The Consolidation Seen in the FII Market: A Closer Look
Introduction
The real estate market has always been an attractive investment avenue for individuals looking to diversify their portfolios and generate stable returns. In recent times, the market has witnessed a significant consolidation, with several real estate funds negotiating the sale of their portfolios or redeeming shares. This trend is gaining momentum, particularly among funds with a small shareholder base. In this article, we will explore the reasons behind this consolidation and its potential implications for the market.
The Impact of New Regulations
One of the key factors driving the recent consolidation in the real estate market is the introduction of new regulations. In particular, the provisional measure (MP) exclusivity funds has raised the minimum number of shareholders required for a real estate fund to offer exempt dividends from 50 to 500. Subsequently, a substitute bill proposed by deputy Pedro Paulo reduced the requirement to 300 shareholders.
However, it is still early to establish a direct correlation between the new regulations and the liquidation of some funds. Arthur Losnak, head of FII at TC, suggests that it would be premature to make any decisions before the law is finalized, but acknowledges that the ongoing discussion could impact future strategies of real estate portfolios.
Real Estate Funds Feeling the Pressure
One example of a real estate fund feeling the pressure of consolidation is FII Inter Titles Imobiliários (BICR11). This fund has recently announced a partial amortization of R$ 18 million due to challenges in expanding the fund and low trading volume. The fund currently has just over 500 shareholders, which is barely meeting the new minimum requirement under the proposed regulations.
Similarly, FII Legatus Shoppings (LASC11) is contemplating the sale of fractions of the projects it owns, namely Parque Shopping Belém and Boulevard Campos. This potential move could result in the dissolution of the fund. The need for liquidity and the opportunity for larger funds to acquire smaller portfolios at a discount are the primary drivers behind such transactions, according to Caio Araújo, an analyst at Empiricus.
The Impact on New Segments
While the new regulations aim to ensure tax exemptions for real estate funds, they could inadvertently hinder the growth of new market segments. Previously, funds with less than 50 shareholders could operate without paying taxes. However, with the increased minimum requirement, the entry barrier for new strategies has significantly increased.
Caio Araújo emphasizes that many funds with less than 50 shareholders are currently operating as one-off strategies. Consequently, the growing minimum requirement could potentially stifle the development of new investment approaches. Furthermore, Arthur Losnak points out that it typically takes a long time for a fund to gather a substantial number of shareholders and consolidate a new segment. As a result, rapid growth in funds or sectors is the exception rather than the norm.
Conclusion
The consolidation seen in the FII market is primarily driven by new regulations that have raised the minimum number of shareholders required for tax exemptions. While it is still early to assess the full impact of these regulations, we can observe a trend of real estate funds negotiating the sale of their portfolios or redeeming shares. The need for liquidity and the opportunity for larger funds to acquire smaller portfolios at a discount are significant factors contributing to this consolidation.
As these regulations continue to evolve, it will be interesting to see how they shape the real estate market and influence the strategies of existing and future funds. The market will likely see a shift towards more consolidated and larger funds, which could pose challenges for new and innovative investment strategies. While the intention behind the regulations is to ensure tax exemptions for individuals, it remains to be seen whether they will also inadvertently limit the growth and diversification of the real estate market.
Additional piece
Title: The Changing Landscape of Real Estate Investment: Navigating Consolidation and Regulatory Challenges
Introduction
The world of real estate investment has undergone a significant transformation in recent years, marked by increasing consolidation and the introduction of new regulatory measures. These changes have prompted real estate funds to reevaluate their strategies and make difficult decisions regarding their portfolios. In this article, we delve deeper into the reasons behind the recent consolidation in the FII market and explore the potential implications for investors and the real estate sector as a whole.
The Driving Forces Behind Consolidation
1. Regulatory Measures: The recent introduction of new regulations, such as the provisional measure (MP) exclusivity funds, has played a pivotal role in the consolidation seen in the FII market. These regulations have raised the minimum number of shareholders required for a real estate fund to offer exempt dividends, thereby affecting the viability of smaller funds with limited shareholder bases.
2. Need for Liquidity: Real estate funds facing liquidity challenges due to low trading volumes and limited investor participation may opt for partial amortizations or portfolio sell-offs to meet their financial obligations. The need for liquidity often arises from the high costs associated with managing a fund and the difficulty in attracting new investors.
3. Acquisition Opportunities: Consolidation also presents an opportunity for larger funds to acquire smaller portfolios at a discounted price. This trend is driven by the desire to achieve economies of scale and enhance the overall performance and efficiency of the fund.
Implications for the Real Estate Market
1. Limited Growth Opportunities: The increase in the minimum number of shareholders required for tax exemptions could impede the growth of new market segments within the real estate industry. Previously, funds with fewer than 50 shareholders were exempt from taxes, allowing for more flexibility and experimentation in investment strategies. With the elevated minimum requirement, the entry barrier for new investment approaches has significantly risen, potentially stifling innovation and diversification.
2. Concentration of Power: The consolidation seen in the FII market has led to the emergence of larger, more dominant funds that control a significant portion of the market. While these funds offer stability and greater resources for investors, they may also limit competition and hinder the growth of smaller, niche-focused funds.
3. Increased Scrutiny: As consolidation continues to reshape the real estate market, regulatory bodies and investors are likely to pay closer attention to the operations and performance of the remaining funds. This increased scrutiny can create both challenges and opportunities for fund managers, as they navigate stricter regulations and the need to demonstrate consistent returns and transparency to attract investors.
Conclusion
The consolidation seen in the FII market is a complex phenomenon influenced by regulatory measures, liquidity challenges, and the pursuit of acquisition opportunities by larger funds. While these developments present challenges for smaller funds and new market segments, they also offer a chance for investors to participate in more stable and established funds. Ultimately, the future of the real estate market will depend on how fund managers adapt to changing regulations, investor demands, and market dynamics. By staying informed and proactive, investors can navigate the evolving landscape of real estate investment and make informed decisions to maximize their returns.
Summary
The recent consolidation in the FII market can be attributed to the introduction of new regulations and the need for liquidity among real estate funds. The increase in the minimum number of shareholders required for tax exemptions has prompted funds with small shareholder bases to negotiate the sale of their portfolios or redeem shares. This trend has created opportunities for larger funds to acquire smaller portfolios at a discount. However, the consolidation may hinder the growth of new market segments and increase the concentration of power among larger funds. The future of the real estate market will depend on how fund managers adapt to changing regulations and the demands of investors.
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TO consolidation seen in the FII market You may have recently gained new protagonists. In recent weeks, at least three real estate funds have negotiated the sale of their portfolio or the redemption of shares -return of Equity-.
Although the liquidation of funds is not exactly new in an increasingly concentrated segment, a common point draws attention in the latest transactions: the small shareholder base of these FIIs, an issue that gained prominence in recent months with the provisional measure (MP) exclusivity funds.
The text raised the minimum number of shareholders that a real estate fund should have to offer exempt dividends from 50 to 500. Subsequently, the substitute presented by deputy Pedro Paulo (PSD-RJ) – which became known as the “offshores” bill – reduced the floor to 300.
In the opinion of Arthur Losnak, head of FII at TC, it is still early to relate the possible liquidation of some funds to the new rule that has not even been approved. The expert acknowledges, however, that the discussion could influence the next steps of the portfolios.
“I think it is hasty to make a decision before the law is written,” he reflects. “(But it could be) a moment of decision if the thesis (of the fund) is already difficult and now there is a debate on regulation,” reflects the expert.
This is what the FII Inter Titles Imobiliários (BICR11). Given the difficulties in expanding the fund, management announced at the end of last month a partial amortization in the amount of R$ 18 million.
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Among the justifications for the measure, the managers cited the low liquidity – trading volume – of the portfolio and the current shareholder base.
“The fund has been listed since December 2019 and the trading volume of its shares in the secondary market is low,” confirms the document, which also includes the number of investors as a challenge for the fund. “It currently has just over 500 shareholders,” the text highlighted.
oh BICR11 Today it has exactly 526 installments and the relevant data on the amortization of installments was disclosed before the replacement of deputy Pedro Paulo.
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What explains the recent transactions?
Recent survey of the InfoMoney With data from StatusInvest – a financial information platform – it indicates that the dividends of at least 159 funds would be taxed, even with the reduction from 500 to 300 shareholders.
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In this new section, the income from FII Legatus Shoppings (LASC11) would remain exempt with its current 390 investors. However, the portfolio is currently analyzing proposals for the sale of fractions of the two projects it owns.
The FII has a 49% stake in Parque Shopping Belém (PA) and 25% in Boulevard Campos (RJ). The sale of fractions could mean the end of the fund.
Caio Araújo, analyst at Empiricus, also avoids relating the transaction to the change in the regulation of real estate funds, but does not rule out that the current discussions could contribute to the consolidation of the market.
“It could happen, but I don’t see it as a notable effect,” he points out. “The move (the recent negotiations) is more associated with some managers’ need for liquidity, as well as the opportunity for larger funds to acquire smaller portfolios at a discount,” she explains.
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Barrier to new segments
With more than 2.3 million investors, real estate funds have among their main attractions the distribution of dividends exempt from Income Tax.
But to guarantee IR exemption to individuals, the fund currently must comply with three rules:
- Shares must be traded on the Stock Exchange.
- No investor can hold more than 10% of the shares.
- The fund must have more than 50 shareholders.
The text of MP 1,184/2023 and its replacement by Deputy Pedro Paulo exactly modify the third rule, the number of quotas – provided for in Law 11,033, of 2004.
Araújo recognizes that, on the one hand, the update of the rule frees most of the market from taxes – since the main FIIs on the Stock Market operate with many more investors. However, he sees the development of new segments as detrimental.
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“Many of these funds today with less than 50 shareholders are one-off strategies,” he explains. “(With the increase in the minimum number of shareholders), the entry barrier for these new strategies increases,” he predicts.
Losnak agrees and points out that, normally, it takes a long time for a fund to grow in number of shareholders and, consequently, consolidate a new segment. Funds or sectors that grew quickly are exceptions, he says.
The TC analyst cites the example of rental housing, which is quite widespread in markets such as the United States, but which has not yet taken off in Brazil.
And in addition to not advancing, the residential SOCIMI segment has also suffered a decline in recent weeks. CSHG Residencial (HGRS11) completed the sale of the fund’s portfolio, composed of 43 apartments in the JML 747 building and 67 apartments in FL 125, both properties in the capital of São Paulo.
For the spaces, the fund – which had only 6 shareholders – received the value of R$ 233 million, a value 42.9% higher than the total invested by the portfolio and 14.4% higher than the project valuation report.
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According to the management of HGRS11, the operation generated a capital gain of almost R$ 70 million, equivalent to approximately R$ 46.85 per share.
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