Market Tests Real Estate Funds on Brazil’s Residential Rentals

RIO DE JANEIRO, BRAZIL – The real estate investment fund (REIF) industry saw the launch in December of two funds specializing in residential real estate for rental.

The initiative is a novelty in the sector, traditionally based on corporate real estate – such as corporate buildings, shopping malls, and logistics warehouses – in addition to real estate credit tools.

Market players expect that the new asset class will become more common in the coming years. By 2020, there will be at least one new capture and one subsequent offer on the radar, as the report found.

Market players believe that residential rental will grow. One of the reasons for this is the potential for attractive yields, in the midst of an economy with a basic interest rate of 4.5 percent – and which should remain low until at least 2021.

Another factor is the change in consumer behavior, with many young adults preferring to rent an apartment rather than buy it and invest the capital.

“The REIF for residential rentals, like any other, can make sense if it has good properties, bought at the right price and is well managed. I believe there will be new emissions in 2020,” says Eduardo Malheiros, founding partner of Habitat Capital.

Despite the promising environment, the funds that debuted in December had diverse performances, signaling that investors have not yet completely embraced the idea.

The Luggo REIF, composed of residential buildings built by MRV and managed by its subsidiary Luggo, was able to raise the total amount proposed for the offer, of R$90 million (US$22.5 million).

The Housi REIF, on the other hand, of properties registered in Housi – an apartment rental platform, which emerged as a split from the developer Vitacon, both by businessman Alexandre Frankel -, had low demand and did not raise the minimum amount of R$150 million.

In order not to cancel the offer, the Easynvest coordinator lowered the threshold to R$50 million and extended the subscription period by one month. However, last Thursday, December 26th, the CVM suspended the offer on the grounds that it was still in progress without the new rules being approved – the statement says that the offer is “pending a demonstration by the SRE (Superintendence of Securities Registration) regarding these new conditions.

Although the real estate fund industry is taking off, investors have found it difficult to put a price on funds in this new asset category. There are still no established parameters to project the generation of dividends from the occupation level and default in the medium and long terms.

In the residential sector, the lease contracts have a two-year term on average. In the commercial sector, there are at least five. In addition, the default of individual tenants tends to be higher than that of large companies in times of crisis, which represents a potential risk for dividends.

Yet another point that generated concern was the corporate governance of these new funds. “The market identified a point of focus in these new funds as investors were buying real estate from sellers linked to the service providers of these funds. When there is a situation like this, investors need to consider with more care whether the offer has the right price,” Malheiros said.

“Because of the price, the market ultimately penalized Housi’s offer.”

“There was a lack of demand from investors because the product is very new and not yet well priced,” said Carlos Ferrari, a partner at NFA Attorneys, who specializes in real estate business.

Strategies

The Luggo REIF offer adopted as a strategy to guarantee the payment of dividends to shareholders, as a way to minimize potential risks of vacating the properties. At the start, the fund will comprise four buildings.

Two of them are operating, with 100 percent occupancy and 70 percent of the apartments. The other two buildings are under construction and will only be ready in early 2020.

In order to provide security to the investors, MRV has committed to pay the rent for the unoccupied apartments in these new buildings for two years or until they reach 95 percent occupation.

“We wanted to show the viability of the business,” said Ricardo Paixão, MRV’s director of investor relations.

According to him, the Luggo REIF has planned a further offer in 2020, slightly over R$90 million, for the purchase of new buildings. In all, the fund may total R$650 million in share issues. “This should be enough for three or four years of structuring. After that, we can open another fund”, he said.

Alexandre Frankel, from Vitacon and Housi, does not specifically talk about the fund because he is in a period of silence. However, he argues that the residential rental market is promising in general. “This asset class represents a great investment alternative,” he said.

“When Brazil had a SELIC rate of 14 percent per year, it was unthinkable to invest in rentals. But with the prospect of long-term low-interest rates, the sector becomes attractive”.

In the REIF market, next year should also offer investors at least one more option to contribute to the residential rental segment. VBI, the owner of Uliving, plans to raise some R$500 million in a fund in the second semester of 2020 with student apartments.

Cyrela is also able to invest in the area. The company has joined the Canadian CPPIB pension fund to enter the residential property rental market.

In the future, the assets may become part of the funds. Wanted, Cyrela reported that it “closely monitors trends and new ways of generating business for the sector”.

Source: Infomoney