When selecting Real Estate Funds, be careful with this indicator – 03/19/2023 – From Grain to Grain

Wrongly, most investors select real estate funds (FII) through the indicator called Dividend Yield (DY), or dividend rate. This seems contradictory since in the footer of almost every product there is a warning that past return is not a guarantee of income. I explain the risks in selecting FIIs through past DY.

As I explained in the previous chapter, a paper FII invests in credit securities, that is, fixed income, backed by real estate assets. These fixed income securities can be referenced to several indexes, for example: CDI, IPCA, IGPM and prefixed.

I’ll start by explaining the problems in classifying FIIs using only past DYs.

There are three reasons that justify the differences in DY between paper FIIs:
I – The predominant index in the FII;
II – The credit risk assumed by the FII;
III – Credit or repricing events.

Usually, each FII focuses on a certain index. Those FIIs that follow the best performing index in the recent past are likely to have the best DY. And there will always be an index that presented a higher result in the past, but that does not mean that in the future, this result will be repeated.

For example, the CDI showed the best return in the last 12 months. This favored FIIs focused on this index to the detriment of those focused on price indices such as IPCA and IGPM.

For example, let’s compare two paper FIIs from the same manager, Valora. The VGIR11, which is concentrated in CRIs referenced to the ICD, presented an average DY in the last 12 months of 14.9%. While the average DY, in the same period, of the VGIP11, which is focused on CRIs referenced to the IPCA, was only 12.1%. The same effect occurs between the KNCR11, which has securities indexed to the CDI, and the KNIP11, whose securities are mostly indexed to the IPCA.

Who chose based on the DY of the last 12 months, preferred price index 12 months ago and now would prefer those referenced to the CDI. However, the order can reverse again and the past error repeats itself.

With the possibility of the CDI falling, perhaps for the next few years, this is not the best index and the DY of FIIs focused on this index may be at a disadvantage in relation to those referenced to a price index.

Therefore, in order to carry out an adequate classification, it is important to analyze the FII paper concentration index and the probability that this will be the best index for the near future.

Credit risk is a critical element when it comes to private credit. Obviously, assets with greater credit risk will have a greater potential for return. However, if you only select the FIIs with the highest DY, you may be investing in risks that you would not want to take. Even worse, it may have bought poorly priced assets, that is, whose return is not adequate for the credit risk.

For example, the HCTR11 fund was recognized for having a DY higher than peers. This attracted a lot of interest to him. In fact, the securities in its portfolio yield as high as IPCA+19.5% per annum. Undoubtedly, this return seems very attractive, provided that the creditor actually honors the debt. However, we have recently seen that credit episodes caused quotas to show significant declines.

Finally, Guilherme De Luca, partner at Mauá Capital and Jive Investments warns “the DY may eventually be affected in the short term by market price movements or credit events that may not be repeated. If a FII, for example, is in high discounts in the secondary market in relation to its equity value, the DY is automatically higher. In this case, it is worth understanding the reason for this price discount, whether it is something specific or if it could last, affecting the fundamentals of the FII.”

If comparing only paper background DYs can already lead to wrong decisions, the error is multiplied when comparing brick and paper background DYs together. As I explained above, even the comparison of DY within an FII segment may not be adequate if the same characteristics of the FIIs are not considered.

Brick backgrounds have even more unique characteristics. Therefore, care must be taken when comparing DYs.

Many compare the DY of paper backgrounds with those of brick. This comparison is even worse.

The DY of paper backings tend to be naturally higher than those of brick. This occurs because the monetary correction is paid as a dividend in paper funds, but not in brick funds.

Simply put, in paper funds, the DY is equivalent to the nominal interest on a fixed-income security, that is, the sum of real interest and inflation. In the case of brick FIIs, DY is equivalent to real interest only. Therefore, the first tends to be naturally larger than the second.

In the next chapter, I’ll cover important criteria to evaluate in a paper real estate fund.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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Book: The Journey to Financial Independence

summary

Introduction
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Part 1 Construction of the plan
Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Connecting the dots to build your plan

Part 2 Assembling the portfolio to lead you to financial independence
Chapter 8 Before making any investment, define these two factors
Fixed Income
Chapter 9 You should not build an income portfolio if you want to reach equity to live on income
Chapter 10 Avoid these two common fixed income investor mistakes
Chapter 11 In fixed income, does it pay to invest in private credit in relation to public credit?
Chapter 12 Discover how to win the private fixed income premium, but with low risk
Chapter 13 This is the simplest way to plan your financial independence with fixed income
Chapter 14 With our interest rates, find out if it pays to invest in dollars
Variable income
Chapter 15 Taking a risk can accelerate your journey to financial independence
Chapter 16 What is multimarket funds and how did they come about?
Chapter 17 Understand how to select hedge funds
Chapter 18 Is Real Estate an Appropriate Investment for Achieving Financial Independence?
Chapter 19 Real estate funds are better investments than real estate, but most prefer the worst; understand
Chapter 20 These real estate funds are more like fixed income funds
Chapter 21 When selecting Real Estate Funds, be careful with this indicator
…
Chapter 24 Actions
Chapter 25 Alternative Investments
Chapter 26 When should I trade a risky investment that is not performing?
Investment funds and Private Pension

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