The second session of the ‘Portuguese Real Estate Investment Vehicles & Financing’ conference, held last Friday in Lisbon, centred on the question ‘Is leverage from the Banking sector and Capital markets now more available?’. The debate highlighted the improvements and weaknesses in the institutional credit market, particularly in the current context of falling interest rates. Experts analysed how domestic and foreign investment vehicles are taking advantage of new sources of funding, while also highlighting the growing role of capital markets in the future of the real estate sector.
‘The trend now will be for interest rates to fall’
Paulo Sarmento, Head of Transaction Services at Cushman & Wakefield Portugal, began by highlighting the main dynamics that are marking access to credit in the property sector. Starting with the scarcity of prime opportunities, he emphasised that ‘prime lending opportunities are few and there is a lot of competition’, while also noting that ‘debt operations are growing, the cost of short-term debt is falling and non-bank players are becoming more important’. In this context, he said that ‘the trend now will be for interest rates to fall’. He noted that there is an active demand for financing, which in his view reflects market confidence: ‘there is a lot of demand for credit, which means that companies believe in the prices that have been set’.
However, he warned that the new regulatory framework will impose additional challenges. ‘Basel IV will make banks more demanding and will have an impact on property loans,’ he said. In this panorama, new financial entities are gaining ground. Paulo Sarmento pointed out that they ‘have more flexibility than banks, more creative and diversified ways’, adding that pension funds and insurance companies, historically conservative, ‘are taking on an important role in property lending at European level’.
Increased competition between funding organisations requires greater strategic clarity, and ‘it's important to adopt themes of conviction, choose the risk profile of transactions, and not let ourselves be affected by sporadic news. These are the investors who are most successful, particularly in fundraising,’ he said.
With regard to the Portuguese market, ‘we have investors of all kinds, foreign, local, local banks, foreigners, we're starting to have insurance companies’. However, he also pointed out structural limitations: ‘we don't have a very strong secondary market for debt transfer operations’, explaining that ‘the deals are relatively small and often don't justify the setup costs’. He added that ‘information is fragmented and legal issues can take a long time’.
Despite some recent dynamism, he was clear in saying that ‘activity is growing, but remains relatively limited compared to other EU jurisdictions’. He also pointed out that ‘we are a country with a small capital market, and the market is evolving’. To summarise, he left the main point of his contribution: ‘alternative financing is growing, and there is greater appetite’.
Round table debate
The second panel of the conference brought together representatives from some of the main financial institutions operating in Portugal and Europe. Moderated by Ricardo Reis, partner at Deloitte, the debate included Francisco Cary, Member of the Board, Caixa Geral de Depósitos, Luís Ribeiro, Member of the Board, Novobanco, João Nuno Palma, Vice President of the Executive Board, Millennium BCP, David Campos e Cunha, Head of Credit Ventures, Invesment Management, Sonae Sierra, and Alberto Sanchez, Director, Corporate Lending for Europe at BTG Pactual.
‘Alternative instruments are not competitors’
Francisco Cary opened the debate by emphasising that ‘the market is very competitive, but with different characteristics than in the past’. Luís Ribeiro emphasised that ‘alternative instruments are not competitors, they don't have the same type of risks or the same type of remuneration. There's room for everyone. For the head of Novobanco, there is now greater maturity in the sector's practices, and ‘we have much clearer structuring policies, we have a global vision’. Even so, he warned that ‘excess liquidity also has its risks of heating up the market and some fund structures lack transparency’. For him, the market ‘works more like a complementary system than one of direct competition’.
João Nuno Palma reinforced this idea, emphasising that ‘knowledge is central to our offer, to the client and to the sector we are financing. We don't finance transactions, we finance relationships’. He said that ‘as we have more observations with each client, we deepen our relationship and then we are quicker to approve new projects’, adding that the alternative offer is ‘complementary and not competing’.
On the other hand, David Campos e Cunha explained that Sonae Sierra ‘is another player in the sector. We identified an opportunity to enter the property credit area, and we made this agreement with BTG, so that we can invest in the sector not only through equity, but also credit.’ The operation's differential lies in its specialised knowledge, since ‘we bring our sectoral and geographical knowledge to the table. We're almost an advisor, we go one step further and have the extra comfort of co-investment.’
‘The property sector is very hot, particularly in Spain and Portugal’
Alberto Sanchez highlighted the dynamism of the real estate sector in Portugal and Spain, noting that ‘we have noticed that the real estate sector is very hot, particularly in Spain and Portugal’. However, he recognised that ‘there are many projects that need financing, and some banks don't like to finance, such as land in premium areas of cities’. In these cases, organisations like BTG see an opportunity. ‘Very good projects are well supported by local banks, yes, and then we can't participate, but there is room.’ The partnership with Sierra is, according to Sanchez, a way of ‘leveraging technical knowledge about European markets’.
João Nuno Palma spoke again to emphasise the importance of trust and local knowledge in financing decisions. ‘We come in as a senior debt financier, which has the biggest guarantees and the least prospects of gain. We have to know the place, we have to trust it. If not, we don't finance,’ he emphasised, adding that ’that's why these operators are very welcome. By financing with an appetite and conditions that we don't have, this complementarity is very positive.’
Francisco Cary also emphasised the challenges of articulating different levels of financing, particularly between debt and equity. ‘When it comes to equity, it's rare for us to do without mortgaging the asset. The trend is towards subordinated debt, and that's where the issue of collateral management comes in, because this debt is also ahead of equity.’
