SAO PAULO – Which is more expensive: a physical property or a property included in the portfolio of a real estate fund? In times of high inflation and devaluation of the prices of FIIs traded on the Exchange, observing the so-called “replacement cost” can give good indications in this regard.
The concept is especially useful for evaluating “brick” type real estate funds, those that invest directly in real estate to obtain rental income. The replacement cost simulates how much it would cost to build a property that already exists and scales if the negotiated value is in accordance with the market.
“The construction cost has increased considerably in recent months. After the pandemic, there was a drop in the commodity and production chains, which we still have reflections on today and, perhaps, this will continue for a long time”, says Thiago Duarte, Capital Markets manager at the JLL real estate consultancy.
In September, the National Construction Cost Index maintained the pace of August, rising 0.56%. However, in the last twelve months, the INCC points to a strong increase of 16.37%. In the period, only the segment of equipment, materials and services rose nearly 27%.
“When you have a price increase, naturally, the replacement cost goes up and you assume that the building that is ready, with tenant and income, tends to follow this appreciation”, evaluates Duarte.
Despite expectations, the movement has not been confirmed, at least among real estate funds. In 2020, Ifix, which brings together the most traded FIIs on the Brazilian stock exchange, dropped 10%. In 2021, the drop already adds up to more than 4%. In addition to the pandemic, performance has been influenced by the cycle of rising interest rates in the country and by political and fiscal uncertainties.
Currently, considering the relationship between price and equity value of real estate funds, a metric also known as “P/VPA”, 31 of the 40 logistics FIIs, corporate and hybrid slabs with participation in Ifix are trading at a discount on the Brazilian stock exchange. On average, the value of the share of this group of FIIs has a 12% discount, according to data from the financial information platform Economatica.
The decoupling of the replacement cost and the price of properties traded on the stock exchange through real estate funds draws the attention of analysts and managers. In the 2021 edition of the FII Talks, the main event on real estate funds in the country, promoted by InfoMoney, the topic generated a lot of discussion.
Caio Castro, a partner at RBR Asset, cited the example of Tellus Properties (TEPP11), managed by BRL Trust, traded today at a 22% discount. “To build the São Luiz building, in São Paulo (SP), which is part of Tellus’ portfolio, would cost much more than R$ 18 thousand per meter. And today you pay R$ 12 thousand on the stock exchange”, he explained.
Managers and analysts point out that, when looking at the price per square meter of funds on the stock exchange and the value of building new properties, there are opportunities to seek long-term capital gains by buying, for example, corporate slabs at a discount, through FIIs , in prime regions and already sold out for new ventures.
Fall in vacancy and rent correction
Restriction of rent prices reinforces the disparity between the replacement cost and the values negotiated in B3. Analysts even talk about a gap of 70% if adjusted for inflation. Rodrigo Medeiros, a real estate fund analyst at the Demystifying FII platform, takes the same line and believes that the scenario will require an adjustment soon.
“There are funds today that rent out logistics warehouses for around R$19 per square meter. To acquire a similar property, the cost is around R$ 3.5 thousand. To rent for R$19, the bill is very tight”, calculates the analyst, taking into account the increased production cost and the lagged rent value.
Medeiros also recalls that the logistics sector is heated and warehouses will have to be built to meet the demand. In his assessment, the new spaces will arrive with higher rental prices and will force the updating of the old locations. “Of course there will be respect for contracts, but the trend is for an improvement in rents, which at least should accompany inflation”, concludes the analyst, citing the recent example of the HSI Logística fund.
In August, the Hemifério Sul Investimentos fund reviewed the rental of a 38 thousand square meter property leased to Pirelli, in Santo André (SP). The readjustment represented a real increase of 33% and an additional R$1.4 million per year, or R$0.11 per share.
The vacancy of real estate, which increased with the pandemic, also contributes to the gap between the price of shares in “brick” REITs and the replacement cost. If prime areas for the segment, especially in São Paulo, managed to maintain their income level during the period of greater restrictions, the same did not happen in alternative spaces.
“There are buildings in these secondary regions traded for a lower price than if I were to build them. It is related to the pricing of current uncertainties”, says Duarte. “For example, the building is 50% vacant, but we are living a moment of uncertainty with the pandemic”, explains the manager of JLL, to justify the pressure on the quotas of real estate funds.
“Many times the valuations are for the moment and do not take into account the prospect of recovery, pulling the asset’s price down”, he says. “If a building today with 50% vacancy pays R$ 100 per share, when the vacancy ends, it will pay R$ 200. It has the capacity to generate dividends for the shareholder again”, he concludes.