Black Friday of real estate has arrived; find out how to use it – from grain to grain

Dismayed by the yields of risky financial investments, investors have flocked to real estate. While the Ibovespa, real estate funds and long-term government bonds referenced to the IPCA fell 13.4%, 9.6% and 7.1% this year, respectively, the prices of residential properties rose 5.18%, according to the FipZap portal . But is home buying the best real estate investment right now?

To characterize a real estate investment as the best opportunity, several criteria can be listed. At this point, I will comment on just one of them: the negotiated price in relation to the replacement cost.

No one can disagree that buying an asset below its replacement cost is a good sign of big business. This concept is not new. In 1966, Nicholas Kaldor created an index to measure this characteristic. Starting in 1977, this index gained popularity with the work of Nobel laureate in economics, James Tobin.

This index is called Tobin’s Q and is calculated by dividing the market value by the asset’s replacement cost, according to the equation below.

James Tobin Equation of 1977. Represents the relationship between the market value and the cost of replacing the asset.

According to Tobin, the market would be in equilibrium when this index was equal to 1, that is, the market price was equal to the replacement cost. When the index is between 0 and 1, it means that the asset is underpriced, that is, it is cheap.

With that, I pose a question for your reflection. Do you believe that the residential launches that you eventually see in your neighborhood are coming out below replacement cost? Or even the same?

You definitely already know the answer. But right now you may be wondering if there is any property that trades below its replacement cost.

Possibly if you do a lot of research, it may be that you find properties whose owner is facing financial difficulties, which are in litigation or at auction, and, in this case, they would possibly be below replacement cost, that is, with a Tobin Q of less than 1.

However, you don’t have to look far and you’ll find a number of brick real estate funds (FIIs) that are below their replacement cost.

I will illustrate this case, citing just a few examples of FIIs in the logistics segment. The logistics segment was one of the segments that even benefited during the pandemic with the growth of online commerce. The expansion of e-commerce has increased the demand for logistics warehouses to provide more efficient distribution.

The cost of building a logistics warehouse is not unique. That is, how an apartment, location and other features change the replacement cost. However, considering recent transactions and issuance prospects reports, it is possible to say that the average replacement cost of high-end warehouses is close to R$3,000 per square meter.

The table below presents some data from the FIIs in the logistics segment.

Table with market value data, gross leasable area, and market value by equity value (VM/PL). Source: Economática and FIIs reports.

The fourth column of the table above shows the market value that each logistics FII trades per square meter. It is possible to observe that several FIIs traded in the B3 of the logistics segment have a value below what would be an average replacement cost. That is, they have Tobin’s Q below 1.

It is as if Black Friday had arrived and there were discounts of 10 to 30% on the cost of building the properties.

The last column of this table presents the annualized dividend rate of each FII. The dividend rate represents how much you earn in dividends in proportion to the current market price. This fee is exempt from IR. Dividend gain from brick REITs like these is nothing more than the transfer of property rent. Remember that this rent is adjusted for inflation annually.

The average rate for this segment is above 8% a year exempt from income tax. This is well above the average income you get from rental housing investments. According to FipeZap, the annual rental income rate for residential properties is 4.63%, gross of income tax and costs. In other words, in these REITs you would earn twice as much rent income as a residential property.

I reinforce that the fact that an asset has its market value below its replacement cost does not prevent it from devaluing further. Convergence to equilibrium, that is, for a Tobin’s Q equal to 1, can only occur in the long run.

However, some REITs provide excellent dividend income in the interim period until convergence to replacement cost occurs. So, there may be a better time to invest in them, but they seem preferable to the alternative of investing in residential properties as an investment.

Michael Viriato he is an investment advisor and founding partner of Investor’s House




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