Portugal is facing a housing crisis that has worsened over the past few decades. The scarcity of affordable housing, combined with the persistent increase in house prices, has made housing unaffordable for many citizens, in particular young people. According to the National Statistics Institute (INE), between 2010 and 2020, house prices increased by around 80%, with particularly marked growth in the metropolitan areas of Lisbon and Porto. In 2020, more than 35% of Portuguese families allocated more than 30% of their income to housing expenses, exceeding the cost burden threshold defined by the European Union.

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The supply of affordable housing is therefore insufficient, and the demand for affordable rentals far exceeds the available supply. This context reinforces the need to explore alternative solutions that may contribute to increasing the availability of housing. This is where AIFs (Alternative Investment Funds) invested in Real Estate, such as real estate investment funds (FIIs) and collective investment firms (SICs), regulated by the Securities Market Commission (CMVM), emerge as vehicles that can play a crucial role in improving the housing scenario in Portugal.

According to the CMVM, in June 2024, the amount under management of Real Estate Investment Funds, Special Real Estate Investment Funds and Real Estate Asset Management Funds reached 14.8 billion euros, representing a new record.

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But how can UCITS effectively contribute to resolving the housing crisis?

1 - Mobilizing Investment for the Housing Sector

UCITS have the capacity to mobilize investors, both national and international, for the Portuguese real estate market, facilitating the financing of new residential projects or the rehabilitation of existing properties, either for sale or for rent. Institutions such as pension funds, insurance companies and other institutional investors often seek investments that offer stable and long-term returns, characteristics inherent to this type of vehicle.

However, the viability of these investments depends on a stable and transparent regulatory and fiscal environment, as well as on the ability to demonstrate the positive economic and social impact of each project.

In addition, the creation of public-private partnerships (PPPs) can play an important role in the financing and development of housing projects. These partnerships will allow the combination of public and private resources, promoting the creation of housing with efficient management and cost control.

2 - Innovation in Construction: Modularity and Sustainability

Another crucial aspect in which UCITS can positively influence the housing market is the implementation of innovative construction solutions. Modular construction, for example, allows for the large scale production of quality housing units, significantly reducing both construction costs and time. This approach is especially relevant in dense urban areas, where the demand for housing is high and land is scarce.

In addition, the use of sustainable materials and energy efficient technologies is increasingly vital for the creation of environmentally responsible housing. These factors, combined with the proactive management of real estate assets, can result in cheaper housing for users, by reducing maintenance and operating costs.

3 - Diversification of the Housing Offer

UCITS can also play an important role in promoting integrated housing. Through product diversification and investment in projects that serve different segments of the population, UCITS can contribute to the creation of more affordable housing for young workers, students, the elderly, or low-income families, with a special focus on the availability of more rental housing.

This strategy can be carried out through the development of projects that integrate a mix of types accessible to different income ranges. Adopting a diversified approach to each project promotes the creation of more integrated communities, a fundamental aspect for sustainable urban development.

4 - Urban Rehabilitation and Reconversion of Spaces

In addition to the creation of new pockets of developed land for housing use, urban rehabilitation remains a central strategy in increasing the supply of available housing, especially in historic urban centers that have degraded properties.

The revitalization of these spaces, which sometimes also involves the change of commercial uses or housing services, not only contributes to the increase in the available supply, but also helps to preserve the historical and cultural heritage of the cities.

UCITS have the capacity to attract capital and manage this type of project, allowing the recovery of degraded areas and their reintegration into the housing market.

5 - Specialized Knowledge and Proactive Management

The ability of UCITS management teams to understand and deal with the dynamics of the real estate market is another differentiating factor to take into account.

Specialized and proactive management is essential to guarantee the success of any housing investment project, in the optimization of its projects, cost reduction and efficiency in the use of available resources.

The implementation of new technologies, such as remote monitoring systems and predictive maintenance, can significantly increase the operational efficiency of assets under management, reducing costs for occupants and ensuring a faster and more effective response to their needs.

6 - Tax and Regulatory Incentives

Creating appropriate tax incentives is essential to attract more capital for investment in the housing sector. A recent example was the approval, on June 12, 2024, of Bill No. 3/XVI/1st, which created a special tax regime for UCITS that invest in housing under the Rental Support Program. This type of incentive demonstrates the State's recognition of the importance of UCITS in increasing the housing supply.

However, a concerted effort will be needed to create more tax and regulatory incentives to facilitate the development of new projects and attract more investors to the sector.

7 - Challenges

The complexity and some bureaucracy still present in urban planning licensing processes are often mentioned as obstacles to the creation of new projects. In addition, the lower profitability associated with renting housing, especially in the affordable housing segment, alienates many investors who prefer sectors with higher returns and lower risk.

The shortage of qualified labor in the construction sector and the increase in material costs are also factors that directly impact housing projects, aggravated by a 23% VAT rate that makes investments in this use even more expensive.

The existence of a reduced VAT rate on the new residential construction and the sale of housing with 6% VAT, replacing the current Municipal Transaction Tax, would allow the portion of this tax borne by the developer to be deducted at the time of sale, reducing your investment costs and your sale price to the final buyer.

In short:

Undertakings for Collective Investment in Transferable Securities (UCITS) represent a very relevant instrument to face the current housing challenges in Portugal.

From the mobilization of new investments in the sector, to the implementation of constructive innovations, the development of new housing formats and their placement on the market, together with specialized management, UCITS can contribute significantly to increasing the supply of available housing, in a sustainable way and adapted to new demands.

Nuno Marques

Member of the N2AM Board of Directors (*)

(*) - N2AM works in the structuring, transformation and management of Real Estate OIA's, offering diversified real estate investment solutions adapted to the needs of each investor.

(**) - Text written with new Spelling Agreement

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