57
57

More than 80% of Investors in the Commercial Real Estate Market Are Foreigners. But Who Are They and How Are Funded?

10 June 2018

Prices in the commercial real estate market are rising, thanks to bets by foreign investment funds. But how do these investors fund themselves? The Bank of Portugal wants more transparency.

It is not just residential real estate that is becoming more expensive. Commercial properties, like offices and stores, are also seeing expressive increases. It was after 2013 that a sharp fall gave way to a significant recovery in housing prices and also in this market. Who is investing? Funds, especially international ones. However, it is not known how they finance themselves, the Bank of Portugal (BdP) warned. This uncertainty raises doubts about the stability of these investments.

The commercial real estate market has been recovering for the past five years, as the value of transactions over the past three has been in the billions of euros. According to data from the BdP’s Financial Stability Report, last year, transactions in this segment reached almost two billion euros.

During this period, there was a “sharp increase in the participation of foreign investors”, namely pension funds, investment funds and Real Estate Investment Trusts (REITs), the Bank of Portugal explained. Last year, “about 80% of the investment in the commercial real estate market was made by non-residents, mostly funds,” it noted.

Institutional investors are betting on the Portuguese commercial segment, but Carlos Costa acknowledges that he does not know the source of their financing. “We do not have information on these investors’ financing structure,” nor do we “know if these funds are leveraged,” the Bank of Portugal stated at the report’s presentation. Investors who are highly leveraged face greater levels of volatility in their investments.

While some are medium-to-long-term investors, others (REITs) have shorter-term investment horizons and are more vulnerable to geopolitical and economic events. “Regarding investors in the commercial real estate market, it is important to distinguish between long-term investors, such as pension funds, and investors who are more sensitive to global financial and economic conditions, such as REITs,” the regulator said.

“Indeed, the presence of [pension funds] could help mitigate the effects on the market of potentially more volatile behaviour by other investors. However, significant changes to the regulatory frameworks that affect expectations of future profitability of investors in this market may have an amplifying effect on prices, given the characteristics of the Portuguese market in terms of size and liquidity,” the Bank of Portugal stated, fearing possible impacts on the national financial system.

Investment funds account for the lion’s share of non-resident investments. They are the most popular vehicle for investors, but even they are beginning to feel the competition from REITs, which are exclusively dedicated to real estate assets. Currently, they exist in several countries, including Spain, where they are known as socimis, and the real estate and financial industry in Portugal has long clamoured for a framework for REITs to be implemented there as well.

Portuguese await the arrival of a local framework for REITs

In 2017, the Portuguese government promised to implement REITs in Portugal, but the process failed to move forward. The government postponed the creation of the regulatory framework for the vehicle, which could, according to the sector, attract investments between 10 and 15 billion euros for the country, until after the completion of the financial supervision reform.

The preparation of the regulatory framework thus fell to the CMVM, and the market regulator has already said that it is open to the investment vehicles that have had such success in Spain. Gabriela Figueiredo Dias noted in recent statements to Economia Online that “she has collaborated and will continue to do so with all interested parties for this purpose.”

“The CMVM believes that REIT – Real Estate Investment Trusts are an important instrument of diversification of sources of financing and the dynamization and competitiveness of the capital market,” and is in favour of introducing an adequate regulatory framework giving the necessary guarantees to the protection of the market and investors,” the CMVM stated.

Original Story: Economia Online – Rita Atalaia

Photo: André Vidigal / Global Images

Translation: Richard Turner