Do you invest in FIIs? Get ready for a fire test – 02/12/2023 – Marcos de Vasconcellos

It may seem like an eternity – which is largely due to having gone through a pandemic – but two years ago we lived with a basic interest rate (Selic) of 2% per year. It was in March 2021 that the climb to the current 13.75% began.

And do you know what happened when money was “cheap”? Those who had plans to take projects off paper went there and did it. As a result, we had the so-called “IPO window” in 2020 and 2021, with an increase in companies that went public on the stock exchange. But it wasn’t just them. Real estate funds (FIIs) also had their golden phase of funding in this period.

Today, we have around 430 real estate funds listed on the stock exchange. Almost 15% of these made the IPO (the first public offering on the Stock Exchange) in those two years. With “cheap” money, it was easy to attract investors. With money in their pockets, the managers went shopping for real estate.

Logistic warehouses, commercial buildings and malls joined the dance of big negotiations. And, contrary to what is recommended in the domestic budget, in the world of FIIs it is common (often recommended) to take advantage of the boom season to take out more credit, contract new debts and increase the fund’s property portfolio — the so-called leverage.

That’s because investors who buy FIIs, for the most part, choose according to the dividends paid by each fund (the indicator to see this is called Dividend Yield), from the rents received.

Thus, in order to make their FIIs more attractive, managers rush to increase the number of properties and, consequently, rent receivables.

It turns out that many of the debts contracted by FIIs in the last good funding window had a grace period of two years. Doing the math, they will be charged from this year.

In some cases, they are monthly installments, which will begin to eat away at the fund’s cash. In others, the FII will be obliged to pay the first so-called “balloon installment” — a union of installments accumulated over a period of time (normally, one year).

In summary: now it will be clear to investors who leveraged themselves (contracted debts) with planning and who only took money because it was on the table, but did not worry about the future.

With the current very high interest rates (Selic at 13.75%), issuing new debt securities to pay the previous one seems like a bad deal. Issuing new shares is not a good idea either, as we are far from a good funding window. What remains, then, is to sell properties or, as they say in the market, change the fund’s portfolio.

With debts knocking at the door, funds that have not planned well will have to sell properties at promotion prices, as they are in a hurry, penalizing investors who trusted their managers. At the same time, those managers who have known where to step will see a wave of property offers below market price.

For investors, it will be time for the fire test for those who only looked at the dividend yield when choosing where to invest. Now it’s time to go a step further and understand what managers are doing with their money. Selling a property in a hurry is synonymous with bad business, in any market.

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