Real Estate Funds: Poor Performance in 2019

In Costa Rica, yields on these investment instruments have been declining since 2017 and even more this year, partly because of the increase in the unemployment rate of real estate.

Monday, September 9, 2019

The prices of real estate investment fund shares on the stock market have fallen significantly in the last year. Economist Adriana Rodríguez, director of the consulting firm Frecuencia Económica, explains what to expect in the medium and short term.

"... Investments in real estate funds are an important allocation within a diversified investment portfolio, since they provide exposure to the real estate market and, in addition, because of their long-term nature, lower liquidity and greater sensitivity to the economic cycle, they generally provide a higher return than that offered by other instruments such as bonds or certificates.

However, the performance of these funds in Costa Rica over the past year and a half has been disappointing.

Thus, of the 9 most traded real estate investment funds, which recorded transactions between $22.8 and $77.9 million from 2017 to date, only 2 do not show losses in the value of their share so far this year (although their prices have not risen more than 0.8%).

Among the 7 largest funds with losses, the average fall in their prices this year is -9.5%, with the most dramatic falls being 20.7% and 12.3%. The most traded real estate fund in the market reports a -11.7% loss this year, after -19.04% last year.

What's going on? The liquid yields offered by these funds (derived from the rent paid by tenants for rent) and the total yields (which incorporate the physical and financial revaluations of the properties) have tended to decline since 2017 and strongly during this year, together with the higher percentages of unemployment in the industry.

Currently, the industry's unemployment percentage is 12%, and this has been its average level since 2017, when it reached a maximum unemployment level of 16%. During previous years, the average unemployment was less than 8.3% according to data from Sugeval."

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During the first eight months of the year, 98,769 properties were registered, 9% less than those reported in the same period of 2017.

According to the most recent figures of the General Comptroller, between January and August 2017 and the first eight months of this year, vertical properties reported a decrease of 11%, falling from 84,627 to 75,036.

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Stable returns is the main characteristic of real estate funds which in Costa Rica have shown annualized growth of 26% in their net assets.

An article in Nacion.com reports that "... Real estate funds spent $284.2 million on the acquisition of 32 buildings between April 2016 and March 2017. As of March, net assets managed by the seven investment fund management companies (SAFI) amounted to ¢754,255 million, after a year-on-year increase of 26%, according to the Superintendency of Securities (Sugeval)."

Growth of Investment Funds in Nicaragua

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Initial expectations for the placement of shares in real estate funds worth $2 million was far surpassed, with a total of $9 million in the first year.

Laprensa.com.ni reports that "... the success of the FII is based on the fact that these pay a better percentage for the investment (from 6.5 to 8 percent a year), much more than is usually paid by the financial system on savings, but also offers fewer levels of risk for investors. This has recently allowed other economic groups to prepare similar products. "

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Investment Fund Managers in Costa Rica are looking to market their securities across Central America.

Some of these companies have many years experience in foreign markets and other started this year in 2013. For example the two funds belonging to Improsa SAFI have been authorized in Panama since 2009, while others such as Interbolsa, resumed this year the work of internationalization in all countries.

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