Just two weeks before the start of the Olympic Games, Rio inaugurated the Olympic Village. The Australian Olympic team took one look at them…and walked right back out. They complained about the blocked toilets, water leaks and electric defects. They were better off staying at a hotel.
Rio’s mayor promised to solve the problems in 48 hours. And to make Australian’s feel more at home, he proposed to place kangaroos in the rooms.
As the mayor promised, the Australian team was able to move into the village shortly after. But once they were in there, the problems did not stop. The team has suffered through a building fire and robbery.
It seems like the Olympic Village can’t get a break, just like the people who built them.
Brazil won the rights to host the Olympics in 2009. The economy was booming then.
And the organisers had a great idea. They would finance much of the Olympics with private investment.
That is, private investors would take on the costs of building stadiums and infrastructure. In return, these investors would get land to build properties. And this land would increase in value overtime, due to the infrastructure built during the Olympics.
Investing in Rio’s Property Market for the Olympics
There were three companies in charge of building the Olympic Park. Oderbrecht, the Andrade Gutierrez group and Carvalho Hosken.
The Park is located in one of the most exclusive neighbourhoods in Rio, Barra da Tijuca. This neighbourhood was recently connected to the rest of Rio by the metro.
In return for building the Olympic Park, the companies got a land lot next to the park, where they could build 5,000 residential units and commercial spaces.
These were to become ‘Ilha Pura’ (Pure Island). Ilha Pura is a little resort of luxury. Complete with tennis courts and pools near the beautiful — and polluted — lagoon of Jacarepaguá.
Ilha Pura is also known as the Olympic Village, where the athletes are currently staying.
The Olympics and the World Cup increased the value of property in Rio. And investors could sell the apartments for a hefty price. Apartments are on sale for between R$750,000 and R$3 million (approximately AU$310,000 to AU$1.24 million).
But seven years after Rio won the Olympics, the Brazil from 2009 is very different from the Brazil of 2016. The country is suffering from a deep recession, a political scandal and corruption.
President Dilma Rousseff is on the verge of impeachment. And Michel Temer, Brazil’s interim president, is in the middle of a corruption scandal, as he may have received illegal financing during his campaign.
Many of the senior executives from Oderbrecht and Andrade Gutierrez are now in jail for corruption.
There is high inflation and unemployment.
Credit has tightened. New properties are flooding Rio’s property market from investments during the Olympic Games.
And all this is driving Rio’s property prices down.
The strategy of funding the Olympics with private money is falling apart. At least for the investors.
So far, Ilha Pura has only sold 240 apartments. Now investors are thinking about lowering the prices.
And they are not the only ones losing money. Other investors, like Tishman Speyer, are waiting to build until after the economic crisis.
And it looks like it will be a while until they see any returns.
The Olympics should have been the start of the party. Much like the one experienced by Barcelona in 1992.
It was not supposed to be the beginning of a hangover.
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PS: Selva recently joined the Port Phillip Publishing team as our macroeconomic analyst. She works closely with The Daily Reckoning editor Vern Gowdie on his advisory service,The Gowdie Letter.