Bondstone, the Portuguese private equity firm set up by former Morgan Stanley exec Paulo Loureiro, sees value and opportunity in family buy-to-rent with a steady return of 5% p.a. He is talking to co-investors about the opportunity.
The new Lisbon-based firm plans to deploy between one-quarter and one-third of an initial €400m to Portuguese residential, and the remainder to commercial real estate. It has won first financial backing from Universtone, a France- and Belgium-based global private equity firm founded by entrepreneur Arnaud Khodara.
Bondstone’s advisory board includes the two men plus Francisco Perez, partner at EverStream Capital Management, a global renewable energy infrastructure fund, Abdiel Santiago, who leads Panama’s $1.4bn sovereign wealth fund, Mark Taborsky, former senior investment professional at Stanford, Harvard, PIMCO and BlackRock, and Patrick Swint, founder and CEO of private equity real estate platform Knightsbridge Ventures.
Before forming Bondstone, Loureiro through his company Louvre Capital, focused on developing high-quality residential projects in Lisbon, Cascais and Porto with a total investment of €100m and a gross development value of €130m. Bondstone has taken over its assets and platform, which includes 15 investment and project management professionals plus offices in Lisbon and Porto. An additional satellite office in London opened this month.
Loureiro exclusively explained to HIE the resi opportunity in Portugal this way: “The sweet spot is 2- and 3-bedroom apartments for middle class Portuguese families. The average size of a 2-bedroom would be 80 sqm and a 3-bedroom would be 120 sqm.”
The reason this sector is now coming into focus has historical precedents. “It happened because we had a demand a supply shock in 2011, 2012,” he says. “The supply shock was basically caused by the bailout of the country by the IMF and the Troika. They lent €78bn to the nation, but at the same time asked for the economy to be overhauled – so all of a sudden we had some deep changes in Portuguese housing laws, mostly in the rental sector.
“Property which existed in Lisbon at the time comprised very derelict buildings, literally falling apart, which was very unusual for a capital city in Europe at that time… It was due to obsolete laws we had in place for close to 100 years, with rent freezes, plus the ability to inherit lease agreements.
This allowed you to pass it on from generation to generation like any other asset. And if you combine rent freezes, adjusted for inflation only over the years, with this law to allow people to pass on the lease agreement meant we ended up decapitalising the owners
“You had no incentive to build anything because you would be stuck with tenants that did not pay rent. You had lifetime lease agreements on top of this, and it all didn’t make sense. So in 2012 we were able to start evicting tenants that did not pay their rents, and because they couldn’t pass on the lease agreement, the property began to have some value and it made sense to have a transactional market in housing.”
The demand side was transforming too. Portugal in 2012 introduced the ‘Golden Visa’, allowing anyone to take citizenship who paid €500,000 to purchase property or a corporate asset. To date this has brought the country over €4.7bn in revenues. Plus, Lisbon passed a law for ‘non-habitual residents’, providing EU residents making their domicile in Portugal with 10-year tax-free status covering all income generated. “It became a tax haven for some wealthy Europeans,” he told HIE. “German pensioners moved to Portugal and didn’t pay tax in either place because of the double taxation treaty. It became very attractive for senior and wealthy Europeans to move in.
“So supply shock, demand shock: that’s why you had a boom in the housing property market in Portugal over the last five, six, seven years.”
This period has now ended. “Fast forward to 2020 and you realise that the market is crowded with a lot of developers. It’s extremely fragmented and we have reached prices that are so high that I believe they have plateaued in the city centres in Lisbon and Porto in particular.”
Downtown in the most desired residential areas, prices are easily as high as €7,000 or €8,000 per sqm – “which by any standards is higher than Madrid, higher than Barcelona, it’s higher than Rome. So we have reached a point where, even if it is attractive to come here for all these reasons, buyers simply don’t want to pay more for their properties.”
What is now apparent, he says, is that a massive segment of demand from Portuguese families has been neglected, and Bondstone, as an asset manager, believes the cycle will move strongly in that direction. He aims to take the company into a market segment which offers prices of €3,000 to €3,500 per sqm, making the full cost of the average market property €240,000 to €360,000, depending on size.
“We will do both build-to-sell and build-to-rent. The younger generation would rather rent; the older generation still prefers to buy. We believe there is room to grow on both investment sides. But we need some adjustment on the build-to-rent legislation because this doesn’t really exist in Portugal today.”
Loureiro targets an annual return of at least 5% or about €150 per sqm return on this PRS segment for Bondstone as it evolves. “We will start by getting busy with the build-to-sell segment and eventually the government will realise that not everyone can afford to buy, and the young people anyway mainly want to rent. They also don’t mind living in the suburbs and so on… So I believe that over time the government is going to adjust to the demands of the people, and that is a real opportunity.”