The new coronavirus, as everyone knows, has been causing huge impacts on the lives of people and companies around the world. In the capital market, this reflection was no different. Stock exchanges and companies in several countries suffered large drops in quotations and a systemic capital flight. In Brazil, in March, we had six circuit breakers (mechanism for interrupting trading on the stock exchange) in a period of ten days, matching a behavior seen in 2008 in the great American real estate crisis. Two of the main performance indices of variable income assets in Brazil, the Ibovespa (shares) and the IFIX (real estate funds), suffered drops of 45 to 30% compared to the value at the beginning of 2020 and even though they obtained recovery over the last 5 months, still carry retractions in the order of 15%.
Figure 1 – Main performance indices of variable income assets in Brazil. Source: TradingView (Consultation on 12/08/2020)
Simply put, real estate funds are variable income assets that buy and rent real estate and distribute these proceeds to their shareholders. In general, the market has a large representation of the sectors of corporate floors, logistics warehouses and shopping malls, but the growth of the industry has been expanding the reach of these assets and increasingly includes retail, educational, hospital, industrial, housing, hotel sector properties. , among others.
In this type of venture, in addition to the expected credit crisis and wave of deferrals and defaults, the COVID-19 pandemic has impacted each sector in different ways. With the lockdown and the various restrictions on the movement of people and the operation of establishments, almost all shopping malls had their operations completely interrupted, and many real estate funds in this sector had their revenues reduced to zero. As for corporate floors, the increase in vacancy and the reduction in rents were notable, given the great movement of companies to adopt the home office and reduce or even completely eliminate their traditional offices.
On the other hand, the sector of logistics warehouses had a very small impact when compared to the others. In the figure below, I bring the performance of 6 funds among the most traded in the 3 major sectors (logistics, corporate slabs and shopping malls). It is possible to notice a comparatively higher profitability between logistic funds and other sectors, and also against the market average represented by the IFIX. Of course, this portrait is just a sample of the vast universe of funds, but the same behavior can be observed by comparing other assets.
Figure 2 – Performance of 6 funds among the most traded in the 3 major sectors (logistics, corporate slabs and shopping malls). Source: TradingView (Consultation on 12/08/2020)
This behavior is explained by several characteristics of the logistics operation in these warehouses. One of the particularities that make this resilience possible is the strong presence of atypical contracts with tenants. The atypical contract, in general, has a duration of 10 or more years and provides for the payment of all remaining lease periods in case of termination, providing greater security and revenue predictability. This type of contract is very common in logistics assets given the strategic importance of the decision to locate a company's distribution centers.
In addition, real estate funds have many build-to-suit logistics warehouses, that is, the warehouse is built to meet the specific needs of the client. In this way, these contracts have a long duration and play an even more vital role in the operation of companies. It is also very common to find warehouses in the sale and leaseback modality, in which the real estate fund acquires the property from the company and rents it out to the company, signing a long-term contract. This arrangement brings the desired revenue predictability to the fund and its shareholders and works as a way for the company to raise money in the market and reduce its fixed assets.
If, on the one hand, circulation restrictions harmed many sectors, the greater number of people at home significantly increased e-commerce demand. This boom in online orders further reinforced the importance of well-positioned distribution centers close to large cities, with the capacity to serve the last mile within the level of service expected by increasingly demanding customers. That said, real estate funds with high-quality, well-located logistical assets reaffirmed the robustness of their operations.
Finally, this maturation of the real estate fund market and closer ties with logistics assets promise to yield good results for the sector. More and more, funds that traditionally acquired ready-to-lease properties have been presenting projects to develop new warehouses, reinforcing the offer of quality distribution centers in key regions for logistics. We will continue to monitor the developments in this relationship, which can further contribute to improving competitiveness and logistics infrastructure in Brazil.
Transport and Infrastructure is one of the themes of the International Supply Chain Forum this year, in addition to E-commerce and New Retail, Digital Transformation of the Supply Chain and Reinventing the Supply Chain. ILOS will promote the Forum between October 13th and 15th, for the first time 100% online. To stay on top of the best market practices and find out about innovative solutions that are being adopted by industry executives, don't miss the opportunity to participate in this edition!
