Opinion – From Grain to Grain: Real estate funds started their third year of decline; find out what to do

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Those who invested in real estate funds (FIIs) in December 2018 still have a return above the CDI, but those who invested at the end of 2019 experience 2 years of negative returns. This recent performance has discouraged investors with this asset class. But is it time to throw in the towel?

After up 36% in 2019, the B3 real estate fund index, known as IFIX, fell by 10.2% and 2.3% in 2020 and 2021, respectively. To make matters worse, in 2022, the IFIX is already devaluing 1.6%.

However, you may be too hasty if you give up now. I list four indicators that you should evaluate before making your decision.

How is the difference in return between public bonds referenced to the IPCA and the dividend rate of real estate funds?

Real estate funds are not fixed income investments. However, they have income from property rentals that are adjusted by an inflation index such as the IPCA.

For this reason, they are very similar to IPCA-referenced fixed income securities. As they are more risky, FIIs must have a rate of return on the dividend higher than the real remuneration of a public security.

A real estate fund’s dividend rate can be calculated as the ratio of the dividend to the current price. For example, an FII that paid a dividend of BRL 10.0 in the last year and has a price of BRL 100.00 has a dividend rate of 10% per year (=10/100).

The chart below shows the evolution of the IFIX dividend rate and the real interest rate on 30-year Brazilian government bonds.

The difference between the two rates is close to its maximum level. This means that the risk premium that FIIs currently offer is attractive.

Is the FIIs’ dividend rate close to the maximum?

Looking at the graph above, you can see that the maximum that real estate funds on average paid in the past was around 12% per year.

This rate was reached when the Selic rate in Brazil reached its maximum in the last decade, which was 14.25% per year between 2015 and 2016.

Therefore, the current average dividend rate of 10% per year is very interesting, especially when considering that this dividend is tax-exempt and is still corrected by an inflation index.

Selic’s high cycle is nearing its end

The best time for FIIs is when the market yield curve stops rising and starts falling. This normally occurs when the Monetary Policy Committee (COPOM) stops raising interest rates.

Note that the best moment in the last decade to buy FIIs was exactly when the COPOM stopped raising interest rates in 2016 and started the cycle of lower interest rates. This point is marked in the graph below.

The yellow line is the evolution of the Selic rate by the COPOM and the white line the evolution of the IFIX. The red circle identifies the optimal point to enter FIIs in the recent past. Note that it coincides with the midpoint of the interest rate breakout period between 2015 and 2016.

Three more increases in the Selic rate are already expected in the next three COPOM meetings. From that moment on, it is expected that he will stop the highs.

So it seems that we are very close to the optimal investment point in this asset class.

Price per book value close to its historic lows

Unlike publicly traded companies, the equity value of FIIs is usually calculated by an independent external company once a year. This company assesses what the value of the invested assets should be, considering the current economic conditions and prospects for the results of real estate investments.

Therefore, the index that measures the ratio between the current price of the FII and its book value (P/VP) is closely monitored. It is more relevant than the same index for shares of publicly traded companies, as their equity value is not revalued.

The chart above shows the evolution of the IFIX P/VP ratio. Note that it is close to its historic low reached in 2016. Therefore, the FIIs may be close to their low point.

I am not here recommending that you invest now in FIIs, but just warning those who are discouraged with their investment that we may be close to their optimal investment point.

I reinforce that FIIs are a risky investment. Therefore, the investment must consider the long term and pay attention to suitability to the investor profile.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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