I think it is very difficult to try to solve the housing problem without institutional investors,” without pension funds and without real estate investment funds. Not only because they can create affordable rental supply in large quantities, but also because they invest for the long term, providing “stability to the market,” argues João Pratas, president of the Portuguese Association of Investment Funds, Pensions and Assets (APFIPP), in an interview with idealista/news. However, there are still not enough incentives today for funds to take this step, which is why housing for rent has only a residual weight in their real estate portfolios (less than 1%).
From the outset, the president of APFIPP points out that the measure included in the Government’s tax package aimed at funds investing in affordable rental housing is an “improvement,” but still insufficient. “Although it increases the amount that is not subject [to tax upon exit], it does not grant a tax exemption as it does for individuals. An equivalence is not being established, which makes no sense, because the investment at stake is always the final investment of the participant, who should have the same regime as a direct investor and not a worse one,” says João Pratas, arguing that a tax exemption is needed for participants in these funds.
“The financial equation of affordable rental housing is difficult”
But this is only the tip of the iceberg. There are other housing-related laws that are holding back investment in affordable rental housing by real estate and pension funds in Portugal, warns the president of APFIPP. This is the case with pre-emption rights and lengthy eviction processes, which add to the high costs of land and construction, as well as lengthy licensing procedures. Transitional regimes such as the Government’s tax package or proposals that seek to limit rent increases (such as that of the Socialist Party) also create instability for those looking at the long term.
“The financial equation of affordable rental housing is difficult,” João Pratas summarizes, still believing that funds are essential to stimulate this market. “It is extremely important to once again have institutional investors who invest over long periods, as this brings great stability to the market itself,” he says in this interview with idealista/news, warning that as long as institutional investors do not enter the affordable rental market, the stock in this segment “will always tend to be limited.”
Funds investing in affordable rental housing
João Pratas, president of the Portuguese Association of Investment Funds, Pensions and Assets
Credits: Gonçalo Lopes | idealista/news
How do you assess the performance of real estate investment funds in Portugal in 2025? How are property portfolios being diversified?
The year was good. There was a 14% increase in real estate funds over the past year, which is quite significant. And the returns of open-ended funds were quite reasonable, around 6%, although this may vary depending on their nature and whether they distribute income or not.
Diversification revolves around retail, services and industry, some tourism, and virtually no housing. And the little that exists in housing is for development and sale. These funds have practically no properties for rental and even less for affordable rental housing, which is what we need to develop in Portugal. In that area, it is virtually nonexistent.
“Main leases continue to be, in fact, in retail and services”
Do commercial properties continue to be the main focus of real estate investment funds? Have you seen any recent shift in focus, from offices to retail or logistics, for example?
There may have been some increase in logistics in recent years. But the main leases continue to be, in fact, in retail and services. In fact, I think there is still a shortage of properties in these areas given the level of interest that exists in our country. Therefore, it continues to be a very interesting market, particularly for real estate investment funds, but also for pension funds.
Is there growing interest from funds in alternative segments (such as coliving and senior residences)?
Not in a significant way. I admit it may grow in the future, especially as we are seeing a great increase in interest in this area, but the impact on funds should be gradual.
Building affordable rental housing
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What percentage of real estate funds is specifically dedicated to housing? And to rental?
Of the 26 billion euros we have in total real estate (open and closed-end funds), perhaps the total of rental properties is around 0.9%, which is a very low figure. In total housing, it should be around 3%, which is also very low. But for rental it is virtually nonexistent. There are no conditions for institutional investors (real estate investment funds and pension funds) to be interested in this market. It has no real weight for either.
“Our funds (...) do not have rental properties. Nor do they even have housing properties and therefore cannot be inflating anything”
Does this investment in housing by funds (real estate and pension) have an impact on rising house prices in Portugal, as Brussels has warned?
In Portugal, no, because our pension funds and our investment funds do not have rental properties. Nor do they even have housing properties and therefore cannot be inflating anything. In Portugal this certainly does not happen. But it may happen in other countries.
Real estate funds invest in affordable rental housing
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Real estate and pension funds could invest more in housing in Portugal, namely in affordable rental housing, and they do not. Why?
The answer is simple and complex. It is important to stress that for an institutional investor to invest in a given asset, there must be an associated return. When we look at pension funds and real estate investment funds, people think of high finance. But the investors in real estate investment funds and the participants in pension funds are often people who do not have enough money to buy a property directly, because if they did, they would buy it and manage their real estate investment directly. No, these are people who may invest 250 euros, perhaps, in a real estate investment fund and thus be exposed to real estate risk and its associated returns.
Now, a fund must generate a sufficient return to compensate for that. The returns of our real estate investment funds in the services, retail and industrial sectors are around 6%–7%, which is a reasonable return to offer investors taking on this real estate risk. In residential rental, I cannot provide this return due to several issues related to rental.
“Investment funds are already exempt, therefore what needs to be exempted is not the fund when it receives rent from an affordable rental contract, but rather when this income is distributed to the participant. Today, this income is not exempt”
Why can’t real estate and pension funds achieve this return in rental housing?
What Portugal needs is affordable rental housing and to create conditions for affordable homes to emerge, because that is where the shortage lies. But affordable rental housing has a cap and a trade-off, meaning there is a balance between having a low rent with a maximum ceiling and then an IRS exemption. In other words, someone who has a home under affordable rental cannot increase the rent beyond a certain value and is then exempt from personal income tax (IRS).
Investment funds cannot achieve this for technical reasons. First of all, an investment fund is a vehicle that is supposed to be neutral:
either the investment fund is taxed and then upon exit (at the time of redemption or income distribution) the individual pays nothing, which was the regime we had until 2015;
or the fund is exempt (therefore pays nothing), but taxation is applied upon exit, which has been the regime since 2015, the year the system was changed.
What happens today is that investment funds are already exempt. Therefore, what needs to be exempted is not the fund when it receives rent from the affordable rental contract, but rather when this income is distributed to the participant. Today, this income is not exempt.
There was some alignment under the previous Government’s package, but it was not a full exemption, so it never fully solved the issue. And the proposal currently under review in the housing tax package will not solve it either: although it increases the amount that is not subject to taxation, it does not grant a tax exemption as it does for individuals. An equivalence is not being established, which makes no sense, because the investment at stake is always the final investment of the participant, who should have the same regime as a direct investor and not a worse one. So far, it has not been possible to reach a point of fiscal equivalence, either in the law or in the proposal currently on the table. But that alone is not enough.
Real estate investors in Portugal
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You say the housing tax proposal will not solve the issue either. What has improved and what needs to change to stimulate investment in affordable rental housing?
The regime is complex and has been for some time. What currently exists is a regime under which if an investment fund invests 5% or more in affordable rental housing, the investor is taxed at 5% on those returns — and not zero, as should be the case to match the regime for individuals. Regarding other returns, we are faced with a complicated calculation involving deductions. For example, if the fund invests between 10% and 20% in affordable rental housing, it may deduct 2.5% from other returns.
The new table increased the deductions. If 50% of the portfolio is in affordable rental housing, it is subject to 5%, and then 30% may be deducted from other returns. Is it worthwhile? It may be, but affordable rental housing has a maximum rent ceiling. Although 50% is invested in affordable rental housing, because there is a cap, there is a certain income at the end of the year on half of the fund’s assets, considering that the other half of the portfolio will consist of real estate assets without rent ceilings. But can deducting 30% on rents from other real estate assets recover the remaining 5% taxation? It is a difficult calculation, but not impossible.
This law has improved in that respect. But we believe it is insufficient. We believe the financial equation of affordable rental housing is difficult. And why? It would make more sense to set it at zero, just as it is for individuals. It makes no sense to grant a different regime.
“Institutional investors must enter affordable rental housing, because as long as they do not enter — as happened in the 1950s and 1960s — supply will always tend to be limited”
What other aspects would need to change for funds to invest in affordable rental housing?
When we look at the financial equation, we must consider land costs, construction costs, and the fact that homes covered by affordable rental housing must meet certain minimum size requirements and rent ceilings defined by law. When you look at the entire equation, it is not enough. There are other areas where it is essential to act in order to attract institutional investors to rental housing and, in particular, to affordable rental housing:
The urban lease regime must provide conditions that attract institutional investors. For example, the exercise of pre-emption rights was changed by the Socialist Party Government. If a pension fund builds a complex with 1,000 apartments for rent and, after 15 or 20 years, wants to sell the complex to another institutional investor, it faces the pre-emption right established in these packages. In other words, if 130 people exercise this pre-emption right, the institutional investor will only be able to sell 870 apartments. This may ultimately make it unviable for a pension fund to enter into such a project. In fact, there was a foreign investor who wanted to invest a very significant amount in Portugal and, faced with this change in the law, withdrew and invested in another European Union country. Therefore, we must review the regime and rebalance it so that it becomes attractive again for investors to enter. Institutional investors must enter the affordable rental market, because as long as they do not — as already happened in the 1950s and 1960s — supply will always tend to be limited.
Rent increases cannot be capped: recently the Socialist Party proposed a 2% cap on rent increases to prevent rises above inflation, which makes no sense. In a Social State, we must protect the interests of people who face economic difficulties. If a tenant cannot afford a rent increase, it is the State that must help that person, not the landlord, because otherwise property owners will not put homes on the rental market. Unless we change this mindset, we will not move forward. We must allow the market to function so that landlords have an interest in investing to rent.
Evictions do not work; they take years. In fact, the entire judicial system needs to be reviewed, but especially the eviction regime does not function properly. I know the Government intends to change something in this area, but I have not yet seen anything concrete. This is something that needs to be addressed, because only with a sensible framework will institutional investors emerge.
There is also the issue of insurance that ensures rent payments when they are not made. And then there are specific rules that can also alter this balance. At the moment, if I look at the market, I think it is impossible to enter directly. But if a municipality provides the land under a 50-year concession, for example, that clearly changes the financial equation because there is no longer the problem of land acquisition, which may allow affordable rental housing to emerge through this route. But that will hardly be enshrined in law, because it would have to be assessed municipality by municipality.
Housing tax package
Luís Montenegro, Prime Minister
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Therefore, are the changes proposed in the Government’s housing tax package insufficient to create this incentive?
The change regarding the alignment of real estate CIUs [Collective Investment Undertakings] has still not gone far enough; it does not fully align them. And then there are other attempts, for example regarding property transfer tax (IMT) and VAT rates on construction, which are transitional rules. I believe the Government genuinely wants to do something in this area, but I think it is very difficult to have an effect on institutional investors when these measures are only in place until 2029. We must consider the time it takes to analyse the issue, plan, purchase land and build.
The Government is also proposing a simplification of the legal regime for urbanisation and construction. Although I have not examined the draft in detail, I will be optimistic and believe that there are improvements that will simplify procedures and be beneficial. Therefore, that will certainly be a positive step.
We are trying to see whether we can create a favourable environment for the homes we truly need under this regime to emerge. But it must be understood that the affordable rental housing regime is a narrow one, with tight constraints due to rent caps. I believe institutional investors are interested in this market because it generates regular income, such as rents. But for this to work and for institutional investors to enter, it must be reasonable. If it is not, they will not enter.
“Although it is very difficult to achieve, it would be essential to have an agreement from the majority of Parliament in certain areas”
What other incentives in the tax package directed at rental housing do you consider positive?
This Government wants to create a regime that may be interesting, namely Investment Contracts for Rental (CIA), whereby an investment contract is concluded under certain conditions and, subsequently, a change in the law is not supposed to alter that contract. This arises precisely to provide long-term stability to contracts. But I believe there should, in fact, be stability in the regime itself. Although it is very difficult to achieve, it would be essential to have an agreement from the majority of Parliament in certain areas, as is the case with Social Security. This would prevent us from constantly changing the rules depending on the Government in power.
There was also improvement in another area. The Government created another regime in which rents can reach up to 2,300 euros with a reduction of the tax rate to 10%. However, it did not foresee the application of this regime to real estate investment funds or pension funds. Therefore, they are excluded, and it is also a transitional regime until 2029. I always view attempts to improve things positively, but I think it may not be enough.
Investing in affordable rental housing
João Pratas, president of the Portuguese Association of Investment Funds, Pensions and Assets
Credits: Gonçalo Lopes | idealista/news
Which investment funds are currently using the existing affordable rental housing regime? And which might potentially use the improvement proposed by the Government, if approved?
I believe this change will not have a major impact. Now, there is the proposal to amend the urbanisation and construction regime, there is talk of changing the urban lease regime and also of amending procedural rules. We also have rental insurance. There may indeed be important changes here that allow the fiscal framework to shift — it is not everything, but it is an important part. Therefore, I will wait and see. But with what is currently on the table, it may be insufficient.
“It is extremely important to once again have institutional investors who invest over long periods, because that gives great stability to the market itself”
Do you believe the Government’s housing tax package may receive approval in Parliament and from the President of the Republic?
Given the Parliament we currently have, I am hopeful that the package will pass. We have been in contact with various parliamentary groups and have been presenting our position. From what I have heard, I see no major reason why it should not pass. But we shall see.
What message would you leave to the Government to encourage real estate investment funds and pension funds to invest more in housing?
For investment funds and pension funds to truly enter this activity related to affordable rental housing — because that is the supply we truly lack — or even housing more broadly, I believe we need to create somewhat more favourable conditions and, at the very least, equal to those available to direct investors. Perhaps within the overall package some real interest will emerge. I think it is very difficult to try to solve the housing problem without institutional investors. It is extremely important to once again have institutional investors investing over long periods, because that brings great stability to the market itself.