Selic falls, but FIIs still face an interest rate winter; investors seek more resilient funds

With the Central Bank projecting an economic slowdown and maintaining concerns about inflation, specialists believe the current environment does not favor a specific category of real estate funds, but rather funds with more defensive characteristics. According to Baroni, the strategy is to identify funds better prepared to navigate a prolonged period of high interest rates.

“There will be an economic slowdown, who will benefit? Ultimately, nobody [...] My view in this scenario is that it is difficult to find winners. We need to look for resilience,” he says.

Among the factors highlighted by the analyst are larger funds, diversification, low leverage, accumulated reserves and active portfolio management.

“A robust portfolio is one with a larger fund, greater diversification, well-balanced leverage and accumulated reserves. These funds can go through this winter with a certain level of resilience,” he says.

Within physical-asset real estate funds, contract quality becomes one of the main differentiating factors. According to Baroni, funds with long-term atypical contracts and high-quality tenants tend to be less affected in an economic slowdown environment.

“Funds that have long-term atypical contracts with strong companies tend to benefit because they have greater rent protection,” he explains.

He cites properties occupied by companies in more stable sectors, such as hospitals and schools, with long-term contracts. On the other hand, assets more exposed to the economic cycle may face greater pressure.

“A corporate office building with a contract that can be renewed every three years is more exposed. If the company is feeling the economic slowdown, it is difficult to imagine that rents will increase,” he says. 

Despite the negative short-term impact, the high-interest-rate environment may also create positive effects for some real estate segments in the medium term.

For Artur Losnak, head of analysis at Zagros Capital, high interest rates reduce the attractiveness of new real estate projects, limiting the entry of new developments into the market.

“High interest rates slow down new real estate developments. Land that was not purchased in 2021 and 2022 will result in lower new inventory deliveries in 2027 and 2028. Less supply combined with strong demand may lead to a recovery in rental prices and, consequently, dividends,” he says.

According to him, the increase in property replacement costs, driven by higher construction expenses, may also benefit existing and well-located assets.

In Losnak’s view, different segments may respond differently when the interest rate cycle begins to change.

According to him, shopping malls tend to react first due to their relationship with consumption and variable rents.

“First come shopping malls, because part of their revenue is tied to variable rents. Then logistics, due to higher consumption and e-commerce growth. Next come office buildings and, finally, urban income assets, a more defensive sector,” he says.

However, the analyst highlights that recent developments in the corporate real estate market show their own dynamics.

“The correlation between the broader economic cycle and the high-end office market has been weak recently. Corporate demand for prime locations appears to be relatively inelastic to GDP fluctuations in the short term,” he explains.

Despite uncertainties, Baroni believes that the current level of real interest rates is unlikely to remain for an extended period. For him, a more consistent decline in future interest rates could become a positive catalyst for real estate funds.

“It is the decline in future interest rates that affects the NTN-B yield curve and consequently leads investors toward assets such as real estate funds, which are currently trading at very high yields,” he explains.

The experts’ conclusion is that the current moment requires less of a search for “winners” and more attention to asset quality.

In an environment of high inflation, restrictive interest rates and external uncertainty, the difference will likely lie in each fund’s ability to navigate the cycle — rather than simply the segment to which it belongs.