The performance of investments in the real estate market

By Giancarlo Nicastro

Investment diversity is a term that is on the rise, especially since the Selic dropped to the lowest level ever seen in the Brazilian economy, and we ought to leave the comfort zone. Now with the basic interest rate going up again, the subject remains on the rise.

Those seeking information on different investments, whether individuals or companies, often face a lack of knowledge and income reference. I believe in the transparency of information. And in what I can contribute, I seek to expose the real performance of real estate assets in Brazil so that domestic and international investors have transparent and impartial information on the performance of their capital employed.

Investing in real estate is an alternative much asked after by Brazilians, as our culture sees real estate as a safe and profitable asset. A little different from the residential segment, the commercial sector has many institutional investors, including national and foreign companies, pension funds and even real estate investment funds, through which individuals have been making contributions.

In the first quarter of 2021, the ROI (return on investment) of Brazilian commercial real estate showed a negative variation of 0.31% compared to the fourth quarter of 2020, according to market research.

The analysis is based on the three key real estate investment assets: offices, logistics condominiums and shopping centres, with the segments having equal weight. This methodology was chosen to replicate a hypothetical portfolio of an investor who wants to diversify his portfolio in the office, logistics condominium and shopping mall segments.

The study also shows the return on income index for investments in commercial real estate, which had a positive balance of +1.22% in the same period. This performance is justified by the logistical assets, which were a great investment option in the midst of the pandemic. The return on capital, on the other hand, retracted -1.52%.

Analyzing each property type, we see that profitability was ensured by inflation for corporate offices, even in a scenario in which delinquency and an increase in vacancy figured. Investments in this type of asset face instability due to the domestic scenario, the economic crisis, the pandemic and the increase in the IGP-M, which closed in March with a rise of 2.94% and 31, 10% in the last 12 months. Until then, the index was the most used in the readjustment clauses of real estate contracts, and such high has generated tension between owners and tenants.

The first quarter also saw a decrease in the average cap rate of transactions (a term representing the percentage of annual income). In other words, properties are getting more expensive, and returns are lower. As a result, we found a shortage of assets offered for sale, given a scenario with greater liquidity and mainly due to the increase in fund investors migrating to the real estate sector. In addition, at this moment, the new work models, such as remote work, made a negative impact on corporate property leases, which left more empty spaces. And in vacant spaces, there is no income from the tenant's rent.

The Logistics Condominiums segment presents a much more positive performance. The reduction in the vacancy rate and the inflationary readjustments led to an increase in income return this quarter. The sector has also seen a demand by capitalized investors, which results in property appreciation, which increases the value of capital.

The shopping mall segment faced strict rules for its operation and public restriction during the first months of 2021 due to the decline of investments performance in these assets. As a result, profitability in the period could not keep up with inflation. However, property values returned to 2018 levels, and as the scenario is still uncertain for the rest of the year, the recovery should extend for an even longer period.

Being a newer and smaller investment market compared to other countries such as the USA and Canada, the commercial real estate market until 2020 didn't have an index to measure the return of income and return of capital employed in assets, which made this analysis impossible. Therefore, we must always demand transparency in information. Only with accurate, accessible data and without conflicts of interest, the Brazilian real estate market will be able to attract even more investors.

And it is always good to remember that offices are occupied by employed people, as well as logistical properties are occupied by goods that were produced and will be consumed by Brazilians. At the same time, malls are the space for the community to shop and enjoy services. It may seem slow at times, but investments in real estate assets are solid.

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