Sales of Brazilian funds that invest in real estate and mortgage securities doubled this year to a record as banks including Grupo BTG Pactual and Caixa Economica Federal sold shares and Caixa sees similar growth in 2013.
Brazil’s version of real estate investment trusts in the U.S., are on track to total sales of about 15.8 billion reais ($7.64 billion) this year, up from 7.7 billion reais in 2011, according to CVM, the country’s securities regulator. The number of funds selling shares climbed to 62 from 39 in 2011.
The funds are “by far the best investments you could have made in Brazil over the past three to four years,” said Paulo Bilyk, chief investment officer at Rio Bravo Investimentos, which oversees about $3.5 billion in Brazilian equity and debt, including $2.6 billion of real estate assets.
Investors seeking higher returns amid record low yields on Brazilian government bonds are turning to the funds, which can invest in properties as well as securities such as mortgage-backed debt. The home loan market in Brazil totaled about 244 billion reais as of October, up 85.7 percent from December 2010, central-bank data show. That’s almost 11 percent of the total credit in the economy. Mortgage-backed bonds outstanding totaled 29.8 billion reais as of Oct. 17, according to Cetip SA-Mercados Organizados, Brazil’s biggest securities clearing house.
Caixa, which plans to offer four new funds in the first half of 2013 totaling about 1 billion reais, expects the market to double again next year, said Marcos Roberto Vasconcelos, vice president of asset management at the Brasilia-based bank.
The real estate funds had a return of 31.84 percent so far this year as of yesterday, according to IFIX Index, which includes funds listed in BM&FBovespa exchanges and traded over the counter. That compares with an increase of 7.47 percent of Ibovespa Index, which includes the most-traded stocks in the Sao Paulo-based exchange.
Brazil’s central bank has cut the benchmark Selic rate 5.25 percentage points since August 2011 to 7.25 percent, the most of any of the Group of 20 nations, and Sao Paulo-based Itau Unibanco Holding SA said Dec. 6 it expects another 1 percentage point of reductions next year after third-quarter economic growth trailed government predictions.
The central bank today lowered its forecast for price increases in 2013, saying record-low interest rates won’t compromise its goal of bringing inflation back to target. Policy makers, in their quarterly report, said inflation will slow to 4.8 percent in 2013, according to its reference scenario where the benchmark rate stays at its current 7.25 percent.
“You are starting to have a more sophisticated and active kind of manager for the funds, the type that doesn’t only buy a property and hold it and collect the rent,” said Michel Gutnik Steinberg, head of real estate for Brasil Plural SA Banco Multiplo. “It’s a whole new way to see real estate for companies and banks.” Sao Paulo-based Plural plans to sell about 2.5 billion shares in the next 12 months, Steinberg said.
BTG sold about 2 billion reais of shares in its FII BTG Pactual Corporate Office Fund, which has purchased 12 properties with a total market value of 2.13 billion reais, according to the prospectus. Federally controlled Caixa manages about 5 billion reais in funds, or about 28 percent of the 18-billion-real market, according to Vasconcelos.
Real estate funds are similar to fixed-income funds and will be “the first ones that retail investors will migrate to because they have a very predictable monthly return and an income-tax exemption,” said Jose Olympio Pereira, chief executive officer of Credit Suisse Group AG’s Brazil business. Zurich-based Credit Suisse manages about 3 billion reais in such funds, he said.
Steinberg at Brasil Plural said only retail investors had been buying shares of real estate funds until recently. “Now it’s changing and Brazilian institutional investors like the biggest pension funds are attracted to it,” he said.
Fundacao Real Grandeza, the pension fund for Furnas Centrais Eletricas SA, plans to invest about 150 million reais in real estate funds next year after investing 40 million this year, said Antonio Machado Filho, manager of investment operations at the pension fund. He said it’s easier to buy a share of a fund than hold actual property, as they had been doing until now, because shares are easier to sell and the fund manager maintains the property.
“Those funds have a conservative profile like a fixed-income investment, as the investors receive the long-term cash flow from the rent, but they have higher returns,” Filho said.
The government has been encouraging real estate funds to expand with tax incentives to increase financing options for housing and construction industries in order to boost employment and the economy. Growth in the world’s largest emerging market after China is expected to slow to 1 percent this year, according to a weekly central bank survey of about 100 economists. That’s down from 2.7 percent in 2011 and 7.5 percent in 2010.
The weakest growth in the so-called BRIC nations is spurring speculation unemployment may rise and housing prices may fall.
Credit penetration in Brazil is low, “so we’re not going to have a big deleveraging like we had in Iceland or Ireland or Spain where the banks start to fail, it’s not that kind of deleveraging,” Antonio Fortes, a Santiago-based fund manager at Larrain Vial, said in a telephone interview. “But I think once you start seeing layoffs in Brazil, then you’re going to see prices come down.”
The real estate funds aren’t guaranteed and can lose money if rents or real estate values decline, or if the property remains vacant for an extended period. Accidents could also increase maintenance costs, according to the FII BTG Pactual Corporate Office Fund’s prospectus. Liquidity is another risk, should investors seeking to exit find it difficult to sell their shares, according to the prospectus.
“There is still a lack of transparency in the way the real estate funds are sold in Brazil and a lot of investors didn’t realize the risks they are taking and can get some bad surprises on the end,” said Geraldo Lamounier, partner at GPS Investimentos Financeiros e Participacoes SA, the Brazilian private-banking firm partly owned by Julius Baer Group Ltd.
Returns on the BTG corporate fund started in December 2010 have been almost 71 percent through June, or more than four times the so-called CDI interbank interest rate, according to the prospectus. The comparison includes the value of the shares as well as earnings from monthly rent, which can be compared to a dividend on an equity fund or the yield on fixed-income securities.
“Real estate is something we are giving a lot of emphasis because the industry tends to grow a lot,” said Andre Schwartz, one of Plural’s founders, who predicted the market would expand to about 50 billion reais in about three years.
More conservative funds for retail investors typically yield between 6 percent and 9 percent a year, said Vitor dos Santos Pinto, national manager for real estate funds at Caixa. There are also private placements for institutional investors with bigger yields and risks, he said. Brazil’s government bonds maturing in May 15 2015 pay a 1.7594 percent yield with the principal adjusted by inflation measure by IPCA, which increased 5.78 percent this year.
Kinea Investimentos Ltda, the asset-management and private-equity boutique owned by Itau Unibanco Holding SA, is also selling shares of real estate funds, according to the CVM website.
For property owners, real estate funds are a new source of financing that doesn’t dilute stakes, Plural’s Steinberg said. Tax incentives include exemptions from the income tax as well as the social security contributions known as PIS and Cofins.
To take advantage of those breaks, banks including Caixa, Banco do Brasil SA and Banco Santander Brasil SA are selling properties to real estate funds and then paying rent to them. Caixa obtained 450 million reais selling properties to a fund that it said will seek to offer a 7 percent inflation-adjusted yield to investors.
Banco do Brasil has done a secondary offering of 1.592 billion reais for a fund holding branches and other real estate assets that were owned by the bank. The fund will seek to offer shareholders a yield of 8.5 percent, according to the prospectus. Before the transaction, the bank owned 100 percent of the fund and said accounting gains from marking the assets to market will total about 710 million reais.
Plural’s FII Rio Negro, a 270-million-real fund, traded about 955,000 reais a day on average from July 31 through Nov. 6, according to data compiled by Bloomberg. Sao Carlos Empreendimentos e Participacoes SA, a real estate company with a market capitalization of 2.6 billion reais, trades about 1.1 million reais a day.
“The funds have much more liquidity, and so for the retail investor the possibility of getting in and out is also bigger than in a company,” Steinberg said.