Brazil’s stable growth, increase in average income and decreasing interest rates in recent years have combined to spur investor appetite for alternative investments that provide higher returns. This increasing demand for new asset classes has driven the development of the market for FIIs (known locally as Fundo de Investimento Imobiliário or just FII) in Brazil.
FIIs have proven attractive investment alternatives for investors seeking an opportunity for higher returns than those currently provided by fixed-income assets. Increased demand for FIIs is directly related to the income paid out to shareholders, the tax treatment of this income, and the fact that the underlying assets are real estate.
Investments in FIIs are also attractive because they facilitate the entry of small and medium-sized investors keen to invest in real estate-related assets.
Additionally, there are important differences between FIIs and real estate industry companies, including:(i) tax exemption on the investment vehicle; (ii) periodic distribution of results; (iii) minimum distribution of 95% of results; (iv) bans on taking on corporate debt; (v) bans on investing in a property whose developer, builder or shareholder owns more than 25.0% of a fund’s shares; and (vi) savings on employment-related taxes and charges.
Notes:
(1) According to the investment duration. Refers to withholding tax only. Total income tax could reach 34% for companies;
(2) as long the fund has more than 50 shareholders and the shareholders hold less than 10% of the Fund;
(3) for taxable foreign investors, withholding tax should be allowed to be used as a tax credit in their country of origin, and taxation on capital gains applies as long as the company’s shares are publicly traded and the sale is subject to interference (i.e. BM&FBovespa);
(4) general taxation of a Company subject to the real profit regime (lucro real).
FIIs stand out as an investment alternative in the real estate industry, have a good risk/return ratio and provide an alternative to the direct acquisition of real estate.
| FII | Property | |
|---|---|---|
| Simplicity | Investors can directly trade shares through home broker accounts. | Traditional purchase and sale of real estate requires extensive documentation and involves bureaucracy and high fees. |
| Liquidity | Shares can be easily traded on a stock exchange or OTC market. | The sale of property includes numerous variables, making it a low-liquidity asset. |
| Entry and exit costs | Investors pay a brokerage fee to trade shares on the market that varies based on the investor’s relationship with its broker. | Costs involved in a real estate sale vary from 2% to 6% of the purchase or sale price. |
| Undivided Interest | An investor in FII shares can acquire undivided interest in various real estate developments without having to worry about the property ownership history. | Acquiring an undivided interest in real estate involves the same documentation and bureaucracy as acquiring an entire property, and purchasers are usually recommended to search the property’s ownership history records for any applicable encumbrances. |
| Tax advantage | Income tax currently does not apply to income distributed by the Fund to individuals. Income tax is only applicable upon the sale of the shares, either by individuals or legal entities at a rate of 20% on the capital gains. | Income tax is due on rent, purchase and sale of real estate properties. |
| Risk | FIIs invest in large developments with diversified tenants and are not dependent on a single tenant. | Ownership of real estate property exposes the landlord to depending on a single tenant or on a limited number of tenants. |
| Management | FIIs are better positioned than single landlords to hire experts in the real estate industry to improve the FII’s results. | Landlords usually aren’t as able as FIIs to meet market expectations and, therefore, are in a worse position than FIIs to improve their results. |
| Properties | FIIs have access to a large volume of high-quality developments, which increases the possibility of improving their results. | Individual investors are subject to information asymmetries, limiting their ability to prospect and finalize great deals. |
