As conditions worsen, fund managers offload assets and boost cash reserves
11/06/2024
Real estate funds (FIIs) experienced their worst October on record, with the Ifix—the sector’s benchmark index—plummeting by 3.06%. This marks the largest monthly decline since November 2022, leaving share values nearing historic lows last seen in March last year. The analysis, conducted by Clube FII’s research team at Valor’s request, covered both “brick funds,” which invest directly in real estate, and “paper funds,” which invest in debt securities.
In response to the challenging landscape, fund managers are adjusting strategies, halting transactions, and selling stakes to bolster cash reserves as capital raising has become increasingly difficult.
“Until late August, our outlook was positive, and we were gearing up for a new issuance with promising deals in the pipeline,” said Gabriel Barbosa, manager of TRX Real Estate (TRXF11), one of the largest funds with R$2.15 billion in assets and 184,000 shareholders. “Since September, the scenario has collapsed.” Both issuance plans and negotiations have been suspended. “It’s better to wait for market stabilization because, right now, visibility is limited,” he adds.
The funds’ devaluation stems from rising interest rates in the futures market amid fiscal and inflation concerns. Long-term rates on B-Series National Treasury Notes (NTN-B) bonds, which serve as sector benchmarks and are theoretically risk-free, have reached yearly highs, surpassing 6.5% of Brazil’s benchmark inflation index (IPCA). These rates are luring investors away from FIIs, said Danilo Barbosa, partner and head of research at Clube FII. “Long-term NTN-B rates are far more correlated with FIIs than the Selic rate,” he notes.
According to the Clube FII study, paper fund shares are trading at an average 7% discount to asset values as of October 31, slightly above the 10% record in March 2023. Brick fund shares show a deeper 16% discount, close to the 17% historic low from March last year, while Ifix sits at a 12% discount (its record was 13% in 2023).
Corporate office buildings are the hardest hit among real estate types, with a 33% discount, followed by shopping centers at 18%, logistics warehouses at 11%, and urban rental properties (such as pharmacies and supermarkets) at 7%. For shopping malls, the discounts are even higher than in November 2021 during the pandemic, when the average discount hit 20%.
According to Clube FII’s Danilo Barbosa, the market may still face further declines, given that long-term NTN-B rates are currently higher than they were at past lows. “The 2035-maturity NTN-B now offers IPCA plus 6.64%, compared to 6.48% in March 2023. If this were the sole factor, it could suggest further downside for fund values.” However, he believes share values are now attractive to buyers.
TRXF11, which holds 53 properties across 11 states—primarily large retail stores—secured a major deal in July with a R$621 million contract to build a “built-to-suit” hospital for the Albert Einstein chain, a landmark 20-year lease for the fund. In the first half of the year, TRXF11 successfully raised R$250 million, twice the anticipated amount. Now, with limited prospects for additional funding, Mr. Barbosa has decided to boost the fund’s cash position, which currently stands at R$400 million.
To capitalize on strong investor demand in the private credit market—where high interest has driven down rates on corporate debt securities—TRXF11 is issuing R$224 million in 15-year real estate receivables certificates (CRIs) at IPCA plus 6.9%. “When public offerings aren’t favorable, we raise capital through debt securities to maintain liquidity and secure quality investments. When the environment improves, we’ll issue shares to balance the books,” the fund’s representative said.
Known for its portfolio rotation, TRXF11 sold ten properties this year, generating R$750 million. Although the fund employs a multi-strategy approach, its primary focus remains on real estate assets (“brick” investments), holding just R$120 million in CRIs. Currently trading at a 2% discount, the fund has mostly stayed above its asset value throughout its history. This recent dip has pushed its dividend yield to 11%, above its historical average of 9%.
“Retail investors tend to have a short-term view, which doesn’t align with real estate’s long-term nature,” said Felipe Gaiad, managing partner of HSI Fundos Imobiliários, highlighting that around 75% of FII investors are individuals. “When interest rates rise, investors shift from FIIs to government bonds, causing quotas to drop excessively. However, the fundamentals remain unchanged.”
Earlier in the year, HSI raised R$450 million for its HSI Malls (HSML11) fund, which it used to prepay debt and strengthen cash reserves. “Initially, we focused on organic growth, but with reduced liquidity, we’ve redirected investments.” The fund now emphasizes acquiring minority stakes and expanding assets, including mall developments, with a 25% discount on asset value and an 11.5% dividend yield.
RBR Asset has strengthened its cash position, allocating 15% of its largest listed fund, RBR High Grade (RBRF11), to real estate credit bills (LCI). This fund, with R$1.2 billion in net assets, is a strategic move, according to Bruno Nardo, the company’s partner and multi-strategy manager. “We leveraged the favorable market conditions in March to build cash reserves and ensure liquidity. Since we haven’t yet made substantial use of these funds, we’re comfortable holding and waiting,” he explains.
The fund invests in other funds and in CRIs, the core focus of the manager’s strategy. According to Mr. Nardo, the bleak outlook has prompted banks to pull back, though companies still have a strong demand for credit. “As expectations have soured, interest rates have worsened rapidly over the past four weeks, and high cash flow is a helpful buffer,” he explains. Currently, RBRF11 shares trade at a roughly 22% discount, with an annual dividend yield of 10%.
The RBR Plus Multiestratégia (RBRX11) fund, with the flexibility to invest in FIIs, CRIs, and equities, originally planned to allocate R$100 million from its March public offering to other funds. However, facing a more challenging market, its focus has shifted to CRIs and preferred equity. Currently, its shares trade at a 15% discount, with a 12% annual dividend yield. The portfolio maintains a more defensive stance in RBR’s exclusive funds for pension and multifamily offices. “We view this period as an opportunity to acquire quality assets at attractive prices,” says Mr. Nardo.
In August, amid challenging market conditions, Inter Asset launched a fundraising effort for its logistics fund, INLG11, which holds R$450 million in shareholder equity. Targeting R$100 million, the offering secured R$82 million. Currently, the fund trades at a 20% discount with an annual dividend yield of 11.6%. “Share prices are one thing, and real estate assets are another. It’s a long-term play,” remarks Mauro Lima, a partner and director of real estate investments, who joined Inter Asset last year to expand the FIIs segment, develop new funds, and reposition existing ones.
According to Flávio Pires, an FII analyst at Santander, the market is unlikely to see recovery in the immediate term. He anticipates continued volatility through November, followed by a traditional December rally seen in FIIs since 2019, with individual investors reinvesting their thirteenth salaries and managers repurchasing shares of their FIIs through other funds. However, he foresees potential instability continuing until at least the second quarter of 2025. “Shares are currently undervalued and present a good entry point,” he observes.
Mr. Pires adds that investors are not entirely exiting their funds but are trimming positions to shift toward fixed income. He notes there are resilient segments within FIIs, particularly urban income. “Few funds warrant an exit solely due to adverse macroeconomic conditions. Most have solid portfolios, sound management, and sufficient liquidity,” he said.
*By Liane Thedim — Rio de Janeiro
Source: Valor International