Brazil Bets on Tiny Apartments, With Airbnb in Mind

(Bloomberg) -- Sao Paulo is about to learn if the kinds of tiny apartments that are common in New York and other financial centers can work for Brazilians.

Los Angeles-based real estate investor Paladin Realty is betting that new zoning rules in the city will help it sell small apartments -- not only for residential purposes, but also for investors interested in a source of income from short-term rentals in online communities such as Airbnb Inc.

The megacity with more than 20 million inhabitants has new rules to allow buildings near public transportation hubs to have both residential and commercial units, including short-term rentals, hotels, hospitals and storefronts.

Among the first projects backed by Paladin is a building in the middle-class neighborhood of Perdizes with 240-square-foot apartments, which are priced 20 percent above the average for the region. The 62 short-term rental studios sold out in the first weekend they went on the market, back in June.

YouInc, the Sao Paulo-based builder and developer in charge of the Perdizes project, says the addition of commercial usage in residential buildings -- from the city’s new so-called “master plan” -- has made a difference. Focusing on selling high-end apartments to young professionals has also allowed the company to maintain a net return above 20 percent despite the recession and the sluggish real estate market.

New Plan

“We were the first ones to approve projects following the new master plan,” YouInc Chief Operating Officer Eduardo Muszkat said in an interview. YouInc and Paladin are working on two new residential projects. One of them, in the Pinheiros neighborhood, will include medical clinics. Paladin has $5 billion under management, with half of its assets in Brazil.

The new zoning rules and the possibility of a new short-term rental category are good news for companies like Airbnb. While the online community marketplace for travelers has struggled in cities around the world that are implementing tougher rules, it’s flourishing in Brazil, where it saw the number of guest arrivals double in 2017 to 2.2 million. Airbnb had 167,000 ads in Brazil in Dec. 2017, 14,000 of which in Sao Paulo. The company declined to comment further for this story.

Sao Paulo needs the investment. Real estate sales are beginning to inch back up, but they’re still recovering the country’s deepest recession ever. This year, economists expect timid growth of 1 percent. There’s also a wide-open presidential election next month that has everyone on edge.

With all the instability in Brazil, Paladin is hoping that offering projects with specific purposes will help it increase visibility and mitigate insecurities, according to Ricardo Raoul, managing director for the country.

“We believe specific projects are easier to visualize than real-estate funds,” Raoul said. “Funds are like blank checks.”

©2018 Bloomberg L.P.