Risk -v- Reward

After my visit I have a lot of thinking to do. I think that there could be substantial rewards in the form of capital appreciation over a ten year period in NE Brazil, however I am not convinced about rental income in the foreseeable future. Since I am investing for the long term I am not too concerned about this.

I am no economist or political expert but the signs for Brazil look promising:

1) In 1995 the interest rate hit a massive 85%. It dropped between 1995 and 2000 and since 2000 it has fluctuated but it has not risen above 27%. It is currently 12%.

2) Inflation is hovering between 3 - 4%.

3) Brazil was one of the BRIC countries tipped for rapid growth by experts in 2003.

4) There is evidence in Brazilian shops of a fledgling consumer credit movement. Many large retailers offer staged payments on goods, akin to the old HP agreements in the UK.

5) The Doing Business website reveals that, although not up to OECD standards, it takes less time to register a property than other countries in the region. On the same website, however, the typical time to build a warehouse looks pretty horrendous - 466 days compared with 199 days in other countries in the region.

6) The president, himself from a poor background, seems keen to improve the lives of people living below the poverty line. If he succeeds in narrowing the gap between rich and poor, more Barzilians will have the wherewithal to travel around their own country as 'tourists'.

7) The NE of Brazil has most of the ingredients required by tourists, such as sunshine, golden sandy beaches, swaying coconut palms, a low cost of living (at least for now), warm lagoons, friendly locals, a wide variety of accommodation, an infrastructure of sorts, carnivals and culture.

On the other side of the coin the potential risk pushes me right out of my comfort zone. Property development in the UK is judged by credit assessors to be one of the riskiest businesses there is. A multitude of things can go wrong on a development, many of which are outside the developer's control. The cash flow on a development is usually very finely balanced and there are many things that can tip a developer into insolvency. So if property development is seen as risky in the UK then it is doubly risky for inexperienced foreigners (like me) investing in projects in Brazil.

I suppose my worries fall into two camps:

1) The developer is basically honest but gets into financial difficulty. This happens to the best of developers in the UK but that is not much consolation when it is my money on the line.

2) The developer is dishonest and disappears with the hefty deposits (typically 30%). This is not as far-fetched as it may sound. Take the example of the Irishman who defrauded British investors hoping to make a killing in Turkey or the UK entrepreneur who scammed people queuing up to buy in Dubai and Spain or how about the Brazilian real estate companies that were a front for Norwegian money launderers? Wherever there are amateur foreign investors with money burning a hole in their pocket you can bet the scammers and fraudsters won't be far behind - remember the timeshare industry in Spain and Portugal in the eighties?

So there it is. Risk -v- Reward. There is rarely ever a good return to be made without some form of risk so I have decided to invest with the following provisos.

1) I will do my best to carry out as much research as I can.

2) I will only gamble what I am prepared to lose.

3) I will not borrow in order to finance this gamble, even though it will tie up a fair amount of capital and will restrict the type and size of property that I can invest in.

4) I will try to make contact with other people who have invested on the basis that together we will be stronger and better informed. This is where you come in, my fellow investors!