Brasilian Hotels, Airbnb, And Other Thoughts
I recently spent three weeks in Brazil, my second trip in three years. It is a great country, and I have some general thoughts on it below. However, one thing that really stood out to me this time was the burgeoning supply of Airbnb apartments.
The last time I travelled was in the July prior to the 2016 Olympics in Rio. The choice of hotels overall was disappointing, with A$100 per night buying a small, dark room with poor sound insulation, slow and patchy WiFi, and similar. The Airbnb competition at the time was unremarkable and I always stayed in hotels.
This trip in October 2019 has seen a massive quality gap open up between hotels (which are mostly the same) and Airbnb apartments. Perhaps spurred by the demand for additional space during the Olympics, the traveller in Brazil can rent a furnished apartment on Airbnb for about 60% of the price of a non-apartment hotel room. The quality of the Airbnb room is typically higher and the traveller has the advantage of a dedicated host (who wants that 5-star review) to answer any questions.
What I found curious is that in some cases, the apartments being rented are actually privately owned hotel rooms. So you can pay A$60 for a (better equipped) Airbnb in Hotel X, or book a room on Expedia for A$100, or pay A$200 at the front desk per night. In other cases, the Airbnb apartment is essentially an investment property in a regular building being rented exclusively through Airbnb. The guest has access to all the apartment amenities such as a gym, pool, sauna, and similar.
There is a similar combination where there are new-built apartments that are essentially hotel rooms by another name (albeit with full cooking facilities) that are being marketed as regular apartments for the Brazilian resident, but just happen to be perfect for renting out on Airbnb.
I stayed in one of the latter in Curitiba. Here is the view:
I did some rough calculations on the cost and implied yield of each of the apartments I stayed in. The cost is typically around R$250-350k (Brazilian Reais BRL), which is approximately $100,000 to $150,000 Australian. The implied gross yields are around 15% annually at 60% occupancy, excluding the cleaning fee and the Airbnb service fee.
The supply of apartments is substantial, with hundreds and hundreds of Airbnb apartments available in every city I went to, and all of the apartments I checked were de facto investment properties rented exclusively through Airbnb.
There are a few possible conclusions to be drawn from this.
- Brazilian Airbnb apartments are an attractive yielding investment especially given the aggregator fee and the cleaning fee are covered by the guest.
- Brazilian Airbnb apartments are highly oversupplied and real occupancy (on average across the whole cohort) is substantially lower than 60% and so the implied yields are illusory.
- Brazilian hotels are getting eaten alive by competition. How do you compete with privately owned rooms in your hotel building being rented out for 60% of the online rate (after fees).
The fair way to compare rates I think would be on some fee adjusted scale. I guesstimate that if a hotel is $100 a night including all costs, ~$20 of this goes to the aggregator website, and probably another $20-$30 to labour and cleaning.
By contrast the Airbnb rate could be $60 a night, plus a $20 service fee (one-off, not per night) and say a $30-$40 cleaning fee (one-off). Ongoing labour for longer stays is borne by the tenant (no housekeeping). It is not clear how much of the Airbnb rate has to be paid privately to the hotel/apartment building for body corporate or hotel overheads (e.g. maintaining front desk staff).
Overall I think it is likely that the Airbnb option is not as attractive as the gross yields imply, but nonetheless the rate remains substantially below the cost of staying in a hotel. The supply of empty Airbnb apartments implies exquisite pressure on Brazilian hotel occupancy and incomes. I would be interested to know if this reflects either:
a) hotels historically overcharging and over-earning
b) Private investors willing or able to accept a lower rate of return. Can private investors borrow to invest at a lower cost than hotels? (If the Australian experience is relevant – probably yes)
Or some combination of both. I suspect a) for sure, and b) is a definite possibility. I have not looked at any Brazilian listed hotel providers (if there are any) but I would be very wary of investing in them at this point.
Brazil in General
More generally I have some thoughts on Brazil. I have spent I guess 9 weeks in the country in total so I present my observations from the perspective of a curious, but ignorant, outsider.
Brazil does not have a great reputation. It is seen as unsafe by a variety of stakeholders including the Australian consulate and Brazil’s own citizens. The political system is unpleasant (President Jair”you are too ugly to rape” Bolsonaro) and Brazil has its share of economic problems. There is seemingly a widespread perception of selective enforcement of the laws. The gap between rich and poor is wide. My mum also doesn’t like it, even though she’s never visited.
However Brazil is in other ways a good country. It has a good healthcare system. The life expectancy (75 years) is on par with the USA (77 years) and in wealthier parts of the country I am told it is 80-84 years (on par with Australia). Brazil has everything it needs to succeed; resources, space, water (in some places), ports, trade with its neighbours (mostly; see Mercosur). There is a lively transportation sector and decent infrastructure in most cities (traffic can be a problem). The population is large, there is substantial excess labour capacity, and city residents are cultured, friendly, and well educated.
Per-capita income and household wealth is lower than Australia (as is the cost of living), but disposable income is not visibly lacking, especially in the clothes that people wear. Some rough estimates suggest that rental housing is affordable for a reasonable number of young people, even in cities of 2m+ people.
I have been to poor countries where the problems and the solutions are obvious. There is a lack of capital and a lack of skills. There are a thousand new businesses that could be started to solve glaring problems. Brazil is not overtly like that. There are always new businesses that could be created, but it is very hard to look at Brazil and say “this country needs more skilled builders” or “this country struggles to provide finance to enough people”.
I think that the problems are more subtle. I see three (four?) main issues.
- There is a very large gap between middle incomes and the poor
- There is a huge misallocation of labour and resources, including a lack of good employment opportunities
- There is a lack of political stability, and some ancillary problems such as homophobia and racism that I don’t fully understand, but are nonetheless noticeable
- I suspect that there is a lack of reinvestment in businesses.
The first problem is relatively self evident and is not specific to Brazil. If I had to guess I would say that there is a wide range of health outcomes and life expectancies within Brazil, and I suspect that (as in many former colonial nations, including Australia) health and wealth outcomes are related to skin colour and ethnicity, favouring lighter skin. I did not however observe a linear relationship between skin colour/ethnicity and apparent health and wealth.
Brazil also faces some of the same challenges as Russia in that it is extraordinarily difficult to govern such a large territory with the distance and implied infrastructure costs to deliver equal outcomes across the population. There will always be neglected regional dwellers in Brazil.
I don’t know what the solution is but I think better allocation of labour is a strong prospect, which leads me to problem 2:
Misallocation of labour and resources
Brazilians are well educated. However, there are problems with this. Firstly, people obtain degrees in things they don’t like (such as law, or librarian…ism(?)) in order to get a secure job. This is a problem in Australia too, although we don’t do job security like the Brazilians. Many jobs are government jobs which are very secure (retire after 30 years on your final salary) and lucrative. A friend of mine, three years of out university, works as a judicial assistant for R$120k per year (about A$50k; quite a good salary). Once she turns 25, she is eligible, after a brief period of study, to become a prosecutor on R$360k per year (about A$140k; a staggeringly good sum anywhere) with a job for life. I am told the judiciary works from ~11am til 6pm and ~10 months per year.
Almost every young person I met in Brazil, both now and three years ago, is studying to be a lawyer.
There are other examples of misallocation such as the ubiquitous doorman and security guards in malls. A large number of hotels and apartments have a doorman whose job is to press the button to let guests in and out. Arrive at an apartment? Wait for the doorman to press the button to open the gate to let you in. Leaving the building? Wait for the button press to let you out. Beep. Beep. Beep. Beep. Beep. 24 hours a day. Every day.
Then look at the footpath sweepers, whose job is to wander along with a dustpan and broom picking up rubbish to put into the bins.
I am not opposed to either of these jobs existing. But goddamn, there are so many of them. Bad incentives drive people into unconstructive degrees and unproductive roles with excessive perks in government. I suspect that many of the other roles are essentially make-work (also government), especially the street sweepers. There is a definite opportunity for winding back government perks and expenditure. Probably a greater focus on constructive degrees in the sciences and technology would be helpful. There is likely an opportunity for additional small private businesses to be created to lift private and productive employment.
I am frankly not sure what to make of the political system. Homophobia and racism are the weapons du jour. President Bolsonaro years ago famously told another politician she was too ugly to rape (link above). There is a running joke I heard from several different people that Bolsonaro waited to see Donald Trump and whispered “I love you” to him, because of the similarities in their policies.
Another story I heard about fake news prior to the latest election. It was apparently claimed that a certain juice company is making drink straws shaped slightly like penises, so that boys in schools can get used to sucking penis-like objects from a young age and therefore grow up to be homosexuals. I could not verify that story, but I certainly did not make it up. I report – you decide. (Please send me a link if you have one). One young person I met had a 15yo female friend murdered for being homosexual.
President Bolsonaro favours torturing drug users. There are comments he has made about the “macaws perch” (a stress position) which I won’t repeat here, but do not speak to a country where people can feel safe. Feeling safe is a precondition for investment in a country (not just in dollars, but in effort). Many people have told me that the government and police are not to be trusted. Whether that is true is not relevant; the belief of the lack of trust is what will drive behaviour. I am inclined to believe that the juicy perks for government lawyers speak to a focus on prosecution and a punitive regime for lawbreakers. In other places (including Australia’s own Northern Territory) it can be seen that more punitive regimes fall disproportionately on poor people and minorities; likely another contributor to the wealth gap.
Strong institutions, an independent judiciary, and separations of power are very important for stable countries where people feel secure. I do not know enough to comment on these, but they are key elements in the Brazilian equation that would be worth investigating further.
A lack of political stability I think is a driving cause of the fourth problem; lack of reinvestment.
(Possible) lack of reinvestment
Brazil has plenty of new shiny buildings. They feel somewhat like they were built with lesser regard for the best use of capital. Are they intended as a store of wealth? Many of the new buildings were half empty and the majority were apartment buildings (see above commentary on Airbnb supply). There are also however an observably large number of houses, businesses, and business equipment in need of an overhaul and refurbishment. If i owned a Bunnings-style business in Brazil I would feel very good about its prospects.
I don’t know what explains the paradox between an oversupply of apartments and yet a lack of investment elsewhere. The central bank rate is 5.5% and inflation is running at about 2.9% currently (see here). GDP growth is expected to be about 1% this year, according to the IMF. In poorer countries there can be a tendency for businesses to acquire an asset and run it until death, extracting as much value as possible from the initial purchase, rather than considering the overall return on capital employed (where it might make sense to refurbish the asset and charge a higher price or provide a better service). Perhaps there is an element of this in Brazil? Perhaps also there is a lack of utilisation to justify the capex; even within a kilometre or two of the CBD it’s not uncommon to see overgrown industrial yards with limited activity.
It’s clear that although Brazil has a developed economy, there are signs of malaise, under-utilisation, and misallocation of resources. I also have two miscellaneous observations which I provide without comment:
Afterpay (ASX:APT) should expand to Brazil. It would be very successful here, and the concept of paying in instalments is already well established.
The cost of intra-country flights has tripled(!) since my last visit. Every flight is full to bursting. I travelled in October vs July previously, if that’s relevant. The bankruptcy of LATAM and Avianca earlier this year look to have been very favourable for industry capacity and pricing, even though both companies continue to operate. GOL Airlines should be a buy but it is still not making all that much money, and carries too much debt (although the stock has doubled in the last 6 months).
The bottom line
I like Brazil a lot. I think the country has a lot of potential. Given economic opportunity and political stability, I think wonderful things can happen here. I think Brazil could also be a cautionary tale for Australia, a sign of what can happen when you go too long with a dead hand on the political tiller.
Food for thought.
P.S. Lest you think I spent all of my time thinking about Brazilian Airbnb…I did spend a considerable amount of time at the beach, in a place called Maçeió.
I have no position in any company mentioned. I have no investments in Brazil. I am not an expert on Brazil, and so this review should be read with a grain of salt. Please send in corrections if you have spotted any errors. This is a disclosure and not a recommendation.