Brazil has exempted foreign investors from paying a financial transaction tax if they purchase real estate investment trusts traded on the country’s stock exchange. This measure announced on Thursday was taken in hopes that foreign investments would be encouraged and later support Brazil’s economic recovery.
In the past year, the Brazilian government has focused on determining alternative sources of funding for local businesses, the majority of which are highly dependent on loans taken from state development bank BNDES, which is the primary source of long-term funds for the Brazilian corporate segment.
The newly introduced tax exception is expected to increase US dollar inflows and help maintain the strength of the local currency. Yet the main reason for the exemption was to encourage investment’s in Brazil’s real estate market.
“The objective here is to stimulate long-term investment in the real estate sector,” Dyogo de Oliveira, a senior finance ministry official, told reporters in Brasilia. “This measure should not have a relevant impact on the currency.”
As a result, BM&FBovespa SA’s IFIX Index that tracks the most-traded real estate investment trusts (REITs) in the Sao Paolo Stock Exchange, went up 0.62% on the day of the announcement.
“On the back of low yields across global assets, these funds should arise as an interesting alternative to international investors,” BTG Pactual Group analyst Alexandre Muller said in a note. “Due to the general scarcity of good yields available in most of the financial assets … we anticipate new buyers for local real estate funds.”
REITs, usually inflation-adjusted as rent contracts in the country are linked to the IGP-M (the local consumer and wholesale price index), represent a very attractive investment opportunity, contrasting with the overall slow-growth of the local market which has seen interest rates at a record low. The average local REIT offers interests of 7-8%, as compared to only 4% for a 10 year inflation-linked bond issued by the Brazilian government.
This is not the first measure the Brazilian government takes to stimulate the real estate sector. In December 2012, they s reduced payroll taxes for construction firms, trying to stimulate investments.
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