Within the universe of FIIs (Brazilian real estate investment funds), there is a well-known split between “brick-and-mortar funds” and “paper funds.” Understanding this difference helps you build a portfolio with greater awareness of the risks you are taking on.
Brick-and-mortar FIIs
These are funds that invest directly in physical properties: logistics warehouses, shopping malls, corporate office floors, bank branches, among others. Income comes mainly from the rent paid by the tenants of these properties.
Common risks: vacancy (properties without a tenant), tenant default and loss of property value in certain regions or sectors.
Paper FIIs
They invest in credit securities tied to the real estate market, such as CRIs (Real Estate Receivables Certificates). Income comes from the interest paid by these securities, often indexed to inflation indices or to the CDI (Brazil’s interbank deposit rate).
Common risks: default by the issuer of the securities and price swings as the economy’s interest rate changes.
Many investors combine both types in their portfolio precisely to balance the different sources of risk and return.
What about hybrid funds and funds of funds (FOFs)?
There are also hybrid FIIs, which combine brick-and-mortar and paper, and Funds of Funds (FOFs), which invest in units of other FIIs, seeking diversification through a single asset. Each structure has its own risk-and-return dynamics.