Two weeks ago, REC had the pleasure to organize its first event. For the ones that were not able to attend, and for the ones that actually attended but want to revise some of the topics mentioned during the webinar, the following article provides the main ideas brought by our guests.
Dr António Hermenegildo
One of our guests was Dr. António Hermenegildo, an Investment Analyst at Explorer Investments, the leading independent management company in Portugal of Private Equity.
How does someone from civil engineering arrives in Explorer Investments?
António, after managing some engineering projects with Teixeira Duarte, in Angola, entered Decathlon. There, he started to gain a better understanding of the market which developed in him a core interest in strategy and business rather than engineering. He then integrated Cushman & Wakefield where he got deeper into the Real Estate industry in the Capital markets department dealing mainly with urban regeneration and Investments. After this contact with these two areas, he wanted to explore being on the side of the investor, and that was when he was invited to integrate Explorer Investments team, to integrate their Real Estate Investment Fund.
May you clarify how Private Equity Real Estate works?
Private Equity in Real Estate can be summed up to gathering both investors and funders to collect capital to invest in Commercial Real Estate Properties. António’s team designs strategies to enhance properties’ rentability, where he can contribute with either his technical skills earned in the engineering sector as with his strategic and financial experience.
May you describe the market and Explore Investments’ activity?
Explorer Investment is a venture capital company founded in 2003 and it is present in several areas of Portuguese investment practices: private equity, expansion capital, tourism and real estate. Particularly, Explorer is an investment advisor in two real estate funds, Discovery and EREF and also an asset manager and owner of CPHP, which holds Penha Longa Hotel & Golf Resort. Private equity can either be applied to the financial market as to Real Estate properties; in the last one, Explorer approaches its asset with the goal to improve their performances and increase their rentability for their investors. In spite of this, these funds also engage in real estate promotion within value-add strategies as was the case with one building owned by Explorer in Fontes Pereira de Melo Avenue. Penha Longa Hotel & Golf Resort is also one example of private Equity applied to Real Estate – Explorer, after gathering investors, acquired this business in the Hospitality sector, where, with their expertise and strategic know-how are increasing this company’s value and also developing new projects within CCHP.
What were the opportunities that the COVID-19 pandemic brought to the private equity investments in Real Estate?
This pandemic challenged investment agents like Explorer to have the creative capacity to re-evaluate how they can add value to their properties. There is a need to adapt the product to the solution.
Particularly in commercial Real Estate, there are challenges that can be turned into opportunities. Remote working showed us how important it is to feel comfortable in our offices. Therefore, companies do not only need a working place, they need a place where it is possible to cultivate the corporate culture and values, connecting employees and top managers in a more relaxed environment. For instance, the building owned by Explorer in Fontes Pereira de Melo Avenue, has 3 floors only allocated for recreational activities (gym, yoga, food court) in order to have all the staff interacting with each other.
The logistics Real Estate, which used to be a non-attractive sector, with the evolution of technology has become one of the most important sectors. The growth of e-commerce with the pandemic has brought a new challenge to companies- reduce the time between the acquisition and the delivery of a product. This is where we can find the opportunities for the real estate market, we have to transform the large logistics platforms located in the suburbs, in smaller connected hubs closer to the final consumer.
Another opportunity for Real Estate is the hospitality sector. This sector is expected to recover quickly as families started valuing more the well being and the contact with nature during this pandemic. Thus, this comes as an opportunity to reallocate and adapt some assets into the leisure tourism business.
How is a day working as an investment analyst at Explorer?
An investment analyst, as the name itself, tells, analyses investment opportunities, but they are also responsible for much more. As in other businesses, there is the analysis phase and then the implementation phase. The latter takes longer because of all the bureaucracy and development processes associated.
The days of an investment analyst are busy and challenging, hence it is important to work with highly competent teams. The two adjectives that best describe a day working at Explorer are:
Demanding: because as in any other private equity, they invest in quality of workers rather than in quantity of workers;
Rewarding: because they are involved in notorious projects which can improve the physiognomy of an entire city. So, at the end of the day they feel motivationally rewarded.
Advice for a person interested in this area and how to get there?
Training area: Management/economics training with some finance specialization is essential because the sector needs specialized labour. Engineer training is also crucial, but in the end, the two areas will complement each other.
Early career: It is essential to know the product sold and the "'players'' in the sector soon; working in a company that exposes a professional to all this (reference real estate consultancy firms) would be quite enriching for someone who wants to grow in the sector.
Important soft skills
• People management
• Emotional intelligence
• Resilience
What security do you think foreign investors can have regarding the profitability of their investments in the Portuguese real estate market, given the current national situation?
Portugal continues to be on the radar of foreign investment. At this stage, the truth is that despite the pandemic, the market's fundamental factors are still relatively healthy, and 2020 was the 3rd best investment year ever despite everything.
There is no degradation in the sector due to the mechanisms that prevent this degradation from happening. Due to this, the recovery will be faster, being a genuine possibility to reach the levels of 2019 already in 2022. Real estate, due to the economic policies implemented, is a very advantageous investment alternative. With interest rates relatively low, investors end up having a higher return on real estate than on financial assets, which maintains the country's attractiveness and investor confidence.
Dr. José Cardoso Botelho
The other guest was Dr. José Cardoso Botelho, the CEO of Vanguard Properties, one of the largest real estate developer in Portugal.
During your professional path, what led you to enroll on Real Estate, more specifically in Real Estate Development?
Since he was a child, this sector was discussed by his family which motivated him to follow it. In fact, he has seen a dramatic change in the sector since in the old days it did not attract qualified people, while now there are more and more people trying to join it.
He decided to narrow his activities to Real Estate Development because it is a very dynamic environment that raises multiple challenges and because rehabilitation is very important and leaves permanent marks in a city and throughout time, which is very rare in other sectors.
There are two main functions of this business:
Managing Real Estate Assets
Managing Human Capital
You have passed by very different countries during your formation, what led you to choose Portugal as the focus of your professional activity?
Besides his big attraction to the real estate market, there was a big opportunity to develop the sector in Portugal because in the past it was a chaotic sector due to the prohibition between 1910-1990 of renting contracts. Besides, the lifetime contracts that existed at the time were not being renovated which led to an aging process especially in Lisbon that became one of the most backward European capitals.
José saw here a big opportunity, from free plots to disabled properties, aligned with the increasing demand and his will to develop his country, everything lined in his head that it was the right path.
Given the evolution of globalization, it is possible to observe a constant change in demand. Do you think this evolution has been reflected in Real Estate development, and how have they adapted to meet the new needs?
When the group was created in 2015, one of the strategic elements was, precisely, to create a strong brand to enable it to sell most of its products directly. This meant, necessarily, creating a brand that would be recognized worldwide.
Therefore, to adapt to a more ample demand, Vanguard had to understand what the modern buyer was looking for. A recent study undergone by ISEG showed that people are looking for more space and are more willing to live outside Lisbon. The Covid-19 pandemic accelerated this process. Vanguard understood this and most of its buildings have substantial square footage and areas suitable for remote working. Furthermore, it is also developing several projects outside Lisbon.
Another critical strategic element was to highlight in its buildings their true potential. For example, most Lisbon buildings do not take advantage of the city's wonderful light if we analyze it. They do not have balconies; they have small windows; they do not have common services, etc. From day one of their concept, all those elements were strongly present in the Vanguard portfolio.
One of Lisbon's most emblematic projects is the Infinity Tower. How did the opportunity to develop this project arise, and what are the biggest challenges associated with this "new way of living"?
This project's opportunity came about when Vanguard Properties was contacted by Caixa Geral de Depósitos, saying they had a plot of land that would be interesting for Vanguard. At first, the firm was not convinced with the project as the location was far from ideal, the plot was difficult to build on, and there was no certainty that they could build such a large building in Lisbon.
However, after a study conducted by S+A (architecture firm), Vanguard quickly understood that constructing an 80m high building in Lisbon was possible and decided to go forward with the project. With this assurance, it decided to embrace this new way of living by offering owners an exclusive set of amenities unseen in most Lisbon apartments. These amenities include three swimming pools, a padel court, a spa, a gym, among many others.
Vanguard Properties being a recent company, how has it managed to develop a solid reputation and positioning in the market as the largest in the luxury segment?
José Cardoso Botelho and Claude Berda, the two business partners behind Vanguard Properties, set several base ideas to ensure Vanguard Properties' success.
Firstly, they decided that Vanguard Properties would be a long-term project, i.e., their partnership would not be limited to a few buildings. Secondly, they decided to purchase the highest number of buildings and land plots at the beginning of the company's life, which was possible due to the partnership's strong economic capacity, and only then worry about a specific brand. Lastly, when the time came to think of a brand, they made sure it had a strong concept behind it and that all their developments would be designed under this concept.
Having these ideas set, Vanguard outperforms competitors in the luxury segment by ensuring they offer what they promise. This means that a building is only put on sale when they know exactly how much it will cost and, therefore, there are no cuts to the design when units are already sold.Lastly, and perhaps most importantly, Vanguard build houses for people and families, not for architects to win awards, which ensures a standard of living difficult to find anywhere else.
Being a Real Estate Developer is to develop everything from scratch to the end. What are the principal phases that any project must cover?
It is important to look up to the market and try to find an innovative and differentiating concept, even before trying to start a project. The process that Vanguard takes is the following:
1) Search and evaluate the asset that, possibly, will be acquired. Take into consideration not only its value but also its architecture, relevance and its place. The Financial side of the company is in charge of this evaluation with the help of engineers and architects.
2) Negotiating process where the lawyers take a bigger role in the communication between companies and with all the documents to finalize the purchase.
After acquiring the property, the second phase of a project begins, and this is the one that consumes more time and more resources, it is the development process. Where concrete ideas of what to do with the property start to surge, how to do it and what is the goal for the project.
3) The first thing to do in this phase is to get a license for the building. This is the worst part of the project according to José, due to the long and not appealing process that happens in Portugal. It takes a lot of time to get a license and there are many necessary to start developing the project which causes an extensive period until seeing returns. The need for having multiple licenses also increases the costs of the project, especially those related to lawyers.
4) After getting all the licenses it is time to launch contests to obtain the lower proposal for each part of the construction process.
5) When the construction is finalized, the next and final step is to sell or rent the asset in order to start creating returns.
Advice for a person interested in this area and how to get there?
There are several possibilities, depending on the function one intends to exercise. One way, after taking a generalized bachelors in management, is to work in consulting firms that provide advice to real estate firms. This career path allows new labor market members to deepen and specialize their knowledge and understanding in the area, moving from theoretical to practical appliance of concepts.
However, some soft skills are essential, such as:
Availability to learn;
Proactivity;
Open-mind;
Intellectual curiosity.
Vision regarding the amount of real estate that already exists: will there always be room for more constructions?
Yes, however, when analyzing, for instance, Lisbon’s situation, one assesses that good dimension land is already scarce. The other possibility (other than building from scratch) is rehabilitating or demolishing old buildings. This possibility must be taken into account since, for most of old real estate constructions, they turned out to be different and worse than what was initially projected. Furthermore, new buildings or houses would be more sophisticated , comfortable and less costly in terms of production. Currently, there is room for both markets to be explored, but, as usually in Portugal, bureaucracies always make the process much more difficult. For instance, for rehabilitation, there are tax incentives. Nevertheless, recently the “Autoridade Tributária '' demanded city councils to issue affidavits on rehabilitating constructions that the city councils were not even ready to issue, delaying several projects.
What can be done regarding housing for youngsters and the middle class?
The main change that needs to be taken into account is, once again, related with the reduction of bureaucracies. Vanguard has had situations in the past where licenses took four years to be issued. Not only does this waiting time increases production costs, but also the amount of money spent in licenses and other types of affidavits increases the costs. Despite not being spoken on the media, this is one of the main reasons why the average housing price in Lisbon has been increasing. Also, there must be an unification of the law and policies among city councils: the fact that it is different to construct in Lisbon or in Loulé only makes it harder for real estate development firms.Finally, a policy of de deducible IVA for first property purchase should be considered.
Conclusion
On the 12th February we held our first event as a students club and we considered it a huge success. We had more 80 people attending the event, with relevant questions and doubts for our guests.
As a note of appreciation, we would like to thank our two illustrious guests for the availability and for sharing their knowledge and experiences with us. We would also like to thank all those who were able to be present at this event that aims to know more of the real estate business and its evolution.
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