adjust the rental rates to reflect market conditions of that time
Service Charges, Repairs and Insurance In shopping centers (malls) there are charges and fees for the start up of a store and for its operations. These include minimum rent, percentage rent, promotion fund, CAM, CDU/Key Money (assignment of right of use), 13th rental rate (in December), plus operational expenses related to the leased space/store (electricity, AC, etc.). As a standard procedure, the developer will calculate the breakeven point, considering the minimum rent and the percentage rate. For the average rate that is obtained, tenants will pay the minimum rental rate if the value is below the average, and will pay the percentage rate if the amount is above the average value (breakeven point). The Condominium charge usually includes services such as security, cleaning, gardening, internal maintenance and water (common use). CAM also includes insurance for the common area, while insurance for the leasable area (leased store) shall be the tenant’s responsibility. For properties located on the street, the values that are usually charged are related to rental rates (according to the market conditions of the region), key money, and CAM in cases where the property is part of a retail complex. The insurance and operational expenses are also the tenant’s responsibility. The Landlord is usually responsible for the structural items of the property and maintenance related to improvements classified as necessary (infrastructure systems). However, usual and regular maintenance and improvements, which don’t affect the structure of the property, are the tenants’ responsibility. Part of the improvements related to operational items of the property can be negotiated between the parties (substitution of the air conditioning system).
Property Taxes and other costs In shopping centers (malls) there are charges and fees for the start up of a store and for its operations. These include minimum rent, percentage rent, promotion fund, CAM, CDU/Key Money (assignment of right of use), 13th rental rate (in December), plus operational expenses related to the leased space/store (electricity, AC, etc.). As a standard procedure, the developer will calculate the breakeven point, considering the minimum rent and the percentage rate. For the average rate that is obtained, tenants will pay the minimum rental rate if the value is below the average, and will pay the percentage rate if the amount is above the average value (breakeven point). The Condominium charge usually includes services such as security, cleaning, gardening, internal maintenance and water (common use). CAM also includes insurance for the common area, while insurance for the leasable area (leased store) shall be the tenant’s responsibility. For properties located on the street, the values that are usually charged are related to rental rates (according to the market conditions of the region), key money, and CAM in cases where the property is part of a retail complex. The insurance and operational expenses are also the tenant’s responsibility. The Landlord is usually responsible for the structural items of the property and maintenance related to improvements classified as necessary (infrastructure systems). However, usual and regular maintenance and improvements, which don’t affect the structure of the property, are the tenants’ responsibility. Part of the improvements related to operational items of the property can be negotiated between the parties (substitution of the air conditioning system).
Disposal of a LeaseLease Agreements in Brazil can consider sublease conditions, assignment, and early termination possibilities. These conditions should be agreed upon by the parties in the lease agreement and are also regulated by Real Estate Law. In case of subleasing/assignment, the current tenant stays as the responsible party for the lease. Early termination is a right provided for tenants. The penalty and prior notice is usually negotiated between the parties, but as general conditions of the market, the prior notice varies between 30 to 120 days and the penalty varies between 3 to 6 months rent. The penalty amount is proportional and should be calculated considering the ratio between the entire term of the lease and the remaining term of the lease. Usual disposal conditions are defined by the parties in the lease agreement. The standard conditions are usually contemplated in an initial inspection report that is produced by the beginning of the lease. As a standard, the properties shall be delivered considering open space conditions, meaning that the general improvements shall be removed.
Valuation MethodsThe technical valuation is normally developed in accordance with the Practice Statements contained in the NBR 14,653-1/2001 and 14,653-2/2011 standards, published by the Brazilian Technical Standards Association (ABNT - Associação Brasileira de Normas Técnicas). The valuation is prepared by appraisers according to the requirements set out in the NBR 14,653-1/2001 and 14,653-2/2011 standards, acting in the capacity of external appraisers. In general negotiations, the market value of a property is considered by analyzing the current market conditions in the region for the analyzed property and for similar properties located in the region. The rental rates are usually compared on a square meter basis. The leasable area can be defined according to each landlords’ desire: private area, usable area, common area, BOMA area, etc.
LegislationIn Brazil, the Real Estate Law provides the regulation of the standard lease agreements between landlords and tenants. The build to suit process is considered an atypical lease agreement and is related to the civil law. For lease periods of five (5) years, tenants can have an automatic right of renewal. However, the tenant has to issue a renewal suit within 12 to 6 months prior to the end of the lease agreement in order to guarantee this right. Registration of lease agreements at the Real Estate Notary is recommended always, mainly to protect the tenant lease characteristics in case the property is sold to a third party during the term of the lease. This registration formalizes the existence of the ongoing lease, and its terms/ conditions will be respected after the sale. It is also recommended that the property’s documentation be analyzed by the tenant’s counsel/legal dept. in order to confirm that it is regularized and meets all local codes in order for tenants to perform their activities.


Brazil Contacts

Renato M. B. S. Almeida

Manager, Brazil
Tenant Representation
T  +55 (11) 5501 5493
C +55 (11) 99937 2873

Praca Professor Jose Lannes, 40 - 3 andar
Sao Paulo - SP - CEP: 04571-100 - Brasil