Acquired by Brazil’s second largest construction company Gafisa in 2008, the dominant low income housing developer in the country Tenda have run into difficulties in maintaining the projects on their books – with an estimated one third of the company´s entire stock under construction having difficulty in moving forward.

With 30,000 units being built in various parts of Brazil, 11,000 are in some form of complicated  situation mainly involving delivery delays (with a handful of projects being over 2 years overdue); bureaucratic issues related to registration at the Caixa Econômica Federal and labour contractual complexities (a problem across the country).  Speaking to the Brasil Econômico news journal, executive director Rodrigo Osmo confirmed that some projects in the first stages of development are being reevaluated and cancelled: “we are putting the brakes on – developments completed at up to 20 percent will be considered as to whether it is best to stop.”

The company was strategically bought by Gafisa in 2008 due to what was then a perceived notion that, due to demand for low income housing being so high, the opportunities in the market would be abundant.  Whilst these fundamentals remain very true, a number of macro factors have come into play compromising project financial viability and leaving the sector at a virtual standstill.  For Gafisa, there has been admittance that it inherited many of the problems that Tenda had prior to be purchased – projects were, for example, franchised to small construction companies who utilised the benefits of the Tenda brand but went on to confront difficulties which subsequently had to be absorbed by the company.  In August this year, Sam Zell´s Equity International disposed of the remaining 2.7 percent share of the group having previously had a peak holding of 23.4 percent in 2007 (reducing its stake gradually since then).

Tenda, nevertheless, has stated that 80 percent of the problems will be resolved before the first half of 2012, promising that customer needs will be prioritised and any project that has been cancelled will entitle the buyer to receive a full refund.  Moving forward, the company has confirmed that it will only launch projects with 50 percent of pre-demand contracts in place.  Osmo stated that 2012 will see the company reducing its capital exposure levels and only reinstalling growth plans when projects can be undertaken profitably. New construction methodologies will also be considered which can viably present cost savings.

Ruban Selvanayagam www.brazilinvestmentguide.com