Alternative Real Estate Investment Funds could help resolve Portugal’s chronic lack of affordable residential housing supply

Alternative Real Estate Investment Undertakings, or AREIUs, including Real Estate Investment Funds (Contractual Investment Undertakings), and Collective Investment Undertakings (CIOs), have grown and broke records in Portugal the first half of 2024.

And these funds could make a contribution to boosting residential supply, particularly rental housing according to the Portuguese Association of Investment and Pension Funds and Patrimony (APFIPP).

Data released by the APFIPP shows that at the end of June, 2024, these investment vehicles were responsible for the management of real estate assets worth around 17.4Bn, which represented a 2.1% growth in relation to the end of 2023 and a positive variation of 48.2% on 30 June, 2022.

In an interview with the real estate magazine Revista Imobiliário, the President of the association, João Pratas, said that Open AIUs constitute a savings instrument for thousands of small investors who choose to apply a part of their savings in the real estate sector, thereby achieving a greater diversification of their portfolios, allowing them to access a segment to which they would otherwise be unable to do.

And Closed Alternative Real Estate Investment Undertakings, because of the competence and professionalism of Portuguese fund managers, have attracted other types of investors, with a corresponding transformation of real estate companies into Collective Investment Undertakings. (CIU).

This has created a different way of operating in the Portuguese market. Alongside the transparency and the professional management that characterise the industry, as well as the good performance of Portugal’s real estate market in general, and the Alternative Real Estate Investment Undertakings in particular, these factors have contributed significantly to the growth that has been seen.

At the end of June 2024, according to data from the Portuguese securities market regulator CMVM, 16.2% (€2.4Bn) of assets held by AREIUs were linked to the real estate sector, although the majority corresponded to vehicles dedicated to real estate development, in other words from construction to sale.

João Pratas points out, however, that the “AREIUs are, first and foremost, a savings instrument, and, in this sense, their purpose is to provide an adequate return for their investors/stakeholders, and the assets that make up the respective portfolios are selected according to their return and risk profile, and guided by the investment policies contained in the constitutive documents of these vehicles.”
And what the association finds is that “unfortunately, in the Portuguese real estate market, as a result of a number of historic handicaps, in many cases the housing rental segment continues to be seen as carrying a greater risk; a risk that in the majority of cases cannot be mitigated or eliminated when compared with the non-housing segment.

As for housing, one of the factors that has contributed to this perception is the added protection that has been given to tenants to the detriment of landlords. Which is why, as João Pratas says, “this fact has led to a lesser interest from investors in AREIUs that specialise in this type of applications.

As a consequence, these entities tend to pay scant regard to these assets in their portfolios in an effort to adapt to the risk profile of their investors.”

But there are those who think that the AREIUs can make a difference in the residential market.

The co-founder and board member of N2AM, Nuno Marques, argues that the AREIUs “can without a doubt make a positive contribution to increasing the available housing supply in Portugal.”

And explains: “By funnelling capital into the development of new property renovation projects, the AREIUs have the capacity of attracting new investors to this sector who are interested in long-term solutions or income.”

Nuno Marques also adds that “the specialisation and depth of these regulated vehicles allow them to respond to the current and future needs of the market by developing a more diverse and adequate supply, contributing towards offsetting the lack of housing in Portugal.”

In a nutshell, in order for the AREIUs to have a greater exposure to the housing market, it is essential that the government and institutional bodies create the right conditions to offer security, stability, and predictability to this sector, and for this to happen a suitable fiscal-legal framework needs to be developed, as well as guaranteeing an expected risk/return relationship that would attract the interest of investors and their applications, which has not been the case.