Brazilian REIT: alternative investment to real estate, stock and bonds/Fundos de Investimento Imobiliario Brasileiros (FII): Alternativa de Investimento ao Mercado Imobiliario, Acoes e Renda Fixa.
| Autor | Yokoyama, Karen Yukari |
| Cargo | Ensayo |
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Introduction
Brazilian REITs--Real Estate Investment Trust- known in Brazil as FII (or "Fundos de Investimento Imobiliario"), were created in Brazil in 1993 and have experienced rapid expansion over the last five years, boosted by regulation changes initiated in 2008. Total primary emissions increased from BRL 1 billion in 2007 to BRL 11.5 billion in 2012, and the secondary emissions reached BRL 3.5 million in the same year (UQBAR, 2009).
REITs combine features of different markets: the real estate market main source of REIT income--and the stock market, environment in which they are traded. REITs benefits from taxes incentives, however, investment is subject to specific regulatory obligations that limit investment management, when compared to stock investments. Moreover, REITs tend to be compared to bonds, as part of gains comes from regular rent distributions (Bertin, Kofman, Michayluk, & Prather, 2005).
The impact of each of these underlying markets in behavior, performance and risk of this investment type, however, has not been clearly defined, being one of the major themes under analysis, both in the academic literature, as in the international funds industry.
Understanding the nature of this financial asset has implications that go beyond the analysis of this investment alone. To support this, we can resort to Modern Portfolio Theory (Markowitz, 1952). According to this approach, the characteristics of the investments, mainly its correlation/covariance with other asset classes, can maximize returns and/or minimize the total risk of a multi-asset portfolio, through diversification. Thus, by increasing the total return of a portfolio, with no increase in risk, or by keeping the return of this portfolio, with reduced volatility, efficiency frontier can be increased (Case, Yang, & Yildirim, 2012).
The main objective of this paper is to analyze whether listed real estate securities distinctive features can characterize Brazilian REITs as an alternative investment despite exposure to real estate, stock or bonds markets, considering the Modern Portfolio Theory approach.
Therefore, we developed an empirical study, from a sample of Brazilian REITs listed on the Sao Paulo Stock Exchange in the period of 2008-2014.
Additionally, the present study aims to contribute to the expansion of national and international research on Brazilian REITs, taking into account that scientific analysis of Brazilian REITs is still scarce in Finance literature.
Finally, our findings have practical implications for REIT industry and investors as well.
The remainder of this paper is organized as follows. Section 2 presents theoretical background and brief overview of related literature. Section 3 introduces the selected data during the examination period, the model framework and the variables description; Section 4 provides empirical evidence and Section 5 presents concluding remarks.
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Background
2.1. Brazilian REIT overview
The Securities and Exchange Commission of Brazil (CVM) defines FII- Fundo de Investimento Imobiliario (or Brazilian REIT) as a capital communion raised through the securities distribution system, intended for application in real estate projects. Therefore, Brazilian REIT may invest in real estate assets, fixed income and other real estate securities, provided that at least 75% of fund assets are applied to real estate properties or rights (Securato, Amato, Takaoka, & Lima Jr, 2005).
Brazilian REIT is a closed-end investment fund, which means it is publicly traded, raising capital through an initial public offering and investors are not allowed to redeem their investment from the fund. Thus, REIT shares shall be traded at secondary market.
Dividend yield comes from income distribution related to lease contracts or asset sale, both exempt from taxes, which attracts mainly individual investors. At least 95% of income must be distributed every semester. In addition, investor may profit from shares traded at stock exchange.
Regulation changes in 2008 and 2009 significantly expanded the types of real estate investment allowed for REITs and the entry of pension funds, driving a new and stronger expansion of this market.
2.2. Modern Portfolio Theory
According to Modern Portfolio Theory--MPT, systematized by Harry Markowitz (1952), an optimal allocation of resources consists of selection of financial assets that promote the maximization of returns, given a risk limitation (Geltner, & Mcgrath, 2007).
Markowitz (1952) proposed a methodology for portfolio selection through quantitative analysis of mean-variance characteristics of assets, where expected values (mean) is a measure of return and the variance of the overall rate of return (or standard deviation) is a measure of risk (Muller, 1988).
More importantly, Markowitz mathematically demonstrated that the mere selection of different assets do not necessarily incur in diversity benefits, but the optimal combination of assets with low or negative correlation would improve risk-return characteristics of overall portfolio, since the total variance is impacted by covariance between these assets (Markowitz, 1990). Thus, combinations of low or non-correlated assets would maximize return and minimize the risk of a portfolio comprising the so-called efficient frontier. A point on the efficient frontier corresponds to the lowest volatility for a given return or the maximum return for a given level of risk.
The benefit of diversification of a portfolio assumes that different asset classes react differently to economic changes, in other words, different asset classes do not substantially share common characteristics of risk-return.
Alternative investments are asset classes that have significantly different risk and return characteristic when compared to traditional investments (eg. bonds and stocks), and consequently are expected to provide risk diversifying benefits in mixed portfolios by broadening the efficient frontier set (Donald, 2013, Ibbotson, 2006).
Academic studies indicate real estate as an investment alternative for diversification (Bekkers, Doeswijk, & Lam, 2009). Real estate securities, due to its hybrid characteristics of real estate, stock and fixed income, on the other hand, is subject of further investigation.
2.3. Literature Review
2.3.1. International literature
The study of influence of real estate, stock and bonds market on REIT returns and real estate securities as alternative investment have been the focus of major scientific research efforts (Bouldry, Coulson, Kallberg, & Liu, 2012; He, Webb, & Myer, 2003), however, there is no general consensus on findings.
According to Glascock, Lu, So (2000), considering that a relevant percentage of the REIT's capital resources have to be invested in real estate assets, it is intuitive that REIT prices follow property market, however, as there are more market participants, especially non individual investors, it is possible that the stock market factors have a greater influence on return behavior, partially due to increase in the volume of transactions and the proper monitoring of the market.
Westerheid (2006) found evidence that international REITs (samples from 1990-2004 of 8 countries) are a different asset class from bonds and stocks, and that REITs tend to function as substitute to direct real estate investments in the long term. Other empirical researches on international REITs, and especially US REITs concluded that REITs behavior differ in time, tending to behave as stocks in the short term and as direct real estate investments in the long term (Bouldry et al., 2012; Clayton; & Mackinnon, 2003; Hoesli, Oikarinen, 2012; Ling, & Naranjo, 1999;). On the other hand, cointegration with bonds was found by Giliberto (1990) and He, Webb and Myer (2003).
Lee e Stevenson (2005) and Sebastian and Zhu (2012) focused on the diversification role of REITs in a mixed portfolio and their benefits concluding that despite major influence of real estate market in return behavior in the long term, their characteristics of the risk-return make them an unique alternative asset class, different from stocks, bonds or real estate itself. Muller and Muller (2003) reached the same conclusion, through sensitivity analysis on hypothetical mixed portfolio comprised of bonds and stocks and bonds, stocks and direct real estate. Applying Markowitz approach, they demonstrated that the inclusion of REIT in a mixed portfolio substantially improves efficient frontier design in both scenarios.
2.3.2. Brazilian literature
While international research on REITs is quite vast, the subject was still little explored in Brazilian literature, especially after 2008, when the Brazilian REITs had its greatest expansion.
Securato et al. (2005) concluded that the price of Brazilian REIT s shares were impacted by dividends payment; secondly, that FIIs were perceived as non-liquid assets with high risk when compared to other investments available in the market and that the profitability was in general heavily influenced by real estate industry. Consentino and Alencar (2011) and De Castro (2012) found that the increase in prices of FII shares, samples from 2007-2011/2012, also followed property market.
On the other hand, FII shares appreciation indicated gains not only by dividends distribution, but probably from greater exposure to the capital markets. No cointegration with stock market was found also suggesting that REITs would function as hedge for stock investments (De Castro, 2012).
Considering sample from 2011-2013, Milani and Ceretta (2013) have not found significant correlation between FII returns and construction companies' performance, but have concluded that REIT relative high average returns and low standard deviation suggest that these funds are an interesting alternative to the investor, since further increase in return of the portfolio did not incur in additional risk.
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Methodology
3.1. Sample and Data
The overall sample includes 37...
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