With Brazilian Real Estate Investment Trusts (REITs), experiencing a surge in fundraising and the Selic rate, Brazil's benchmark interest rate, on a downward trajectory, REsource's editorial team reached out to Carolina Borges, an analyst specializing in REITs at EQI Research, to dissect how this scenario might benefit investors and the real estate market at large.

"2023 witnessed a substantial influx of fundraising, and the initial months of 2024 have mirrored this trend. This period unveils windows of opportunity wherein REITs' market value meets or even surpasses their net asset value," explains Carolina.

According to the expert, this juncture prompts fund managers to perceive opportunities to issue shares, enabling a fund to grow beyond portfolio appreciation. "In the absence of share issuance, a REIT's assets only grow if the portfolio's properties appreciate, as the fund must distribute 95% of its profits to its unit holders," she adds.

Carolina elucidates that through these share issuances, funds can acquire new properties, sometimes with even more attractive cap rates than those in the current portfolio, thus potentially delivering even better results to unit holders over the medium to long term.

In the short term, the outlook is for expanding funds to moderate their growth to ensure market price alignment with share issuance prices. "The significant volume of issuance may result in attractive prices for investors, encouraging their entry into the fund or increasing their stake. The key is to observe how these funds utilize this capital, their growth trajectory, and whether their current acquisitions will generate value for unit holders in the future."

And what about the novice investor? Where should they start, and what should they look for?

"For individual investors, essentially, they need to focus on two criteria: property location and REIT management. All other factors end up being consequential. A fund with a well-located portfolio comprises properties with high demand, more resilient to crises, capable of passing on inflation or values higher than inflation, typically providing consistent real returns to unit holders. Management is equally crucial because they are the ones who will be present daily, making decisions, executing buying and selling operations, and issuing new shares," she explains. According to the expert, the combination of these two criteria in assessing funds can yield good returns. The EQI analyst also recommends that investors having their first encounter with REITs observe fund liquidity.

And the Selic rate decline?

Carolina highlights that REITs benefit from the Selic rate decline, primarily due to the outlook for future decreases and the stimulation of institutional and individual investor inflows. "The potential reduction of the Selic rate to around 9% to 9.25% by late 2024 positively impacts the pricing of REITs, elevating their fair value. The EQI specialist explains that this reduction encourages the entry of institutional investors and those with a more aggressive profile, as well as incentivizing individual investors to shift a portion of their fixed-income investments to riskier assets." Thus, REITs become even more appealing and serve as a gateway for conservative investors seeking higher returns.