Real Estate Notes – REN
1. What is it?
The Real Estate Note is a fixed rate bond financially backed by real estate credit. This type of investment’s primary objective is to stimulate a country’s real estate market. About 70% of the funds from common savings accounts are used by Brazilian banks to back real estate financings. However, since the common savings account was, in the past, insufficient to carry out the task, on May 2nd, 2004 the Real Estate Notes were created in order to raise more funds for real estate financings.
Real Estate Notes can be issued as book entry, nominative or endorsable form. Only commercial banks, multiservice banks with a mortgage lend portfolio and building societies can issue Real Estate Notes, apart from other institutions specially authorized by the Brazilian Central Bank. All Real Estate Notes operations are registered with Central de Custódia de Títulos Privados – Cetip (or Private Bond Custody Center, in loose translation. This is an open society company that offers services to the financial market in Brazil).
The underlying or referenced asset that backs the Real Estate Note is a commercial, residential or industrial real estate property that was given as a guarantee in a financing operation – or a mortgage. Based on the value of the real estate property the bank issues Real Estate Notes. This underlying or referenced asset is what guarantees the credit operation and, therefore, back payment on the loan and the operation’s interest. Real Estate Notes offers are bound to the existence of underlying or referenced real estate. Because of this, offers of Real Estate Notes may vary.
In other words, when a bank owns a mortgage lend portfolio it can use this as an underlying or referenced asset to a financial operation to be offered to its clients. All resources brought into play shall be destined to dwelling programs and incentives. However, the total of the Real Estate Notes issued cannot surpass the total amount of real estate credits retained by the institution that issued them. It’s like a sort of “real estate Bank Deposit Certificate”, meaning fixed rate bonds issued by banks and based on real estate loans or mortgages.
The deadline on these bonds is limited by the due date of the mortgage bonds that served as their base. The liquidity of the Real Estate Notes varies from bank to bank. Some institutions only offer liquidity upon the due date, meaning you can only retrieve your money when the due date is reached. In other banks, nonetheless, a minimum deadline of 90 days is demanded.
Therefore, the Real Estate Note is a good option for conservative investors that do not need the funds on short term. They represent a good variation option, considering there is no income tax burden.
Profitability may be attached to industry or general index prices, benchmark rates (the Brazilian TR), and to the Interbank Deposit Rate, being the last one the more common occurrence.
Since Real Estate Notes are not burdened by income tax, banks generally pay a slightly smaller percentage on the Interbank Deposit Rate (if compared to the Bank Deposit Certificate) and, the longer the financial asset period, the bigger the percentage. One should keep in mind there’s bound to be variation from bank to bank.
In the olden days this type of investment was only available for investors with larger funds. Nowadays there are banks that demand a minimum investment of R$ 1,000.00, or even less. When it comes time for the investment the due date is set and the reference Interbank Deposit Rate percentage is defined. Real Estate Notes can be pre or post-fixed.
Nonetheless some banks offer good profitability, even overcoming 100% of the Interbank Deposit Rate. It all depends on the duration and the amount invested. These banks aren’t as big, obviously. But they offer a level of security and credibility.
Risks attached to the Real Estate Notes are low. The biggest risk is the possibility of the bank offering the asset going bankrupt. But even if that happens Real Estate Notes are guaranteed by the Credit Guarantee Fund for investments up to R$ 250 thousand per bank account. In other words it’s a very safe investment that usually pays better than the common savings account and, sometimes, more than the Bank Deposit Certificate.
Since 2004 all Real Estate Notes are free from income tax burden for normal persons as well as for residential or commercial building complexes. For companies the taxation is similar to other fixed income investments, as per the rules listed below:
- Investments of up to 180 days: 22,5% (over the profits, only)
- Investments from 181 to 360 days: 20% (over the profits, only)
- Investments from 361 to 720 days: 17,5% (over the profits, only)
Investments over 720 days: 15% (over the profits, only)
5. How it works
To invest in Real Estate Notes you need to hold a bank account at the bank you wish to invest with. Some banks allow you to open a bank account online, directly from your home. After the account is operational you need only transfer the money and choose from the letters of credit portfolio available in your bank. They vary as per the duration and rate of return on the investment. The larger the amount and duration chosen, the more the bond will pay. Real Estate Notes have daily liquidity and one can check the balance every day to evaluate the profitability of the investment.
There are no classes or types of Real Estate Notes. What varies between them is the deadline and the return rate, as well as the type of compensation available. More commonly Real Estate Notes are linked to the Interbank Deposit Rate. There’s also the choice between prefixed or post-fixed Real Estate Notes.
- Real Estate Notes raise money from the general public, playing a part in the activation and growth of the real estate market;
- When Real Estate Notes are issued, financial agents don’t need to await payment on the final buyer installments to regain the capital invested in a project. This way the funds are available for reinvestment and financing of other projects sooner;
- No income tax burden for normal people;
- Low risk, considering they are backed by real mortgages;
- Guaranteed by the Credit Guarantee Fund for up to R$ 250 thousand (even if the bank account in question is a joint bank account);
- Profitability matching the Selic rate.
- Liquidity only upon the deadline;
- Some banks require backing to offer Real Estate Notes and when that backing lacks, the product is suspended;
- Minimum term: 90 days