Real Estate Funds Still on the Rise

Increasing property values and income tax exemptions make investments increasingly attractive. Average returns reached 32.86% in 2010.

As real estate prices increase, so does the value of associated investments, says Bruno Nahon, partner of Aria Capital. In 2010, returns on real estate funds have averaged 32.86%, which corresponds to 483% more than returns on savings accounts (6.81%,) and 337% over the interbank deposit yields (9.75%) (CDIs) that serve as a benchmark for fixed income funds and for the market as a whole. According to a specialist, the highest returns (44.97%) were registered by a real estate multi-asset fund that specializes in office space for the rental market and hotels. “In this case the returns made on the venture are paid out to shareholders on a monthly basis. Share value reflects not only rent performance for office space and hotel accommodation but also the increasing value of the property as a whole,” he explains.

Real estate investment funds were introduced in 1993, but it was only in 2005, when these funds became exempt of income tax, that the volume of operations involving these types of assets increased. According to Nahon, there are currently over 80 funds whose total value is estimated at R$ 9 billion. In 2010 shares of new funds issued were equivalent to R$ 4 billion. In total, fifty funds have shares traded in secondary markets (exchange-traded or over the counter through BM&FBovespa) and generated transactions of a total value of R$ 377 million in 2010 compared to R$ 229 million in 2009. Despite being relatively new, the secondary market in shares of real estate funds is growing year after year.

Small investors

Things are also looking good for sales and for the rental market. Monthly income on renting property varies on average between 0.5% and 0.6% on the nominal value of the property, says Luigi Martins, director of Lopes Consultoria Rio, “in some cases they can be as high as 0.8%, which is excellent.” In Americas Corporate, on Avenida das Americas, returns are increasing at 1%. “Currently I rent one square meter for R$ 110, and I can sell it at 12 to 13 thousand Reais. Apart from independent professionals who invest in office space in Barra, smaller investors are looking for non-residential property as an investment alternative. “The value of property increases reliably approximately 30% per annum,” says Rubem Vasconcelos, president of the realty firm Patrimovel. With an initial investment of RS 160 thousand, for example, he says it is possible to purchase 27 square meters of office space in Barra. Buying property is very easy now. You pay 25% on the building plans and 75% when the property is ready. This has generated increasing interest in office space.

Of all buyers of corporate property, Rogério Jonas Zylbersztajn, president of RJZ Cyrela estimates that 54.3% are investors. On residential property, this proportion is 22.2%, and the average area of apartments purchased is 80 square meters. According to Mário Amorim, director-superintendent of the realty firm Basimóvel, this recovery reflects the needs of the final buyer, as well as the needs of smaller investors making their presence felt in the marketplace. “The small investor discovers a market with good returns and liquidity that provides an alternative to financial markets that offer either high risk or more conservative low-yielding investments. It is often the individual investor who buys one or a few offices, apart from, of course, big investors who are usually international funds who are also increasing their stake in constructions.”

Amorim estimates that 60% of corporate properties are sold to small private investors seeking to supplement their income or pensions.

How it Works

Real estate investment funds are closed funds, in other words they don’t permit share redemptions. Returns to shareholders are conducted through payouts (usually monthly) of returns on investments or portfolios, or through dissolution of the fund by selling assets. Funds raised are usually invested in real estate projects either by purchasing existing property or through fixed income securities and equity linked to real estate assets. Funds are classified either according to the type of real estate in which they specialize (hotels, hospitals, industrial, retail, offices, etc.) or according to the purpose of the investment. Some funds produce regular returns either by renting properties or through receiving coupons payments of fixed income securities purchased by the fund such as Certificates of Real Estate Receivables. Capital gains funds on the other hand generate returns on the back of increasing values of real estate assets purchased by the fund. Other more general real estate investment funds produce returns from a combination of rent, interest, dividends and capital gains on the sale and purchase of assets. Finally, securitization funds set up pre-established securitization operations such as build-to-suits or sale and lease-backs.

Among the most profitable funds of 2010, there are funds that focus on a wide range of properties from malls, to hospitals, to hotels, and office buildings. Most of these can be classified as fixed income funds.