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AdvancedBrazilian REITs · Lesson A1.2 · Module A1

Debt and property REITs in each rate cycle

Module A1: Interest, price and value

11 slides~5 minquiz at the end

In this lesson

  • The three income clocks
  • The map of hikes and cuts
  • Why you don't need to time the turn
See the slides
Aisle of a logistics warehouse with pallet racks

Brazilian REITs · Lesson A1.2

Rates went up. Who gains income, who loses price?

Debt and property REITs react in opposite ways to the same cycle.

Three income engines

Each fund runs on its own clock

  • CDI-linked debtincome follows the Selic, almost monthly
  • IPCA-linked debtincome follows inflation, not the Selic
  • Propertyincome follows the yearly rent adjustment
  • Everyone's pricesuffers when rates rise (lesson A1.1)

The cycle map

When the Selic rises and falls

Selic risingSelic falling
CDI-linked debt incomerisesfalls
Property incomefollows the leasefollows the lease
Share pricestend to falltend to recover
Leveraged borrowersget squeezedget relief

A tendency, not a rule: each fund has its own leases, debt and portfolio.

CDI-linked debt in a hike

A CRI paying CDI + 2%

CDI 10%+2%=12%a year
CDI 14%+2%=16%a year
16% ÷ 12%=+33%more income

Illustrative numbers. Default risk also rises when rates squeeze the borrower.

Over the same period

Property gains little and loses price

CDI-linked debt

+33%

  • income, with the CDI going from 10% to 14%

Property

+4.5% · −10%

  • income, with the rent adjustment
  • share price, using lesson A1.1's math

When the cycle turns, it flips.

The full wave

Who comes out on top in each phase

  1. 1 · Selic risingCDI debt earns moreproperty loses price
  2. 2 · Selic at the topCredit tightensleveraged borrowers struggle
  3. 3 · Selic fallingCDI debt earns lessborrowers get relief
  4. 4 · Selic at the bottomProperty recovers pricethe same income is worth more

The misconception

Do you need to time the cycle?

Nobody knows when it turns. A portfolio with both engines suffers less in any phase.

Remember this

Three ideas from this lesson

  1. Income: each on its own clockCDI follows the Selic, IPCA follows inflation, property follows the lease.
  2. Price: almost all togetherRising rates weigh on debt and property shares alike.
  3. A cycle is not a forecastHolding both engines protects more than guessing the turn.

Quick quiz · 1 of 2

The Selic is FALLING. Income from a CDI-linked debt REIT tends to:

See answer

Fall. The bonds' interest follows the CDI, which moves down with the Selic.

Quick quiz · 2 of 2

A CRI pays CDI + 3%. The CDI goes from 9% to 13%. Yearly income goes from:

See answer

9% + 3% = 12%; 13% + 3% = 16%. The spread stays, the CDI moves.

Lesson complete

Next lesson

A1.3Advanced · Lesson A1.3Fair value: cap rate, replacement cost and cash flowThree yardsticks for a fund's value, and what to do when they clash.Continue
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Image credits
  • Handi Boyz LLC · Pexels · Pexels License — Pexels
  • Gaf.arq · Wikimedia Commons · CC BY-SA 3.0 — Wikimedia Commons

Educational content, written for learners. Not investment advice.