Homebuilder stocks are attractively priced after tipping, experts say

The year 2021 has not been an easy year for the shares of large developers traded on the Brazilian Stock Exchange.

While the Ibovespa, the main local stock market index, has accumulated a drop of approximately 9.7% this year (until December 13), shares of large construction companies such as Cyrela and MRV have losses that reach 46.3% and 36.2 %, respectively.

According to market analysts, there are several factors that help explain the challenging moment in the sector. There was a sharp rise in raw material prices in a scenario of accelerated economic recovery, reflected in inflation of 14.7% measured by the INCC-M (National Construction Cost Index) in the 12 months ended in November. Added to this are the rises in the Selic rate and real estate financing.

“When the person interested in buying a property sees that the inflation indexed to long-term financing contracts is in high double digits, they get scared. This reduces the purchasing power of construction companies”, says the analyst at Suno Research, João Daronco.

In addition, with the increase in the Selic rate underway by the Central Bank in an attempt to bring inflation back to the target, the interest rates charged by large banks in real estate financing also rose.

At Santander, the rates charged on real estate contracts started at 8.99% per year, plus the TR (Referential Rate).

At Bradesco, they ranged between 6.7% and 6.9%, to values ​​between 8.5% and 8.9%. At Itaú, the fixed interest rate was 8.3% at the beginning of December, plus the Referential Rate. In December 2020, the bank charged 6.9%.

At Banco do Brasil, fixed rates start at 7.58% (against 6.55% in December last year).

In the case of Caixa, rates in the category start from 8% per year (the bank was the only one that did not report the rate in effect in December 2020).

Daronco, from Suno Research, says that, although economists’ forecast is that the benchmark interest rate will still rise further in early 2022, the movement in real estate financing should occur at a much lower intensity.

“The Selic rate has already risen 7.25 percentage points from the lows of 2% a year, but the adjustment in real estate financing was not of the same magnitude”, says the analyst.

Daronco also says that, as a rule, financial institutions use the long-term modality more as a way to retain customers and offer other products than to seek high profitability with the operation.

As for 2022, although the market is betting on an even higher interest rate, some decompression in inflation is also expected over the next few months.

In the Focus report on December 10th, estimates by economists consulted by the Central Bank pointed to an inflation measured by the IPCA (Broad National Consumer Price Index) of 5.02% next year, after a projected increase of 10, 05% this year.

“The latest inflation data surprised positively, coming below market estimates and already signaled a weakening of economic activity”, assesses Raul Grego, civil construction analyst at Eleven Financial.

In this context of decompression in prices, and given the strong devaluation that real estate securities have had in recent months, the assessment of specialists is that there are already some good opportunities on the local stock exchange.

“What the Exchange is pricing has been exacerbated in most developers and, in my view, even irrationally,” says Daronco.

In a short-term scenario —which is projected to be highly volatile due to the 2022 elections—, analysts point out that developers aimed at the high-income public tend to show a more resilient performance compared to those operating in lower income groups.

Grego, from Eleven Financial, says that companies that are more focused on the federal government’s Casa Verde e Amarela program, such as Tenda, MRV and Direcional, end up having greater difficulty in transferring cost increases to the end customer, which reduces the financial margins.

“We saw the gross margin [indicador financeiro que mede a rentabilidade da empresa] of low-income developers fall between 5 and 10 percentage points in one year.”

Cyrela, Eztec and JHSF, in turn, which are more focused on the middle and high-income segments, have shown a much greater capacity to pass on the increase in costs, preserving the profitability of their operations, says Grego.

Renan Manda, the analyst responsible for covering the real estate sector at XP Investimentos, has a different view.

He claims that the developers more focused on the low-income public, in addition to having a much larger addressable customer base, also rely on government subsidies, which tends to keep the segment heated despite the comings and goings of economic cycles .

“The incorporated companies that serve the low income had a more expressive impact on the gross margin, but they are companies that have a very resilient demand and that are unleveraged”, says Manda.

“The electoral factor tends to be much less impactful for these companies.”

Enrico Cozzolino, partner and analyst at Levante Ideias de Investimentos, notes that it is common to find shares in the sector that, given the discounts that have been negotiated, do not even correspond to the company’s consolidated equity value.

“The relationship between risk and return, in my opinion, is positive. I believe it is more interesting to invest now and wait for a recovery,” he says.

The Levante analyst also claims that the process of reopening the economies and gradually returning to face-to-face activities is another factor that may contribute to the recovery of the real estate sector on the Stock Exchange in the coming months.

In particular, he adds, in the case of large developers already consolidated in their respective niches of activity — and with well-located ventures. “The sector is going through a difficult phase, but there are already some price asymmetries in the papers that can provide an interesting opportunity.”