March 24, 2017 / 4:01 PM / a year ago

UPDATE 2-Cyrela expects ongoing Brazil sales cancellations this quarter

(Adds comments from company officials)

SAO PAULO, March 24 (Reuters) - Cyrela Brazil Reality SA expects high levels of sales cancellations during the current first quarter, a sign Brazil’s largest homebuilder continues to struggle with the impact of a multi-year downturn in domestic construction.

During a conference call on Friday to discuss fourth-quarter results, Co-Chief Executive Officer Raphael Horn said Cyrela will focus on lowering inventories as cancellations and the lack of a government response to the problem continue to hamper the sector.

As a result, Horn said Cyrela will not increase the number of launches this year because the focus will be to reduce inventories of existing homes.

Last year, the company started 32 projects in core markets, including São Paulo, Rio de Janeiro, and Minas Gerais.

Cyrela’s rate of sales cancellations averaged 30 percent of deliveries in the fourth quarter, down from about 35 percent in the prior two quarters, said Paulo Gonçalves, investor relations officer, in an interview on Friday.

Cancellations tended to be higher in markets in the North and Northeast of Brazil. As Cyrela has now concluded its projects in those regions, the rate should fall in absolute terms over the coming months, he said.

Still, Brazil’s bleak economic prospects and lack of clear rules regarding sales cancellations are likely to affect Cyrela’s ability to generate cash and improve profitability this year.

A recovery looks likely next year if the government revamps rules related to home sales contracts that are onerous for the sector. Stubbornly high mortgage rates and unemployment are still stifling demand, Cyrela’s executives said.

“We still see a very tough year,” Horn said, adding the government’s response to the issues affecting the sector has been “slow.”

He said that Brazil has rules for home sales cancellations that are among the most punishing for homebuilders anywhere in the world.

The government has been trying to broker a deal between homebuilders and consumer protection groups on new rules for the sector. The talks have yet to find common ground on key aspects.

Cyrela said it had the highest rate of sales cancellations in its history for the year when it released fourth-quarter results, leading to a 68 percent drop in net income and an 11 percent drop in net revenue.

Shares of Cyrela fell 1.38 percent in afternoon trading on the São Paulo Stock Exchange, to 12.81 reais. The stock is up almost 26 percent this year. (Reporting by Ana Mano; Editing by Guillermo Parra-Bernal and Bernard Orr)

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