HIGHLIGHTS. Nina Booty, Research Analyst, Ritz-G5

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1 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

2 HIGHLIGHTS In the latest Ritz-G5 Brazil Real Estate and Economic Update, Spring 2015 we consider Brazil s historic and current economic landscape, presenting you with key data and forecasts performed by Economist Intelligence Unit, global economic forecasting and advisory specialists, amongst other independent experts and authorities. Firm believers that knowledge is power, we have compiled a large amount of economic, investment and real estate information available on Brazil and in particular the North East, taking a look into the future and projections performed by PwC and Cebr. Furthermore, we look into the drivers of the economic and real estate performance in Brazil in recent years such as the mortgage market, population growth, wealth creation, and house price development across large Brazilian cities. We have relied our analysis on robust international sources including Knight Frank and Savills as well as wellknown national Brazilian house price index, Fipe Zap. Finally, we take a look into investment both in terms of Foreign Direct Investment inflows, summarising and presenting the data from OECD as well as representing individual large investor cases where substantial sums have been invested in Brazil. Compiled and written by myself, Ritz-G5 s in-house research analyst. I hope that you will enjoy our analysis and findings and we welcome any queries you may have. Nina Booty, Research Analyst, Ritz-G5 2 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

3 THE BRAZILIAN ECONOMY Leaving firmly the turbulent economic and political history behind, over the past decade, Brazil - the sleeping giant - has attracted much attention on the global scene due to its economic and real estate boom. Brazil s macroeconomic situation has become much more stable. In particular, the real GDP growth between 2004 and 2014 has averaged 3.4% per annum, thus, far ahead of 1.2% average growth per annum in the preceding decade. According to the latest data published in December 2014, the World Bank has ranked Brazil s economy seventh largest in the world for both 2013 and Positioning itself amongst the top seven world economies is very encouraging for an emerging nation, and as one of the BRICs (Brazil, Russia, India and China), the only economy ahead of Brazil is China. Brazil - in the top 7 world economies Source: World Bank 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 UNITED STATES CHINA JAPAN GERMANY FRANCE UNITED KINGDOM BRAZIL RUSSIA ITALY INDIA 3 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

4 Brazil - the economic powerhouse of Latin America Brazil is the economic powerhouse of Latin America. According to the World Bank, Brazil accounts for 40% of the total Latin American economy. Mexico, the second largest economy in Latin America, only takes just over a half (22%) of Brazil s proportion. 4% 7% 5% 4% Economic size as % of Latin America Brazil (40%) Mexico (22%) Venezuela (8%) Argentina (11%) Colombia (7%) Peru (4%) Chile (5%) Other (4%) 40% 11% 8% 22% Source: World Bank Brazil was one of the rare economic performing stars in the world during periods of the global financial crisis. Brazil s real GDP grew by 5.2% in 2008, briefly falling in 2009 (-0.3%) and bouncing back remarkably with 7.5% growth in Following a wave of Eurocrisis, Brazil s real GDP slowed to 2.7% growth in 2011, still outperforming several of developed countries GDP (e.g. Spain 0.1%, Italy 0.4%, and Denmark 1.1%). Brazilian economic rise is primarily thanks to its large export potential; a continued increase in the middle-class, which boosted a strong domestic consumer economy; inflation and interest rates much below the historical levels and expanding credit markets. Although recent GDP growth has slowed down, from 2.5% in 2013 to preliminary estimate of only 0.1% in 2014, from 2016 and onwards, higher growth rates are projected for Brazil according to Economist Intelligence Unit (EIU) forecasts. Moreover, Deloitte s latest February 2015 Latin America economic report, also highlights that the first steps are taken towards Brazilian economy recovery. 4 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

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6 A BRIGHT FUTURE FOR BRAZIL S ECONOMY The Centre for Economics and Business Research (Cebr), a leading economic forecasting and analysis consultancy, latest forecasts in 2015 highlight that in 2029, Brazil s growth will rise to overtake some of the largest Western economies including Germany, UK and France, positioning itself as the 5th largest world economy. In 2014, Brazil was positioned as prominent 7th largest world economy, behind the previously mentioned three largest economies in Europe. Cebr believes that Brazil faster economic growth will re-assume in the near future, driven by favourable demographics, strong agricultural trade boosted by the DOHA round agreement and genetically modified foods. PricewaterhouseCoopers (PwC) latest world economic league table forecasts for 2030 and 2050 (February 2015), are projecting that Brazil will become the sixth largest world economy in 2030 in PPP terms (Purchasing Power Parity) and fifth in PwC highlights that emerging economies, Brazil, China and India, will become not just low production locations but also increasing large consumer markets, offering greater opportunities than advanced economies World Rank by Cebr GDP US$ bn. 1. China 40, US 32, India 9, Japan 6, Brazil 5, Germany 4, UK 4, Korea 3, France 3, Russia 3,295 Source: World Economic League Table 2015, Cebr 2050 World Rank by PWC 1.China 61, India 42, US 41, Indonesia 12,210 5.Brazil 9, Mexico 8, Japan 7, Russia 7, Nigeria 7, Germany 6,338 GDP at PPP (2014 US$ bn.) Source: The World in 2050, PwC (February 2015) 6 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

7 One of particular highlights of Brazilian economy is the low level of unemployment. With 5.3% unemployment in January 2015, this level is amongst the lowest for Brazil despite some decimals increase since In comparison to 15 years ago, the rate of unemployment was at double-digit levels (14.2%). This reflects evidence of an impressive employment growth over the recent years. In relative terms, this also compares favourably even with some of the world s most developed economies such as France (10.4%), Denmark (6.4%), Sweden (7.8%), Netherlands (6.7%), Finland (8.9%), and Belgium (8.4%). Brazil s unemployment is even slightly below the UK (5.9%) and US (5.6%), although the latter two countries have seen a high rise in employment since one year ago. Brazil s unemployment level is far lower than the average for the Euro area, which remains worryingly high, at 11.4% according to Eurostat in January In the Euro area, Spain and Greece are topping the chart at 23.7% and 25.8% unemployment rates respectively. Unemployment rates - January 2015 Source: Eurostat, Brazilian Census Bureau (IBGE) GERMANY BRAZIL US UK DENMARK NETHERLANDS 4.8% 5.3% 5.6% 5.9% 6.4% 6.7% SWEDEN 7.8% FINLAND 8.9% FRANCE BELGIUM 10.3% 10.8% ITALY 12.9% SPAIN 23.7% GREECE 25.8% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 7 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

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9 RISING WEALTH IN BRAZIL The crucial story underpinning the economic and real estate development lies within a rise in wealth across the Brazilian population. Over the last two decades, the rise in wealth in Brazil has been outstanding, and coupled with the housing shortage, it makes one of the key drivers behind the real estate boom witnessed in this country. In particular, between 1993 and 2011 the middle class surged by 131% to stand at 105 million, amounting to 55% share of the population. The upper class has increased by 155% to stand at 23 million people, which is equal to 12% of population. Meanwhile, the lower class has decreased by 32% to stand at 64 million people, making a population share of 33%. The World Bank has praised Brazil for this achievement and progress in reducing social and economic inequality in the country. Rising wealth in Brazil Source: CPS/FVG (based on data from IBGE) Lower Class (DE) Middle Class (C) Upper Class (AB) 120 Population (millions) % 31% 55% 38% 33% 55% % 8% 12% RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

10 BRAZIL S RESIDENTIAL PROPERTY MARKET The property market is one of the most important mainstays of the Brazilian economy, followed by the projects of infrastructure, necessary for the country s development. In Q3 2014, Knight Frank s Global House Price Index recorded a solid 9.2% year-on-year growth in Brazil. The previous two years, 2013 and 2012, demonstrated robust 12.7% and 13.7% year-on-year growth respectively. In 2011 Brazil was the number one fastest growing real estate market in the world according to the same index. Although recent growth has slowed down in Brazil (Knight Frank reported a general global house price growth slowdown in Q3), Brazil is still positioned as a prominent eighth fastest growing residential market in the world as at Q Brazil in the top 10 world s fastest growing markets Source: Knight Frank 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0 IRELAND TURKEY DUBAI UK ESTONIA COLOMBIA TAIWAN BRAZIL AUSTRALIA MALTA ICELAND SWEDEN SOUTH AFRICA LITHUANIA INDIA 10 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

11 THE BRAZILIAN MORTGAGE MARKET Another factor influencing the real estate market is the availability of mortgages. In historical perspective, mortgage and long-term lending in Brazil used to be very scarce, primarily due to very high inflation rates. However, 20 years ago when economic stabilisation program Plano Real was brought into action in July 1994, a series of reforms enabling macro-economic stability of the country were implemented. This allowed for a creation of a secondary mortgage market. New sources of finance appeared increasing availability of mortgages and reducing its cost. This is evident by looking at the significant reduction of Brazil s base interest and inflation rates compared to historically high, doubledigit levels. In February 2015, the interest policy rate stood at 12.45%. Although the base interest rate has been rising since 2013 due to Brazil Central Bank s tightening monetary policy to combat inflation, it still remains much below the historical highs, i.e. in 1999 it peaked at 25%. The current inflation rate has risen to 7.7% in February 2015, particularly in recent months due to the increase in taxes and austerity measures implemented by the Brazilian Government after the elections in October Although the inflation has risen since the low levels in 2012 (5.4%), the current levels are still much below the peak in 2003, which had reached 14.7% according to data series from Economist Intelligence Unit. A developing mortgage market in Brazil Source: Fipe Zap, Savills, Banco Central do Brasil, Hypostat 9% 8% 7% Mortgages as % of GDP 6.80% 7.90% 6% 5.40% 5% 4.10% 4% 3.10% 3% 2.30% 2% 1.80% 1% RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

12 Overall, the Brazilian mortgage market still remains on the rising curve. If we look at 2013 mortgage to GDP ratio, it amounted to around 7.9%, making an increase from 6.8% in Looking back to 2007, this ratio was as low as 1.8%, evidencing a steep growth curve. However the mortgage market is still in its infancy stages relative to many other emerging economies. For instance, in Chile this ratio is 20% and in Mexico the ratio is 12%. Furthermore, the difference is much bigger in comparison to majority of the developed Western economies. For instance in the UK, the ratio of mortgages to GDP is 81%, in the US it is 73% and in Sweden 60.4%. Hence, Brazil s ratio for the moment remains low, indicating that there is good scope for further growth. Brazilian mortgage market - good scope for growth Source: Fipe Zap, Savills, Banco Central do Brasil, Hypostat DENMARK 2010 NETHERLANDS 2010 UK 2012 SINGAPORE 2014 US 2012 PORTUGAL 2011 SPAIN 2011 SWEDEN 2011 FRANCE 2011 GERMANY 2012 MALAYSIA 2012 CHILE 2012 THAILAND 2012 MEXICO 2012 BRAZIL Q INDIA 2011 RUSSIA % 17.0% 12.0% 7.9% 3.5% 2.6% 42.4% 35.0% 32.0% 81.0% 79.0% 73.0% 66.6% 62.1% 60.4% 110.0% 133.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 12 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

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14 THE HOUSING SHORTFALL It is worth also noting that whilst real estate lending reached record levels in Brazil during 2013, Brazil s large housing deficit continues to be a major reason for the rising real estate market, defying the economic down-cycle. Many Brazilians are buying homes to live in, in order to satisfy their primary accommodation needs, rather than pure investment. Moreover, the government program for low-income buyers Minha Casa Minha Vida is also seen as one of the principal reasons behind the real estate industry s impressive performance. In particular, the mortgage market in Brazil grew by over 30% in 2013, reaching a record 46 billion USD, with nearly 530,000 properties financed. The state owned bank Caixa Econômica Federal leads the market with almost 70% of the total loans. According to the Brazilian Association of Real Estate and Savings (ABECIP) in May 2014 there was a 6% rise in mortgage lending compared to the previous month, posting the second best month-on-month growth over the last 20 years. This indicates that the availability of mortgages is growing and it is easier to obtain mortgage finance. Some commentators believe that this rise in lending may be a cause of concern however CEO and founder of Agente Imovel, Johan Jonsson commented in July 2014 that it could be at least 10 years before there is any cause for concern over rising levels of lending. His opinion is based on the comparison with the developed economies and added that almost 50% of property transactions performed in Brazil are done completely without financing. 14 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

15 ONGOING PROPERTY PRICE GROWTH ACROSS BRAZIL According to Fipe Zap Index (primary house price index in Brazil); the two cities with largest house price increases are Rio de Janeiro and São Paulo. In Rio de Janeiro, house prices soared with 266.4% rise from January 2008 to February 2015, making a 10% increase since six months ago alone. São Paulo, not lagging far behind recorded 220% increase over the same time period, and incredible 12% since six months ago, again defying Brazil s economic downturn. In the North East, Fipe Zap Index measured that the three largest cities, Recife, Salvador and Fortaleza also recorded very strong growth. Recife is leading with 102.2% growth between Q and February 2015, which makes a 7.2% rise since October 2014 alone. Fortaleza and Salvador recorded 78% and 43.7% over the same period, making 5.6% and 5.1% increase over the last six months. This demonstrates a continuing impressive house price growth across Brazilian cities, clearly defying the wider economic picture in Brazil. Residential property price growth in North East Brazil Source: Fipe Zap (as at Q3 2014) 120% 100% Fortaleza Salvador Recife 95.3% 80% 72.4% 60% 40% 38.6% 20% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

16 In Natal, according to Webcasas Index (part of Santander), the average asking sales price in Petrópolis (Natal s prime residential area) has seen a rise of 23% over the 12 months to Q3 2014, with prices rising from R$3,683 per m² to R$4,526 per m². It is notable that this is the average asking price across the whole area, which also includes older and second-hand apartments. However, the prices of new and prime residential prices of developments in the area are significantly higher, varying between R$6,000 per m² to a maximum of R$12,000 per m² for the most exclusive tower buildings. Finally, Fipe Zap Composite Index that includes the seven largest cities in Brazil (Belo Horizonte, Brasilia, Fortaleza, Recife, Rio de Janeiro, Salvador and São Paulo) shows that the average house price growth across the cities has been astonishing. Between October 2010 and February 2015, the total house price growth amounted to 89.7%, which equals an average growth of 20% per annum. House price growth across the largest cities Source: Fipe Zap Index 100% 89.7% 80% 60% 40% 20% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q FEB RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

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18 IS THERE A RISK OF HOUSE PRICE BUBBLE? In recent years, some analysts have been warning of a potential real estate bubble in Brazilian property market. Thus, a potential house price overvaluation has been a hot, publically debated topic. This is because the housing market in major cities recorded extraordinary high price growth in recent years. On the other hand, the income growth, although high, has been comparably lower. However, due to low mortgages to GDP ratio, the health of the Brazilian banking system with robust international reserves (R$ 350 billion in mid-2014), coupled with traditionally cautious mortgage policies in Brazil (the average loan to value ratio in March 2014 was 63.5%); a risk of a house price bubble appears unlikely. During the credit crunch we have witnessed house price bubbles bursting and bank crisis hitting more heavily indebted economies (e.g. in United States mortgage loan to value ratios before the credit crunch had reached 120% or 130%). Elsewhere, according to analysis from Savills, Brazil s property market compared to some of the other fast growing emerging economies, is showing price growth without looking overheated. In autumn 2014, Savills senior researcher Paul Tostevin reported that both the commercial and residential rentals sectors are showing healthy yields, at 8.5% and 5.1% respectively Savills World Research of 12 Cities H has attempted to take the temperature and determine if their selection of 12 most attractive global cities (of which Rio de Janeiro was newly added in 2014) look overheated in terms of house prices. According to Savills report findings, Rio de Janeiro ranked as one of the safer cities measured by ratio of average city GDP per capita to mainstream house price values (non-prime). The ratio of 10 for Rio de Janeiro is far lower compared to Mumbai that was singled out as potentially overheated, showing a ratio of 40. On the prime side (the same type of ratio applied over prime properties in Rio de Janeiro), it was slightly higher, however not vulnerably high. Rio s ratio was 38 and the highest was 120 in Mumbai, followed by 80 in Hong Kong. 18 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

19 THE IMPORTANCE OF FOREIGN DIRECT INVESTMENT Foreign direct investment (FDI) is of enormous importance in Brazil. The growth has been astonishing. If we compare growth between 2003 and 2013 FDI has grown from 10 billion USD to 64 billion in 2013, an incredible 531% growth was achieved over the 10-year period. These are the final results for FDI data series up to For 2014, the figure is currently a preliminary estimate (marked by graph s gradient line). EIU estimates that Brazil will have received around 60 billion USD in 2014, however, as the figure is preliminary the final result can be higher. The official OECD statistics on FDI statistics reveal that Brazil was the third largest FDI receiver in the world, in both 2013 and In December 2014 OECD issued preliminary results for all countries for the first two quarters of 2014, and it highlights that Brazil, amongst US, China, UK and Canada, remains to be one of the top 4 world-leading destinations for FDI inflows. Foreign Direct Investment in Brazil Source: Economist Intelligence Unit Billions (USD) Country 2012 USD billion 1. China US Brazil Australia UK Canada Ireland Russia Spain France 25.1 Source: OECD, 2012 Country 2013 USD billion 1. China US Brazil Canada Russia Australia Spain UK Ireland Mexico 35.2 Source: OECD, RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

20 WHO IS INVESTING IN BRAZIL? The aforementioned FDI inflows include all types of foreign direct investment in Brazil. Whilst it is not possible for us to know how much of the total FDI was invested into the real estate sector, we know that real estate represents one of biggest magnets for foreign as well as domestic investment in Brazil. A question we have sought to answer is: Who is investing in Brazil from overseas? A good example of a foreign investor is one of the largest US property investor magnets, Donald Trump, who is investing in Brazil s offices and hotel sector. Donald Trump has partnered with Brazilian developer LSH Barra SA in a project to build a 171-room luxury hotel, called the Trump Hotel Rio de Janeiro. This will be the first Trump Hotel in South America and the building cost is estimated to be in the region of R$200 million. In the office sector, Trump is planning to build a giant office tower complex for R$5 billion (USD 2.1 billion) in Rio de Janeiro city centre. Also, the largest private US equity fund in Brazil - GTIS Partners, has raised approximately USD2.3 billion of equity since its inception in The firm has an office in São Paolo and so far has invested in residential, offices, hotels and industrial real estate in Brazil. Another large US private equity fund investing in Brazil s real estate sector is Blackstone. Blackstone has signed USD1billion deal in July 2013 with the homebuilder Gafisa for a controlling stake in its high-end residential subsidiary, Furthermore, Blackstone-backed Patria Fund V fund has closed at USD 1.75 billion in July 2014, beating its USD 1.5 billion. Moreover, Canadian Brookfield Asset Management has its own Brazilian subsidiary named Brookfield Brazil, employing 14,000 people and operating in Brazil since It is one of the largest investment platforms in the country with USD7.9billion of assets under management across retail, residential and office developments. Also, Singaporean Sovereign Wealth Fund GIC has invested USD167 million into Brazilian online retailer Netshoes earlier in May. In April 2014, a new GIC office officially opened in São Paulo with an aim to focus on investments opportunities in Latin America. In the hospitality industry, French hotel group Accor and Canadian luxury hotel management group Four Seasons have both announced their intentions to build new hotels in Brazil. Accor plans to invest USD 1.5billion to increase a number of its hotel properties to 250 in the next four years, while Four Seasons is planning to open three more hotels in Brazil to satisfy the demand for the growing luxury tourism market. Award-winning developer, Ritz-G5, is also investing heavily into Brazil with a strategic focus on the North East of the country. Raising funds globally, Ritz-G5 holds an impressive track record and has numerous residential, commercial, industrial and agricultural projects in progress. 20 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

21 OUTLOOK FOR BRAZILIAN REAL ESTATE An intense exploration of the property market in the core Brazilian cities such as São Paulo and Rio de Janeiro, have led to extremely high increase in property values. Although both cities remain attractive, this may potentially limit the opportunities for such high capital value growth in the future. However, there are other regions in Brazil needing investment in the real estate sector. As Brazilian property market weight in the economy is growing, opportunities in the North East offer better value, allowing for growth of more attractive returns. Brazil s outlook remains positive and the country is currently taking the first steps towards economic recovery. Brazil s real estate continues to be highly attractive for foreign investors and the country is boosting its position as a competitive market. Brazil has several positive features of an attractive market including: age pyramid favourable to the property market; healthy growth in population, rising mortgage market; social mobility; government programs Minha Casa Minha Vida (Social Housing); growing wealth and high employment figures. Moreover, a severe housing shortage in the country continues to boost the residential property demand and the mortgage market. Population growth in Brazil Source: Economist Intelligence Unit, IBGE Millions RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

22 Brazil s population is significantly younger than in the West Atlas do Censo Demografico, IBGE WORLD AFRICA NORTH AMERICA LATIN AMERICA ASIA EUROPE ASIA PACIFIC BRAZIL Furthermore, recently the Brazilian real depreciated and is currently on a 10-year high against US dollar (3.25 BRL/USD). Whilst the currency depreciation is usually perceived as a weakness of the economy, on the upside of the story lie two positive factors: more favourable prices for international investors as Brazilian property becomes cheaper overseas, and secondly, a boost for Brazilian exports as the prices of Brazilian goods and services become cheaper abroad. In conclusion, taking into consideration our analysis, we firmly believe that Brazil s real estate remains as one of the highly attractive investment propositions. 22 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

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24 DISCLAIMER Whilst Ritz-G5, its agents and representatives have made every effort when compiling this report to provide current and accurate information from reliable sources it is accepted when reading this report that the content could contain errors. Ritz-G5 takes no liability or responsibility for any errors or omissions in the content contained in this report. Furthermore, this material may contain references to statistics, prices, certain laws and regulations that may change over time and should not be interpreted as factual without checking. The material, content and information in this report is provided as is with no guarantees of completeness. Figures, accuracy or timeliness are provided without warranties of any kind, express or implied. Ritz-G5 does not guarantee that this report, the services provided through this report, prices, comparable prices of developments and any material information or content from this brochure, is valid at the time or after the publication of this report. The predictions within this report should not be relied upon as actual returns and the investment at maturity may be worth less than the amount paid. The information contained in this report should not be construed as legal, tax, accounting or any other professional advice or service. You should consult with a professional legal or financial advisor familiar with your particular factual situation for advice concerning specific legal, tax, accounting or other matters before making any decision. Ritz-G5 is not regulated by the Financial Conduct Authority FCA or any other financial institution and is not offering investment advice in this report or through any other means of communication. Computer Generated Imagery (CGI) is for illustrative purposes only and may be subject to change. 24 RITZ-G5 BRAZIL ECONOMIC & REAL ESTATE REPORT SPRING 2015

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