Real estate funds have the highest dividend return in five years

Many real estate investment funds (FII) have had bitter losses on the stock market and so far not recovered during the last two years of the pandemic.

The IFIX, the B3 index that brings together the main real estate funds listed on the stock exchange, has been walking sideways since the beginning of the health crisis: its score is today still 9% below the level it registered at the beginning of February 2020, just before the coronavirus crisis hit the Brazilian stock market.

There is one piece of them, however, that is recovering strongly: dividend yield.

Dividends are the semiannual or monthly distribution of profits that real estate funds pay to their shareholders. This income usually comes from rental earnings on the properties they manage or income from fixed income securities in the real estate sector in which they can invest, such as Certificates of Real Estate Receivables (CRI).

Until February, the average return with dividends of the funds that make up the IFIX accumulated 8.8% in 12 months, according to a survey by the financial data consultancy Economatica.

It is the highest return since June 2017, when the so-called “dividend yield” of real estate funds was also 8.8%.

The proportion is much higher than the CDI return in the same 12 months up to February, which was 5.4%.

The dividend yield account in real estate funds is made considering how much the fund has distributed in profits per share divided by the value of the share, which is, for FIIs, the equivalent of the unit value of a company’s share. To arrive at the average IFIX return, this account is weighted by the share of each fund that is part of the index.

It is a way of giving investors an indication of how much money they have invested in these funds is yielding.

Interest aid and high inflation

Maria Fernanda Violatti, real estate fund analyst at XP Investimentos, explains that much of the high return is explained by the so-called “paper funds”which are real estate funds that invest not in physical properties, but in fixed income securities linked to the sector, the CRIs.

CRIs are securities issued by specialized financial institutions to finance real estate projects. Like other fixed-income securities, they usually remunerate their investors with interest linked to the CDI or inflation – and, as both have risen in the last year, the yields on CRIs have skyrocketed as well.

According to Violatti, paper funds have been gaining ground since 2018 and today represent around 45% of IFIX. “They are greatly benefited by higher interest rates and inflation, they ended up becoming very attractive and their representation ended up being reflected in IFIX as a whole.”

XP’s calculations indicate that the payment of dividends by funds that form the IFIX represented, in January alone, the equivalent of an annual return of 11.8%.

Considering only the portion of the index formed by paper funds, this return was almost 15%, while in other segments, such as FIIs that invest in shopping malls, it was 8%.

It is for this reason that both Violatti and other industry experts see 2022 as an opportunity to invest in these real estate funds specializing in financial securities.

“We started 2022 with very high interest rates, above 10%, which favors paper funds”, says Arthur Vieira de Moraes, a finance professor specializing in the real estate fund market.

“The return on brick funds should be around 0.6% to 0.7% per month currently, while paper funds are approaching 1%,” he said.

Opportunity to “buy” cheap property

So-called “brick funds” are the other big part of the real estate fund world. These are funds that own or manage real estate, such as shopping malls, corporate buildings, warehouses or hotels, and earn from the rent and sale of these spaces.

This gives people who invest in these funds two possible fronts of earnings: the recurring income that comes from rentals, paid to shareholders in the form of dividends, usually monthly, and the possibility of appreciation of the quota, which is the small piece of the fund that investors buy directly on the stock exchange and whose price rises and falls according to demand, much like stocks.

Although even less attractive than paper funds at the moment, these funds formed by real estate, according to analysts, are still priced well below what they are really worth. This also gives them a good buying opportunity now.

“It’s a great time to buy brick funds, many of them with excellent assets and which are still well below their book value”, says Moraes. “It’s like buying a property much cheaper than it’s really worth.”

The funds that invest in malls and corporate slabs are some that, after going through hard times with many stores and empty offices during the pandemic, are already showing a resumption of activities in the country’s main shopping centers, according to analysts.

Others, such as logistics warehouses, much sought after by e-commerce companies, never stopped, grew even more during the pandemic and are still warm.

“These are funds that have very attractive discounts. It doesn’t mean their shares are going to go up significantly now, there aren’t many signs of that yet,” says Violatti, from XP.

“But we are, indeed, at a very interesting entry point for that investor who is oriented to the long term, who knows that you don’t buy a property today to sell tomorrow, who sees that they are paying monthly dividends and that they can return to value at some point.”