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Real estate promotion and crédit risk

Francisco Dias
Francisco Dias

In recent weeks, we witnessed the upgrade of ratings for the Portuguese Republic and major national banks to levels that some may not recall; Moody’s elevated the Republic by one notch, while the largest banks in the system received a two-notch upgrade. These upgrades demonstrate that the reduction of risk in Portuguese public debt is effective and that the decrease in the Debt-to-Gross Domestic Product ratio positively influences the country’s evaluation by major international rating agencies. Simultaneously, the effort to cleanse and strengthen balance sheets (the Non-Performing Loan ratio has decreased in recent years, and profitability has substantially increased) undertaken by banking entities has borne fruit. The improvement in the Republic’s risk undeniably contributed to the positive outcomes.

It seems evident that the effort to reduce debt has paid off in the perception of the country’s credit risk. As the rating is a crucial indicator for many international investors, the Republic’s improved rating has led to an increase in the number of investors looking at and buying national debt.

However, if that is the case, why are the costs of debt increasing for all economic participants when a higher interest in acquiring Republic debt should result in lower borrowing costs?

It’s important to note that the overall cost of debt results from the sum of a reference rate and a credit spread, the latter varying based on the issuer’s risk. Thus, if the reference rate increases due to the European Central Bank’s rate hike, the cost of money must increase, despite decreases in both credit risk and the spread. In other words, even though we have to pay more for money due to the higher reference rate, the reduction in the spread observed in the Republic’s funding cost not only partially cushions the reference rate increase but also keeps the spreads practiced by national financial entities stable or even lower.

In recent years, Portugal’s attractiveness has been felt in various sectors, not only in tourism and residential investment but also in its ability to attract investment. The increasing demand for and purchase of Portuguese debt by foreign investors reduces costs, but it also reduces the Republic’s reliance on credit from national banks. If the Republic’s use of credit from national banks decreases, these banks will undoubtedly be more available to lend to the local economy.

The interaction between real estate promotion and credit needs is well known, with national banks being a significant presence in many national real estate projects, which, in the past, incurred well-known costs. Today, more conservative and with more nuanced risk analyses, national banks still ensure that well-capitalized promoters and/or projects with solid assumptions have access to credit.

At the same time, due to the somewhat rigid actions of banking entities, other economic agents have emerged with a real contribution to energizing the financing market; several investment funds are now available to provide credit for real estate promotion projects from their inception, with the purchase of the land, to the completion of the project. Initially operating on the fringes of projects without access to commercial banks, these entities now compete with traditional banks, offering faster decision times and more flexible, yet equally solid, financial structures that allow them to cover projects that might otherwise struggle to secure credit.

Today, a promoter has a multitude of instruments on offer that were unknown until a few years ago: bridge finance, crowdfunding, mezzanine loans, among others, ensure the availability of a financial product for every step of the project, not to mention construction credit for which traditional banks still have liquidity available.

If there is liquidity, there is financing; if there is financing, there is real estate promotion. All reasons to face the coming year with some confidence.


Opinion article by Francisco Dias, Head of Financial Advisory, published in the Magazine Imobiliário on November 4th, 2023.

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