Cyrela Brazil Realty is Brazil’s largest developer of residential properties. It currently operates in 17 states and 55 cities in Brazil, and also in Argentina. Elie Horn is chairman of Cyrela’s board of directors and chief executive officer. He has served in both capacities since the incorporation of Brazil Realty in 1994. Horn is also founding partner and has been president of Cyrela since 1978.
These are volatile times for Brazilian real estate, which mirrors the situation in most countries. But Horn explains that Brazil doesn’t have the deep-rooted problems of the U.S. market. It’s just a matter of lying low for some time until confidence returns, he explains in the interview with Knowledge at Wharton.
An edited transcript of the interview appears below:
Knowledge at Wharton: What is your view of the world’s financial crisis and its impact on Brazil?
Elie Horn: Brazil is not an island. In a globalized world, everybody pays the price, and Brazil is paying the price too. The feeling is that at a certain point we are in a crazy world and the game changed too quickly. The truth becomes a lie, and the lie becomes a truth. If you do not adapt, you will either go mad or bankrupt.
It is a new game. The new game is exactly the opposite of what it was six months ago. We are trying to adapt because we have no choice. But it is a crazy world at the same time. We cannot but say it is a crazy world.
Knowledge at Wharton: What has been the effect on Brazilian real estate?
Horn: Well, real estate is something that people buy when they can, when they have some money to invest, when they are not nervous about tomorrow. With the global financial crisis, everybody is nervous about tomorrow, so it is not the best time for real estate. We hope and think that this nervousness will quiet itself very quickly. At a certain point, real estate is a harbor. It is not a speculative business. In Brazil, people buy apartments to live in, not speculate. So if everything else goes bad in the financial sector, at least the real estate will be theirs. It will not fly away. (But) 15 or 20 years ago, real estate was (made) the scapegoat of the financial crisis. It could happen like that again.
Knowledge at Wharton: In the U.S. it was real estate and subprime lending.
Horn: We do not have subprime (lending) in Brazil. No over-credit; real estate in Brazil is about 2% to 5% of GDP; in the U.S. it is 80% to 90%. We are far from subprime.
Knowledge at Wharton: Nonetheless, there are some liquidity issues in Brazil, especially in the banking sector. What effect will that have on real estate?
Horn: We work in a world where banks are important to the mainstream. Suddenly, the banks have not been working for some time, so it affects everyone’s future plans. Then you become quiet and you stay quiet till things happen. This is what is happening here, happening in the whole world. You stay quiet, you wait. The best thing is to do nothing, if you can.
Knowledge at Wharton: So is your strategy for the time being to just wait it out?
Horn: My strategy now is to stay quiet, not to profit from the crisis, to wait and then decide in a calmer situation.
Knowledge at Wharton: Some people say when the market comes down so dramatically, it offers good buying opportunities. Are you…
Horn: My history is to make money when there is a boom, not when there is a crisis. When there is a crisis, stay quiet. We do not like to speculate. We would like to be safe. When there is a crisis, stay quiet. When there is boom, move quickly.
Knowledge at Wharton: Since you mentioned your history, could you tell us about your experience in real estate?
Horn: What is important in my history? Nothing is important.
Knowledge at Wharton: Well, the company’s history, for example…
Horn: The company has existed for more than 40 years. It grew a lot when it went against the trend. The company did not securitize papers or receivables. It went according to its means. In 1994, when there was a credit crunch, instead of going to the banks, we prepaid the banks, and we worked with our own money. This allowed us to grow at a very quick pace. We have always worked with our own money. We finance clients and we work as far as we can with our own capital. We grew a lot because we did not pay any interest. We received interest while other companies paid interest, big interest. That was the difference. We do not like to follow trends. We like to think, scrutinize, and make our own trend, not be a slave to the situation.
Knowledge at Wharton: Within the real estate sector, which were the primary growth areas for your company?
Horn: Residential. We work in many residential markets. We have another company – CCP – (listed) on the stock market. That is for rental properties. It is a small company. In residential, we have been growing at maybe 80% to 90% a year for the past three or four years. In 2009, we will probably not have that growth. We may not have it henceforth. The growth was in low-income, middle-income and high-income. It was in the all sectors of Brazil. Of course, low-income is the category that is supposed to grow more because more people willing to buy such apartments.
Knowledge at Wharton: What about your activities in commercial real estate?
Horn: Until a few months ago, the rental business was very good. Of course, everything has slowed down so we do not know what is going to happen two months from now, especially with the banks that had problems. The banks were top tenants as they would pay the maximum price; they wanted the best locations. As after the technology bubble, things changed. I think the rental business will change. How? We do not know exactly. But again, we are used to crises. It will not be the first; it will not be the last. The important thing is to survive and then to grow again.
Knowledge at Wharton: Although you say that the market is slow, we heard that your company launched a building recently and all the space was sold in a single day.
Knowledge at Wharton: Is that a true story?
Horn: It is a true story.
Knowledge at Wharton: How did you manage to achieve that?
Horn: I did not want to give long-term financing to the buyers. I did not want to go to the bank for a mortgage because the rates are very expensive. So I gave a proposal. We would launch the project if it could be self–financed. So we were able to sell a whole building in probably 48 hours — average 30% cash, (the remaining) 70% in 36 months.
So the building is totally self–financed. We would like to go into this space in the future. We do not want to go any more with 10-12 years’ self–financing, or go to the banks. We would like to be financed by the buyers if it is possible.
We are launching another building in the south. This one is for 10 years, not three years. The first day they sold 48% of the building. According to what I heard, it (the full sale) will be finished in two-three days. But not everybody has the same story. I would like it to be this story every day.
Knowledge at Wharton: What will be your top priorities for the next two or three years?
Horn: Besides work, I do a lot for charity. So…
Knowledge at Wharton: I understand that you care very deeply for charitable projects in education. Could you tell us about that?
Horn: I am a believer in God, and I think a world without God is a poor world. So my goal is to bring God to the students. We had a lot of educational projects in a lot of universities that try to teach spiritual values. What is lacking in the world today is spiritual values. It’s not only material, money, business matters… we need to go to spirituality. We try to focus on that goal. We try (harder) because we are succeeding. Other people are joining the group too. We are not alone. And this takes a lot of money. This is big charity.
Knowledge at Wharton: You have had a long career in business?
Horn: It has been more than 45 years.
Knowledge at Wharton: During your career, what is the toughest leadership challenge you have faced?
Horn: What do you mean by toughest leadership challenge?
Knowledge at Wharton: When your leadership was tested the most. How did you overcome the challenge?
Horn: My biggest challenge was to convince people that the world had changed. It is very difficult to convince people that the game has changed.
Knowledge at Wharton: Could you explain?
Horn: Yes. The position of a leader is to try and feel the situation and to try change the direction. People do not like this. You have a tough time with people changing direction; it is very difficult. People dream or they think that everything is easy, everything is stable. Things are not stable. Everything is not stable. Life changes and you need to change. Maybe the toughest thing is to make people change their way of thinking.
Knowledge at Wharton: You are absolutely right. Can you give a concrete example when you faced this situation?
Horn: A lot of times. Not just once. In this crisis it has been hard to talk to people about the situation. People do not want to see the truth. It is probably a world problem, a human problem. Truths change, business truths change, and people do not like to change their truth. That is the difficult task because you cannot change the situation and work, but you can change your way of thinking. But that is difficult.
The second point is to try to know where you are in order to know how you must behave. Besides the people, you must know where you are according to the environment and how your company should react. We have been spending four or five hours a day just to know where we are.
Knowledge at Wharton: How do you do that?
Horn: By speaking with economists, bankers, and analysts every day, and also by reading widely.
Knowledge at Wharton: One last question. How do you define success?
Horn: Success is when you make fewer mistakes than achievements.