* Government seeks to spur investment as growth slows
* REITs have become a top pick among foreign funds
* Move could entice dollar inflows, bolstering currency
* Government says effect on exchange rate to be minimal
By Guillermo Parra-Bernal and Alonso Soto
SAO PAULO/BRASILIA, Jan 31 Brazil on Thursday
exempted foreign investors from paying a financial transaction
tax on purchases of real estate investment trusts traded on the
country's stock exchange, hoping to spur investments and support
an economic recovery.
For the last year the government of President Dilma Rousseff
has aimed to develop funding alternatives for local builders,
many of which are overly dependent on loans from state
development bank BNDES, the main source of long-term corporate
financing in Brazil.
The tax exemption will likely increase U.S. dollar inflows
and thus help keep the local currency strong. However, a senior
government official said the measure was designed mainly to
boost investments in the country's buoyant 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."
BM&FBovespa SA's IFIX Index, which tracks the
most-traded real estate investment trusts, or REITs, in the Sao
Paolo Stock Exchange, rose 0.62 percent on Thursday afternoon in
the wake of the announcement.
The move, which zeroes a 6 percent financial transaction tax
known as the IOF, was announced in the government's official
gazette. The IOF tax can be lowered or increased at any time
depending on market conditions, government officials said.
"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 are usually inflation-adjusted, since rent contracts
in Brazil are linked to a consumer and wholesale price index
known as the IGP-M, offering an attractive investment
opportunity in an otherwise slow-growth market where interest
rates are at a record low.
Currently yields on an average local REITs, depending on
size, can offer interests of between 7 percent and 8 percent,
compared with less than 4 percent for a 10-year, local
government inflation-linked bond, data by BTG Pactual showed.
Last year about 14 billion reais ($7.04 billion) worth of
REITs and similar instruments were sold in initial public
offerings in Brazil, compared with 7.66 billion reais a year
earlier, data by the country's securities regulator CVM showed.
In 2009, sales of REITs, known in Brazil as FIIs, reached 2.88
In a bid to foster more investment in the industry, the
government reduced payroll taxes for construction firms in
December, a few days after reporting surprisingly weak economic
Brazil, Latin America's largest economy, probably grew just
1 percent in 2012, according to most forecasts, a disappointing
performance for an economy that grew 7.5 percent in 2010.
BET ON REAL ESTATE
The government is betting on the construction industry to
breathe some life into an economy struggling to recover after
two consecutive years of weak growth. A surge in the middle
class over the last decade has made real estate in Brazil very
appealing for investors.
Brazil ranked first as the most attractive emerging market
country for commercial and residential real estate, topping
China for the first time in three years, according to a survey
conducted by the U.S.-based Association of Foreign Investors in
Sao Paulo, Brazil's largest city, climbed to 4th from 26th
on the list of top global cities for foreign investment in real
estate, the association said.
Nevertheless, some Brazilian builders are facing problems
after years of poorly managed growth and runaway construction
costs. Major Brazilian homebuilders like PDG Realty SA
are scaling back operations to focus on executing old
projects and generating cash to reduce debt.
Government officials said foreign investors, who have little
participation in REITs, could bring some needed cash to the
Brazil's Byzantine tax system is often blamed as one of the
reasons for its chronically low investment levels. Foreign
investors also complain about measures taken in recent years to
curb dollar inflows.
Foreign investments in domestic bonds are taxed at 6
percent, while stock portfolios are exempt from the IOF tax. De
Oliveira said the government has no plans to cut the IOF tax on
foreign investments in fixed-income instruments.
The Brazilian real weakened 0.2 percent on
Thursday to 1.9908 per dollar. It was its second consecutive day
of losses, following a rally early in the week that took the
currency past the mark of 2 per dollar for the first time in
nearly seven months.
The country reported $2.693 billion in dollar outflows in
the first four weeks of the year, according to the central bank.