Investors look to middle class housing demand

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After a three-year boom in Portugal’s luxury, second home and regeneration of existing urban housing stock markets, overseas funds are now looking to cash in on the growing demand for middle class new build homes.

Text and photos: Chris Graeme

British postwar prime minister Harold Macmillan famously told the British public in the 1960s that they had “never had it so good!”
Today, the Portuguese Prime Minister António Costa and his finance minister Mário Centeno would be entirely justified in claiming the same sentiment for Portugal whose property sector, fuelled on renewed investor confidence and a record boom in tourism, has enjoyed year-on-year growth of 20% and combined property investment of €3.5Bn — up 54% on 2017.
But according to Hugo Santos Ferreira, Executive Vice-President of the Portuguese Association of Real Estate Developers and Investors (APPII) and voted ‘Real Estate Personality of the Year’ by Magazine Imobilíario, the “big investment opportunity now” in the market is for new build to satisfy the lack of housing for the Portuguese middle class.
“The large institutional overseas investors want quality and responsible non-speculative long-term investment for pension funds” stresses Santos Ferreira.
By this Santos Ferreira means projects that will bring in a steady and reliable income over five, 10 and 20 years come for the biggest private equity and investment funds in the US, Middle East and Asia where 70-80% of these funds are now looking at big projects for the middle classes in countries like Portugal.
“We are talking about higher investment tickets of €100 million or even €300 million for Urban Conurbation Master Plan projects in Greater Lisbon (Miraflores, Telheiras, Alta de Lisboa and Carnaxide) and Greater Oporto where there are still plenty of suitable development sites and they are looking to do projects with 1000 housing units,” he says.
A year ago, the kind of investors coming to Portugal were small and investing smaller tickets of millions or a few tens of millions for real estate urban rennovation projects. From the beginning of 2019, the investor landscape completely changed with big international investors, some top-ranking investors from Spain (the so-called Big 5) as well as the largest London stock exchange listed private equity firms looking to invest in Portugal’s consolidated market.
“We are seeing a big change in the type of developments, moving from urban rennovation and regeneration projects inside Lisbon and Porto to the peripheral suburban areas and new construction,” Santos Ferreira says.

Tax incentives
One measure that the APPII is pushing the government to do in order to encourage new build housing to meet Portuguese middle class demand is the lowering of VAT in this specific area to 6%.
“Whenever we have overseas investors from real estate funds in town they always bring up the issue of VAT which has scared a lot of them away”, says Santos Ferreira.
“The Portuguese State needs to take the long view and reduce VAT on new build housing which would not only encourage the market, but also solve the extremely high demand for housing for Portugal’s middle classes, a demand which at present is not being satisfied because of a lack of supply”, he adds.
Santos Ferreira points out that Portugal is “an isolated case in Europe” where IVA on housing is either tax deductible or at a lower rate.
“In Spain developers and investors can deduct VAT costs from construction and we have to ask the question why the Portuguese Government is not doing the same?”
However, he is optimistic from discussions already had with contacts within the Ministry of the Economy and the Ministry for Infrastructure and Housing, the latter headed by Pedro Nuno Santos, that the present government is committed to giving a leg up to Portugal’s construction and property development industry in this specific area.
This point is even more salient when one considers that since 2014 Portugal has attracted around €100Bn for its property sector, much of it from overseas and some invested in real estate funds (REITS), a total investment that has boosted the sector and provided tens of thousands of jobs, half of which have been absorbed by the estate agency sub-sector which today is responsible for over 50,000 jobs alone.
In fact in 2018, Portugal’s property market saw an investment of €30Bn, worth 15% of the country’s GDP and there are certainly few other sectors of the economy that have managed to attract that amount of investment in Portugal.
And Hugo Santos Ferreira gives a specific example of how Government incentives paid off not only for attracting investment from developers and generating jobs but also in transforming Portugal’s run down and abandoned city centres.
“Regarding rennovation works, in 2014 this type of work was not common in Portugal. Our cities were empty, buildings were in a derelict state and one of the incentives to boost rennovation work was slashing VAT to 6%”, says.
Santos Ferreira is quick to point out that he is not calling for a VAT reduction for all building projects, but only for those new build projects that are so desperately needed to create new and affordable housing stock for the middle classes.

Supporting prop-tech startups
One growing area that the APPII is keen to get involved in and actively support is the prop-tech sector in which a union between technology and this traditional and important sector in Portugal is already enjoying a transformation never before seen.
To this end, the APPII is developing an online platform called Develotech Centre powered by BPI to support and divulge and help develop innovation in Portugal’s property industry.
The Develotech Centre – Where We Want to Be? aims, according to Santos Ferreira who spearheads the project, to keep abreast of the new challenges in Prop-tech and blockchain associated with real estate and make this forward-looking industry able to operate in the new paradigm within the context of a market which is increasingly global, connected, networked and constantly on the look out for new ways to innovate.
The platform, managed by the APPII, aims to feature the most relevant national and international prop-techs which have activities in Portugal, showcasing their services and technology to real estate developers and investors, its members to encourage the sector to be dynamic, innovative and able to meet the competitive challenges of the future.

Property prices at Paris rates?
While it is no secret that enormous overseas demand for relocation, second homes and properties for students and Air BnB tourists, not to mention Portugal’s Golden Visa programme aimed at non-EU HNWIs, has inflated house prices to record highs in Portuguese cities like Lisbon and Porto, Hugo Santos Ferreira completely dismisses claims toted in several overseas newspapers that house prices in Lisbon have reached Paris levels.
“It is important to dispel this myth that somehow property in Lisbon has reached Paris price levels. If you know the Lisbon and Paris property markets you can see that this is simply not true,” says Santos Ferreira.
“We cannot compare different things. When comparing the medium house prices in Lisbon with Paris, Paris is at least double. And when top-end luxury homes are compared then prices in Paris are three or even four times more expensive than Lisbon. We don’t have the same prices per square metre that they have in Paris.”
And is Hugo Santos Ferreira optimistic for the future of Portugal’s property market? “We actually do not want property growth to continue at 20% per annum as it has been since 2014. This is not sustainable or healthy”.
“As a real estate professional I believe we now need steady long term investment. We are now in the consolidation phase of the cycle and won’t see the 20% growth we have seen in recent years. Instead we will see consolidated and balanced quality growth which is what the market needs right now” he concluded.