Up until the mid-1980s, there were few builders busier than those in the Brazilian city of São Paulo. In little over a century, they turned a small provincial town into one of the world's biggest cities, many of them making huge fortunes building the seemingly countless office blocks, apartment buildings and freeways that make up this urban giant of almost 20 million people.

But after decades of breakneck growth, São Paulo's construction sector hit a brick wall in the mid-1980s, as Brazil entered its "lost decade", blighted by default and hyperinflation, problems eventually solved - but by the very builder-unfriendly means of high interest rates.

"For the construction sector, the period from 1985 until 2002 was a dark age," says Celso Petrucci, executive director at Secovi, the real estate industry's main body in São Paulo. But after so many lean years local confidence is once again bullish, confidence that is shared by some influential voices abroad.

Last year the Duke of Westminster's Grosvenor Group predicted the city would - along with Shanghai and the southern California conurbation - be one of the 21st century's property hot spots.

Reasons for the optimism are not hard to find. China is bidding up demand for Brazil's commodity exports leading to record trade surpluses. The country's notoriously unsteady finances are more robust than at any time in living memory and, with inflation stable, interest rates are falling from their growth-crushing 2003 high of 26 per cent to 13 per cent today.

And, after the long slump, there is much catching up for builders to do after years when economic mismanagement and then belt-tightening ruled out sufficient investment in construction. São Paulo has a housing deficit numbered in the millions, between people living in slums and young middle class adults still living with parents because they cannot afford a place of their own.

Infrastructure is creaking. Roads, ports and power plants will all need billions of dollars in investment in coming years if economic growth is not to come to a shuddering halt because of gridlocked transport networks or electricity shortages.

Meanwhile the city government is looking for partners in an initiative to rehabilitate the decrepit old commercial centre, of which an estimated 20 per cent is lying vacant, and is now home to a neighbourhood known as cracolandîa - crack-land.

Almost as important in fuelling confidence as the idea of tackling all this pent-up demand is a change in the law that beefs up protection for mortgage lenders.

Previously in Brazil lenders found it very difficult to evict borrowers who had ceased repayment on loans. Therefore lenders demanded borrowers jump through an almost impossible series of hoops in order to receive expensive credit to be repaid in as little as five years. The result is that today only around a fifth of Brazilian home and business owners have a mortgage, compared with more than 70 per cent in Europe and the US.

But recent legislation has been put in place enabling lenders to repossess assets. "More security for lenders means more credit and cheaper credit for borrowers," says Petrucci.

This has had a dramatic impact on the market. Banks doubled the amount of credit available for homebuyers last year from 2005. The number of property sales in the city last year was up over 20 per cent on 2005, which itself saw a rise of 18 per cent on 2004. Prices for new residential property in the city rose by almost 24 per cent last year.

Builders are ready to take advantage of surging demand as they have large piles of cash ready to invest after the industry recently recapitalised.

"Before, the sector in Brazil never had a sustainable financial model. Now there is huge liquidity as it starts to tap capital markets," says Fabio Nogueira, director of Brazilian Mortgages, a leading local real estate financing company.

"Construction companies are stronger after a recent rush of IPOs. Fifteen companies from the sector in the last two years raised over US$5 billion (€3.77bn). The sector has never tapped capital markets in the way we now see with securitisation, creation of real estate investment trusts (REITs) and equity funds. By doing so the sector is ready to achieve a level of business never seen before."

US investors have been the first of the outsiders to show up looking for a slice of the action but, unknown to them, Irish investors will already be present - albeit indirectly - given that London-based hedge funds have been quick to follow the Americans into the São Paulo property market.

"Average returns here are between 10 and 12 per cent, good by international comparisons and the strengthening real (Brazil's currency) benefits foreign investors," says Nogueira. But São Paulo has so far not attracted the smaller foreign investors who instead have gravitated to Rio de Janeiro and Brazil's beach-lined north-eastern states. These tourist locations have strong buy-to-rent markets, all the more attractive as many foreign buyers plan to spend part of the year holidaying in their Brazilian property.

São Paulo, on the other hand, can be an intimidating city for foreigners and most tourists who land here seek to transit through as quickly as possible. But bargains can be had in a city residents consider the most exciting in South America. Investors can find a 200sq m (2,153sq ft) three-bedroom apartment in the upscale Jardim district from around €150,000.

But, for those who do not want to buy, yet are interested in investing in its property market, then they can do so through one of the developing world's most liquid stock markets. The Bolsa in São Paulo lists many leading construction companies as well as REITs. All earnings on property-related paper are tax-free for private investors, locals and foreigners alike. Many European fund managers offer investors exposure to this market.

There are risks to investing in Brazil, analysts warn. If the country fails to resolve its looming pension crisis it could leave the state dependent on increased borrowing to plug the deficit and so impede further falls in interest rates, thus dampening the current economic optimism.

The benign international scenario, which has seen record prices paid for Brazil's commodity exports in recent years, could be hit by a slowdown in China, a major customer for Brazil's raw materials. Hikes in US interest rates in response to higher inflation there would direct foreign investment away from emerging markets and drain much of the current liquidity from Brazil's markets.

"But the positives outweigh the risks," believes Petrucci. "Our country risk rating is at record lows and I believe the property market is entering a 10-year cycle."

Brazilian Mortgages' Nogueira agrees: "This is a unique moment. We are not entering a bubble. Our company was founded nine years ago envisaging this moment. Brazil is not perfect so it took some time to get here. But now it is happening."