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AdvancedBrazilian REITs · Lesson A1.1 · Module A1

Why interest rates move the share price

Module A1: Interest, price and value

11 slides~5 minquiz at the end

In this lesson

  • Price as income ÷ required return
  • Inflation-linked Treasury as the yardstick
  • How much 1 rate point takes off the share
See the slides
Glass office towers in São Paulo

Brazilian REITs · Lesson A1.1

The rent didn't change. Why did the share fall?

One fraction explains what interest rates do to the price.

Luiz Pantoja · Wikimedia Commons · CC BY 2.0
Headquarters of the Central Bank of Brazil in Brasília

Where it starts

The benchmark rate moves

The Central Bank changes the Selic. The market reprices Treasury bonds, and every investment gets measured against that new rate.

Banco Central do Brasil · Wikimedia Commons · CC BY 2.0

The chain

From Treasury bonds to your share

  1. Inflation-linked bonds pay morehigher real yield, no fund risk
  2. Investors demand morefrom the REIT: bond yield + premium
  3. They pay less for the incomethe same rent is worth less
  4. The share fallswithout a single real less in rent

The premium pays for the REIT's risk and lower liquidity.

The fraction

Price ≈ income ÷ required return

7%Tesouro IPCA+ (real)+2%REIT premium=9%required return
R$ 9.60income per year÷9%=R$ 106.67theoretical price

A simplification to show the direction. It does not price any specific fund.

Rates rise 1 point

Same income, 10% lower price

8%Tesouro IPCA++2%premium=10%required return
R$ 9.60÷10%=R$ 96.00−10% on the share

Illustrative numbers. Inflation-linked income is compared with the real rate.

The whole scale

Theoretical price of R$ 9.60 a year

  1. 120.008%
  2. 106.679%
  3. 96.0010%
  4. 87.2711%
  5. 80.0012%

Below, the required return. The higher it goes, the less the same income is worth.

The misconception

“High rates are good for REITs”?

Income of CDI-linked debt REITs

rises

  • The bonds' interest follows the CDI

Share price

falls

  • In almost every REIT, property or debt

Income and price are different questions. The next lesson shows each type across the cycle.

Remember this

Three ideas from this lesson

  1. Price is a fractionAnnual income divided by the return investors demand.
  2. Treasury is the yardstickRequired return = real yield of Tesouro IPCA+ plus a risk premium.
  3. 1 point mattersFrom 9% to 10%, the same income loses 10% of its price.

Quick quiz · 1 of 2

Income of R$ 12 a year. The required return goes from 10% to 12%.

See answer

R$ 12 ÷ 10% = R$ 120; R$ 12 ÷ 12% = R$ 100. Higher required return, lower price.

Quick quiz · 2 of 2

Inflation-linked Treasury yields rose and rent didn't change. The share tends to:

See answer

Fall. With Treasury paying more, the same income only attracts buyers at a lower price.

Lesson complete

Next lesson

A1.2Advanced · Lesson A1.2Debt and property REITs in each rate cycleWhen rates rise or fall, who gains income and who gains price.Continue
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Image credits
  • Luiz Pantoja · Wikimedia Commons · CC BY 2.0 — Wikimedia Commons
  • Banco Central do Brasil · Wikimedia Commons · CC BY 2.0 — Wikimedia Commons
  • Handi Boyz LLC · Pexels · Pexels License — Pexels

Educational content, written for learners. Not investment advice.