For generations of Brazilians raised under the prospect of skyrocketing inflation and the forfeiture of savings accounts in the 1980s, purchasing a property to rent out in your golden years was seen as the ultimate retirement goal.
Fast-forward to 2020 and the prospect of a much more stable economy than the turbulent 1980s and the lowest benchmark interest rates of all time have once again kickstarted Brazilians’ dreams of becoming property moguls. As a result, Brazilian real estate investment trusts (FII, in Portuguese) are enjoying their heyday. [restricted]
The number of investors in these assets jumped from 121,000 in December 2017 to over a million in August 2020 — and 99 percent of them are retail investors, according to data from the B3 stock exchange. Such booming growth has attracted the attention of major players and, by the end of September, brokerage XP had its first FII Summit — a digital conference with some of the biggest fund managers to discuss the market prospects for these assets.
Juliana Pedroza, the head of Investor Relations at Habitat Capital Partners credits this astounding popularity to a combination of factors: the lowest benchmark interest rates in history drew increased attention to variable income assets (such as FIIs), which was supported by the increasing availability of information on new financial products.
Also, FIIs allow investors to gain exposure to the real estate market using less money than they’d have to spend to buy a property — without having to worry about administering homes or tenant agreements — and they can enjoy a much more diversified portfolio.
“Brazilians like to invest in real estate, it’s a historical tradition. FIIs are an evolution of this way of investing,” she told The Brazilian Report.
Investing in real estate: a change in mentality
Despite the rationale of FIIs being an easy way to invest in real estate, it is quite a different matter to owning a house or commercial property. First of all, there are multiple kinds of funds: ones that own or manage properties and gather income on rent, funds that invest in real estate companies and bonds, and funds that invest in other funds. Second: these are variable income assets.
The latter is probably the hardest concept to grasp for newcomers, as a large part of the appeal of FIIs is that they are known for paying out monthly dividends, income-tax-free — a market practice that many investors believe will be the equivalent of the steady rent income that leasing property can provide.
“When you own a property, real estate agents won’t show up at your door every day telling you the house’s market value. But you can consult the value of an FII and this is daunting. Some investors are uncomfortable with a 30 percent loss, as we had during the peak of the crisis,” explains Ms. Pedroza.
The Covid-19 crisis affected FIIs differently. While the benchmark index for these funds is down by an overall 12.8 percent this year, those funds that are focused on shopping malls suffered even a tougher blow, as was the example of General Shopping e Outlets do Brasil Fundo de Investimento Imobiliário FII, which has seen 45-percent since last this time last year.
For Ms. Pedroza, the need for a diversified portfolio is a big lesson learned from the crisis. “The big advantage of FIIs is that you can be positioned in many kinds of assets. But you need information, investors must know they may even have a negative return.”
Room to grow
Despite the astonishing expansion in the past few years, FIIs still have a lot of potential for growth. The market cap of FIIs in Brazil reaches BRL 103 billion (USD 18.5 billion), but the equivalent REITs in the U.S. are valued at a total of USD 1.17 trillion.
Ms. Pedroza believes that the Brazilian market has the capacity to absorb new product offers and already existing funds may recover as the economy reopens gradually and companies return to office work.
Another opportunity seems to be on assets focused on responsible investing and ESG (Environmental, Society and Governance) principles. As of August, Brazil got its first such fund, FII Biotic, which will invest in a startup hub in capital city Brasília. The fund aims to raise capital for a technology hub in the city. According to newspaper O Estado de S.Paulo, the first fundraising round is scheduled for this year and aims to raise up to BRL 2 billion of a total of BRL 5 billion.
“[ESG funds] tend to grow in the next two to three years and there are resources available for that, but now we need to develop the assets for the funds to invest,” said Ms. Pedroza.[/restricted]