“Portugal would benefit from greater dynamism in the residential Build-to-Rent segment.”– Miguel Pereira Pinto, Head of Asset Management at Albatross Capital

In an interview with Brainsre News Portugal, Miguel Pereira Pinto, Head of Asset Management at Albatross Capital, explained the importance of residential leasing in Portugal, and whether the country will have the necessary conditions to boost the Build-to-Rent market. He also assesses the acquisition of the ZIP portfolio.

Albatross Capital is a real estate investment company focused on the Portuguese and Spanish markets. Present in Portugal since 2017, it predominantly operates in a joint venture with Quantico, a reference promoter in Portugal. Albatross is involved in several projects, with emphasis on the Development platform (the Antas Atrium project) and the Rental Residential platform (highlighted on the Zip portfolio).

During the current high interest rates and inflation, what are the uncertainties most concerning to the real estate sector?

“Real estate, in line with other sectors of the global economy, is experiencing a moment of uncertainty regarding future developments, in view of high inflation and rising interest rates. I believe that there are three main evolution uncertainties that stand out in the sector: evolution of construction costs, of financing costs, and of yields, all of which have a direct impact on the value of assets.

“The increase in construction costs was the first factor to generate instability, even during the pandemic crisis, and this leveraged on the logistical constraints felt. The increases in this phase, aggravated by the subsequent and current high inflation, continue to contribute to the increase in the most relevant ‘production cost’ of real estate. If this factor is not addressed or compensated for, the market will have to assume an increase in property prices, at least proportionately.

“On the financing side, there seems to be two aspects: the increase in the cost of financing development, and of acquisition. In the case of development, again, if this cost is not addressed or offset, the market will drive up property prices. On the other hand, the increase in the cost of financing, from the buyer’s point of view, affects their ability to pay, putting downward pressure on the price.

“With regards to the yields, an inversion of the past trend of compression is already perceptible in the market, with yields expanding now. If this trend of future evolution continues, the increase in yields will pressure the reduction of property acquisition prices if there is no compensation in other factors.

“The fact that there are contrary trends regarding the impact that these factors may have on property prices, reinforces the uncertainty regarding the future.”

Real estate investments continued to exist, even after all the constraints in 2020, when the pandemic broke out. What has changed in the decision process?

“Yes, investments continued, despite the pandemic crisis, but also despite the ongoing war in Europe, despite an historically high inflation rate, and despite the fact that we have accelerated growth in interest rates.

“It seems important to me to mention that, currently, the decision-making process for relevant investments is predominantly collective, supported by meetings (Investment Committees and others) and thus, in understanding different people.

“Regarding the current continuation of investments, I believe that this is due to players in the sector with different expectations regarding the evolution of the uncertainties existing within the sector. I also understand that, in people with responsibility for a specific investment decision process, there are different expectations of the evolution of these uncertainties, which requires a greater debate and the need for greater justification of the investment in terms of its fundamentals.

“I also highlight that, in recent years, we have had atypical situations with an impact on the global economy, namely, a pandemic crisis and a war in the middle of the European continent, forcing decision-makers to analyse new risks associated with investments, which were not considered before.

“These uncertainties and risks have also had an impact on the duration of the decision-making process, with delays in the initial timing of the transaction and in the expectations of parties concerned.”

Does Portugal have the necessary conditions to boost the Build-to-Rent market? If so, in what way?

“Without a doubt, I believe that Portugal would benefit from a greater dynamism in the residential Build-to-Rent segment. However, I think that currently, there are relevant constraints to it. I would divide them into two main areas: Profitability and Risk.

“In terms of profitability, there seems to be an imbalance between the investment required for development and the potential income from rents. Comparing Portugal with other geographies with dynamism in this segment, we realise that the reduction in our development costs is lower than the difference in rents versus these other geographies, which simply makes Portugal less attractive in terms of profitability (ratio rents/development cost).

“Regarding risk, I would highlight the uncertainty regarding the stability of residential leases, mainly justified by the lack of contractual security. In my opinion, the development of this market should be based on high-scale projects, traditionally carried out by international institutional investors. However, these are also the investors most sensitive to existing legal and contractual risks. For this market to develop in Portugal, I believe it is necessary to resolve the existing imbalance between these two aspects: Profitability and Risk.”

Is the rental market capturing the attention of international investors?

“The residential leasing market is very relevant in the real estate sector in several international markets, captivating the interest of different and relevant institutional investors.

“Portugal has been less on the radar of these investors, mainly due to the lower maturity of this segment (historical legislative obstacles to residential leasing), and due to the size factor, (lack of large integrated residential leasing projects).

“Even so, in recent years, some benchmark investments have been made in this segment, namely our ZIP portfolio, which, due to its size and organisation, seems to us to be unique in Portugal.”

Two years after the purchase of the ZIP portfolio, what is your assessment of this acquisition, and what is Albatross’ pipeline of projects for the coming years?

“We make a positive assessment of the ZIP operation. Internally, we believe in the importance of residential leasing for Portugal, and that is what motivated the purchase of the portfolio in 2021. In these first years of managing the portfolio, we were able to confirm that a relevant part of the fundamentals that justified the decision to proceed with this investment were correct, in terms of the real demand for residential leases. Even so, we are still at an early stage of our plan (about 50% of the portfolio to be leased) to draw definitive conclusions. We hope that the future confirms the current balance sheet.

“Regarding Albatross, it should be noted that we have been present in Portugal since 2017, operating predominantly in a joint venture with Quantico, a reference promoter in Portugal. Since that date, we have been involved in several projects, which we highlight on our development platform (highlighted on the Antas Atrium project), and the Rental Residential platform (highlighted on the ZIP portfolio). Currently, we have been active in the market, namely, the acquisition of small portfolios of Rental Residential, and we have other projects in the pipeline that include different segments: residential, tourism, and offices, which we hope to materialise in the short term.”

As you are responsible for coordinating the management of the Zip portfolio and investment in similar portfolios, what are the main challenges posed by the current scenario?

“At the management level, the main challenges are linked to specific characteristics of the ZIP portfolio, such as logistical challenges due to the high number of properties, and challenges associated with the current context. Concerning the latter, I highlight the increase in construction costs, the difficulty in finding competitive construction teams, and the increasing pressure on buyers and tenants in the face of rising interest rates and inflation.

“From an investment standpoint, the residential market has been very dynamic, with record numbers of transactions. Thus, the main challenge we feel is the lack of product on the market due to the high demand.”

   

“The current moment in the residential sector is characterised by high demand versus low supply, with uncertainty as to the time required for correction on the supply side. This is the main reason for the recent accelerated price growth and for the sector’s resilience, given the current uncertainties and challenges. The future of the segment seems to me to be linked to the responses we are going to have to this imbalance.

“With positive implications for the future, I feel that the Government’s growing appreciation of this segment is relevant, highlighting the recent creation of a Ministry exclusively dedicated to housing. For the sector, it seems to me to be a relevant step, which is expected to bring solutions to the challenges of creating a new offer that has already been debated for several years: streamlining the licensing process, reviewing the sector’s tax structure, updating regulations/laws associated with housing (e.g. REGEU, NRAU), among others.

“On the private side, I understand that Portugal has gained greater exposure to international investment in real estate in recent years, a position that I hope will be further consolidated, and also leveraged in addressing the aforementioned challenges. This consolidation of international and institutional investment should contribute to the growth of the traditional residential offer, but also to new alternative residential models, which still exist in a residual form in our market, and can add a lot, and update the offer, such as Co-Living models, Senior Living, Student Housing, Serviced Apartments and Branded Residences, among others.

Source: Brainsre.news