The Brazilian Finance Ministry’s recent hike of the IOF tax on foreign investment into fixed income investments to 6% from 4% is bound to have some kind of impact on the appetite of overseas money for local securitization products. The increase comes after a 2 percentage point hike earlier this month.
While foreign investors do not make a significant portion of local structured finance demand, they are targeted by a number of shops, in particular as buyers into certain asset classes such as payroll deductible and agribusiness-related deals.
Chuck Spragins, a partner at financial information company Uqbar, see a potential effect via private equity investment funds known as FIPs, which invest in a range of instruments. “Through FIPs a lot of investors make real estate investments such as in CRIs (certificate of real estate receivables) or in a Greenfield project that will sell receivables to a securitization vehicle.” Real estate investment funds, which also purchase CRIs and other structured investors, could also see diminished foreign investor demand due to the tax increase, he added.
But even with the increased tax, the returns on local real estate investment funds would still be attractive, said Fabio Noguiera, the chief operating officer of Brazilian Finance & Real Estate, a company with four units involved in financing, structuring and managing real estate investments. He added that given the longer-term nature of some of these assets, paying an upfront tax of 6% is not prohibitively costly over the life of deals. At any rate, he does not expect real estate investment overall to suffer as a result of the tax hike, as the government has enough of an interest in buoying demand in housing to offset any potential impact from the IOF increase. “The government is concerned with preserving this market,” he added. “[It] is looking for alternatives to funding the real estate market.”
The tax increase was widely seen as an attempt to arrest appreciation in the local currency, which has strengthened 30% against the dollar since March 2009, according to Dow Jones Newswires.