In the March 18, 2022 edition of Valor Econômico, in the column – Palavra do Gestor, our Chairman & Founding Partner of Ativore, Pedro Barreto, analyzes a powerful strategy for protecting international wealth against dollar inflation through investment in U.S. Real Estate Private Equity. Read the full article below:
The search for the safety of the dollar, combined with the modernization of our regulatory environment, has been driving Brazilian investors to internationalize their portfolios. However, the global environment is no longer so calm for investors either.
One of the main consequences of the pandemic was the acceleration of inflation in the U.S. The price index (CPI) ended 2021 with the largest increase in the last 40 years, at 7%, and to contain inflation the Fed signaled an early rise in interest rates for 2022 - a cycle that began this week.
This is expected to negatively impact the price of most assets and raises a major question for investors: how to position the international investment portfolio to protect against, or even profit from, a higher inflationary environment in the U.S.
A great alternative is investing in assets that act as an inflation hedge, that is, as protection against macroeconomic movements that reduce the currency's purchasing power. Good options are fixed-income securities with inflation-indexed returns, shares of companies whose revenues are easily adjusted for inflation, gold and other commodities. However, one class deserves special mention in this strategy: real estate in the United States.
One factor that places U.S. real estate among the best hedges against dollar inflation is leverage. In the U.S., it is very common to finance a large portion of a property's acquisition value with loans on quite favorable terms, with low, fixed interest rates or, when variable, with a cap. As a result, inflation causes the value of properties and rents to rise, while the cost of financing remains the same or rises to a lesser extent, producing an effect known as the erosion of the debt's value, well known among professional U.S. investors.
Another important factor is short-term rent adjustments. Some classes of real estate, such as multifamily residences - apartment complexes or houses where all units are intended for rental and held under a single deed, have contractual structures that allow contract values to be adjusted quickly, so that inflation benefits investors with exposure to this type of asset.
Investors who understand the effects above will seek to take advantage of the current environment of negative real interest rates in the U.S. to build real estate portfolios, using financing with fixed or capped interest rates, widely available in the market. Buying real estate in the U.S. as an investment presents several barriers to the Brazilian investor, among them illiquidity, the high capital required for diversification and limited knowledge of the market.
A more accessible route is publicly traded REITs, assets similar to Brazilian real estate funds. However, the behavior of this asset is similar to that of stocks in the short term, more tied to capital market movements than to the value of the properties in their portfolios. Therefore, the cost of liquidity and accessibility is high volatility and a weaker role as an inflation hedge.
A more efficient alternative is Private Equity Real Estate (PERE), which is quite widespread globally and is becoming increasingly known in Brazil. In this model, highly specialized professional investors raise funds from various passive investors to acquire properties or small real estate portfolios. In addition to deeply understanding the markets in which they operate, professional investors have access to opportunities and financing structures on privileged terms, hardly accessible to Brazilian investors, that considerably increase the returns of the investments.
Although returns vary according to the different strategies, Ativore's experience indicates that, typically, the IRR of the investments exceeds 10% per year in dollars, composed of quarterly dividends above 6% per year and capital gains from the appreciation of the assets.
In general, investment in PERE is restricted to qualified investors with a minimum value of US$ 100,000. In addition, because they are private, they are not freely tradable and the exit is defined by the professional investor, usually with the sale of the property after a period of five to ten years.
The lack of liquidity, however, is offset by the premium in returns, low volatility and low correlation with traditional markets, making investing in PERE not only an excellent inflation-hedging alternative, but also an essential element for portfolio diversification.
This article reflects the opinions of the author, and not of the newspaper Valor Econômico. The newspaper is not responsible and cannot be held responsible for the information above or for losses of any kind resulting from the use of this information.
Check out the link to the original publication of the article in Valor Econômico
