Certificates of Real Estate Receivables – CRER
1. What is it?
Certificates of real estate receivables (or CRI, in Portuguese) are a fixed income bond based on real estate credits. They are duly registered with the CVM (the Brazilian SEC) and only real estate securitization companies are allowed issue such bonds. Real estate securitization companies are those that acquire receivables with real estate guarantees and use them to back real estate bonds to be traded in the financial market.
Credits aren’t guaranteed by the bond issuing institution. However, this institution is responsible for setting up the operation, following up on it and for liquidating credits and guarantees. When buying such bonds, choose an issuing company with market experience and rapport.
Investment on CRIs is a long term one. Redemption is usually on the due date, by means of installments. Some CRIs, however, allow for early redemption and, should that be the choice, the can also be traded on the secondary market (stock exchange). These bonds, however, have low liquidity.
To acquire a CRI the investor needs to be registered with a broker or bank. This type of bond is not burdened by income tax and represents a good diversification option. This was a qualified investor bond (focused on injections over R$ 1 million). Lately, with the market evolution, lower minimums have already been found.
Investment funds are one of the alternatives for investors searching for this type of bond. A more diversified backing strategy on this type of fund makes it a better alternative, in fact, depending on the amount to be invested. As a practical example, one could imagine a cohort of investors choosing CRIs as their main focus. This group can offer quotas at lower prices for less experienced investors. They also help mitigate risks, considering the variety of bonds acquired.
CRIs may be prefixed or post-fixed. That implies on fixed interest payment or fluctuating interest payment according to the type chosen. Redemption payment can be on the due date or in advanced, and payment can be made monthly, quarterly, annually or on every other quarter.
Post-fixed CRIs can be linked to the General Market Price Index (or IGP-M, in Portuguese), the Interbank Deposit Rate, the Broad Consumer Price Index (or IPCA, in Portuguese) or the Benchmark Rate (in Brazil, specifically the TR rate).
As for the prefixed options, earnings tend to supersede the common savings account, the Bank Deposit Certificate and, sometimes, even the public bonds. One can only calculate the actual profitability after analyzing all CRI particularities. Some examples are:
- 9.0% p.a. + IGP-M – Monthly Payment
- 9.0% p.a. + IPCA – Payable in 13 consecutive annual installments
- 107% on the DI over – Payable every other quarter, in 24 installments
9.9522% p.a. + TR – Payable in 35 monthly installments
The main risk for CRI investors lays with the possibility of noncompliance on the underlying or referenced asset – in this case, installment payments on real estate financing, leasing or rent payments. Usually, sales contracts have a repossession clause in case of noncompliance, which tends to reduce risks for the CRI holder. In most cases, repossessed property is put to action. When dealing with rent-backed CRIs the guarantee may be a pledge stipulated in the contract. To mitigate risks, residential CRIs are usually tied to multiple contracts – unlike corporate CRIs. Market ratings are used to qualify these bonds – higher rates represent safer bonds.
This type of investment is not burdened by income tax or tax on financial transactions (IOF, in Portuguese). However, the investor may be subject to certain CBLC (Liquidation and Custody Brazilian Chamber, in loose translation – a Brazilian Custody Regulator) and broker house fees. As well, if the holder is investing through an investment fund, they may charge service fees. Other fees may be incurred upon due to specific operational fees and discounts, or to cover expenses and commissions on the operation or securitization. The securitization company may also charge service fees.
5. How it works
The work mechanism of a CRI is fairly simple: securitization companies “buy” a series of real estate receivables (such as installments on home financings, rent, non-financed installment plans and so on), out them together and sell them to investors as products. A CRI investor receives a bond backed by underlying or reference assets. Those assets have, themselves, other underlying guarantees, such as repossession clauses or other fiduciary pledges.
According to the chosen type of CRI, the investor is paid amortization installments periodically, with added interest, until the full return of the investment at the end of the contract.
CRIs are subject to a series of premises that categorize them:
This is a secondary round, and therefore riskier. It may suffer the full burden of any noncompliance, having its funds destined for payment to the upper round. Should any noncompliance occur, the upper series will be repaid first, leaving this secondary round for last. As well, certain Junior Series CRIs have a grace period before actually starting payment both on the principal and the interest.
This is the preferred round and, consequently, the safest. It has no grace period – which means payment is made immediately. For this series, if any noncompliance occurs and the receivables guarantee is insufficient, this round is favored over any other.
All earnings registered in the grace period will be destined to a reserve fund. This fund will account for all operation and securitization commissions and expenses, as well as for the possible insufficiency of funds to repay earnings to the Senior Series.
Per financial backing:
Residential CRIs have the sale of real estate to normal persons through non-financed installment plan as financial backing (investment guarantee). They comprise loan portfolios with a pulverized risk profile. The risk here is further mitigated by the Junior Series round, set to bear the burden of noncompliance up to its subordination limit.
Corporate CRIs are usually tied to a single contract held by a company. There are, however, CRIs with multiple corporate contracts. For this type of bond there is usually no Junior Series – noncompliance here can only be null or complete.
- No income tax burden;
- No tax on financial transactions burden;
- Periodic payments (monthly, annually, per semester);
- Good choice for portfolio diversification;
- High earning rates, superseding many fixed income investments.
- Long term bonds;
- Low liquidity;
- High minimum investment level;
- Not guaranteed by the Credit Guarantee Fund.