Brazil’s Real Estate Investment Trusts Face Steepest Decline in Two Years

Brazil’s real estate investment trusts (REITs) experienced their most significant drop in two years this September. The monetary tightening in Brazil has affected these funds, pushing the sector’s benchmark index into negative territory for 2024.

The index’s decline has resulted in a 0.16% loss for the year so far. This small decrease follows several consecutive increases in the first half of 2024. During that period, REITs saw R$ 20 billion in offerings on the B3 stock exchange.

REITs continued to advance in July and August, driven by funds focused on real estate receivables. These “paper funds” have shown the best performance this year, with a 3.4% increase.

Larissa Gatti Nappo, an analyst at Itaú BBA, notes the renewed investor interest in this category. Flávio Pires, a REIT analyst at Santander, recommends a more defensive portfolio to preserve dividends.

He suggests hybrid funds with long-term contracts from large companies and reduces exposure to products negatively impacted by the Selic rate.

BTG Pactual has also adopted a conservative approach to its portfolio. They have reduced funds with greater exposure to inflation indices and increased those indexed to the CDI.

For “brick funds,” which hold real assets, they prefer more diversified options. Among brick funds, office-focused REITs have performed the worst, with quotations falling 8.8% this year.

However, this decline reflects weak data, with São Paulo’s office vacancy rate rising slightly to 21.4% in Q1 2024. Rio de Janeiro’s vacancy rate remains above 30%.

Impact of Rising Interest Rates on REITs

The rise in future interest rates has increased the attractiveness of government bonds, putting REITs at a disadvantage.

Higher interest rates have also negatively impacted shopping mall funds, which have declined 3.7% this year through September.

Logistics warehouse funds, a favorite among managers, have remained nearly flat with a slight 0.1% increase from January to September 2024.

The sector’s vacancy rate improved to 9% in Q2 2024, one of the lowest historically. Office REITs show the largest discount between market value and book value at 30%.

Logistics funds have a 12% discount, shopping malls 10%, financial asset funds 9%, and fund of funds 6%. BTG Pactual‘s report highlights dividend yields, with multi-strategy funds offering the highest average at 12.8% per year.

In short, real estate receivables funds follow at 12.3%, and urban income funds at 11.5%. Logistics warehouses average 10.3%, corporate slabs 10.5%, and shopping malls 9.1%.

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