- “I am hoping they all recover after the pandemic. But I know the ones that own only one building may not come back, depending on who the tenant is," Diniz said.
- “Many investors saw similarities in real estate funds to fixed income products", Lucas Collazo, an analyst with broker Rico said.
- The IFIX is down by 19% so far this year, while Diniz, who has resisted the temptation to sell, says the value of his portfolio of funds has slumped 16%.
SAO PAULO: With interest rates at record lows, Brazilian Bruno Silveira Diniz decided to seek better returns on a slice of his savings by investing in real estate funds.
The 30-year-old engineer was one of hundreds of thousands of Brazilians who rushed into such funds last year, only to see their investments wither as the coronavirus crisis hit.
“I am hoping they all recover after the pandemic. But I know the ones that own only one building may not come back, depending on who the tenant is," Diniz said.
He put 40% of his savings in five listed property funds, higher than the 5% threshold recommended by banks such as Itau but not a uniquely high proportion.
Reuters spoke to six individuals, one of whom said they had put 90% of their savings into such products, while others said they had invested 30% or 40%.
Brazilian retail investors, who had long kept their money in fixed income investments when interest rates were high, were tempted into real estate funds by a soaring market during 2019, with their numbers tripling to 630,000 in just one year.
“Many investors saw similarities in real estate funds to fixed income products", Lucas Collazo, an analyst with broker Rico said, adding that a tax exemption was another incentive.
“We had a couple of years of extremely low volatility and prices were only rising," Collazo added.
However, as Brazil's benchmark real estate funds index the IFIX, which gained 35% last year, has fallen, so too have many of these funds, which are similar to Real Estate Investment Trusts (REITs).
The IFIX is down by 19% so far this year, while Diniz, who has resisted the temptation to sell, says the value of his portfolio of funds has slumped 16%.
Funds which invested in shopping malls, traditionally a bedrock of Brazil's retail economy, have been the hardest hit and even some owning offices have seen dramatic declines.
XP Malls is down 36% this year after it, along with other such funds, suspended dividends in March as malls were forced to close due to the coronavirus and their tenants were unable to pay rent as customers and revenue evaporated.
Meanwhile, the Torre Almirante fund, named after the single Rio de Janeiro office building it owns, has a near 70% vacancy rate and is down 39.5% so far this year.
And funds invested in office blocks are also cutting dividends as corporate tenants of all sizes ask for rebates or to suspend rent payments.
However, funds which own warehouses, many of which have seen growing e-commerce demand, have held up relatively well. CSHG Logistica is down 13.5%, data shows.
And few real estate fund offerings have attracted retail investors, who last year made up 72% of traded volumes, since the coronavirus pandemic began, Diego Coelho, a capital markets lawyer, told Reuters.
“Now we're only seeing institutional investors," he said.
Brazil's real estate funds are not alone, with losses in REITS worldwide amplified by leverage.
The FTSE Nareit All REITS Index, the broadest index of US REITs, has fallen 27% so far this year, compared to the 9% drop in the S&P 500.
In Britain, many real estate funds held by retail investors had their trading suspended, in compliance with regulatory rules, after the value of more than 20% of their assets became uncertain, while the REITS index in continental Europe has dropped 23% this year.
In Brazil, the slump has shocked investors like 39-year old shoe salesman Diego Schulz, who says he learned about property funds on personal finance channels and internet forums.
“My goal was to invest to have a stable revenue and pay part of my expenses", he said, after moving 60% of his net worth out of savings accounts and government bonds and into such funds.
Those holdings are now down 10%, showing a small bounce back, and Schulz is holding on to them for now.
“I know I need to take more risk to earn more, in stocks for example, but I really have to take the time to understand it better." he added.