Post-election Focus raises rate forecasts and increases pressure on FIIs and real estate
- Market forecasts higher Selic rates through 2028, higher inflation and weaker growth, increasing competition from fixed income and putting pressure on FIIs
Released by the Central Bank of Brazil on Tuesday (3), the Focus Report showed a deterioration in expectations for the Brazilian economy. The report compiles market forecasts and statistical estimates. It is important to note that these figures reflect market expectations, not official projections from the Central Bank. COPOM's official interest rate decision will be announced next Wednesday.
The projections indicate that the Selic rate will reach 13.5% at the end of this year, 12.5% at the end of 2027 and 11% at the end of 2028. Inflation expectations also worsened. The inflation target is currently 3%, while the forecast for the IPCA, Brazil's benchmark consumer price index, in 2027 rose from 4.34% to 4.76%. For 2028, the estimate increased from 3.75% to 4.00%. The forecast for 2029 also rose, from 3.50% to 3.98%.
Another important indicator is Gross Domestic Product (GDP). The growth forecast for this year fell from 1.8% to 1.76%. For 2027, the projection declined from 1.31% to 1.2%.
Real Estate
Real estate projects depend on long-term investment horizons. High interest rates make new developments more difficult to finance, which can delay project deliveries, especially in markets where supply is already limited.
With interest rates expected to remain high for longer, Brazilian real estate investment funds, known as FIIs, are likely to continue facing a long-standing challenge: competition from fixed-income investments. In the first trading session after the second round of the election, on October 26, the IFIX fell 5.68%, one of the largest declines in its history. Worsening fiscal expectations and a rise in the interest rate curve were among the factors associated with the move.
The effect is also visible in market performance. In October, the IFIX fell 3.27% and accumulated a 3.79% loss in 2026. Over the same period, the CDI had gained 11.63% year to date, while government bonds, measured by the IMA Geral index, had returned 10.27%.
With the Selic rate still at 13.75% and the Focus Report projecting a 12.5% rate at the end of 2027, investors tend to demand a higher premium to maintain positions in real estate funds. This adjustment can put pressure on FII share prices and can also affect the valuation of the underlying properties.
One of these transmission channels is the cap rate, which relates the income generated by a property to its value. When the return required by investors increases, cap rates can also rise. If the property's income remains unchanged, a higher cap rate reduces its estimated value.
What explains this phenomenon?
The market reaction is linked to a change in investor perception in the post-election period. Before the second round, some investors had priced in a different outlook for economic policy and public finances. After the election result, those positions were reassessed. In the first trading session after the election, in addition to the 5.68% decline in the IFIX, the Ibovespa fell 13.88%, while the interest rate curve moved higher.
A higher interest rate curve means that the market began to demand higher returns to lend money over the coming years. Concerns about the fiscal outlook and expectations of more persistent inflation are among the factors behind this movement. Even before the election, the Central Bank had already warned that unanchored inflation expectations and economic policies with inflationary effects could make convergence toward the inflation target more difficult.
