March 1, 2018

Portuguese real estate is in the midst of a record-breaking boom.

In 2017, commercial real estate investment peaked at €1.9 billion. And the prospects for 2018 are even better. While investments are expected to reach at least €2.5 billion, the market’s current dynamism could see that level hit close to €3 billion.

Strengthening fundamentals
With Portugal’s 2011-14 debt crisis now firmly behind it, signs of an economic resurgence have boosted confidence in the country’s real estate market among both domestic and foreign investors. GDP growth for 2017 was revised up from 1.8 percent to 2.6 percent, with public debt and the budget deficit continuing to shrink. Unemployment, which hit 17.5 percent in 2013, has fallen to 8.9 percent, and is forecast to drop to 7.8 percent during the coming year. Upgrades of Portugal’s credit rating to investment grade are also improving funding conditions and reducing credit costs.

Against this backdrop, and with the 2018 State Budget presenting a range of tax breaks that will benefit both landlords and tenants, investor interest in the country’s real estate markets will continue to grow – especially among foreign investors, who accounted for 80 percent of flows last year. This strong investor appetite has pushed prime yields down to historic lows. However, they remain higher than in most other European markets, helping sustain demand for Portuguese real estate.

And while all sectors saw strong performance through 2017, with investment opportunities across core, core plus and value add assets, the retail and office segments are forecast to attract most investment this year.

Shopping for deals
The retail market maintained its growth trend throughout 2017. Retail sales volumes continue to rise, with high street retail and shopping centres benefitting from an influx of tourists and growing confidence among Portuguese consumers. The end of the Income Tax surcharge, which was phased out through the course of the year, helped further.

“High street retail has become the preferred choice for brands wishing to enter the market,” says Maria Empis, Head of Research at JLL Portugal. “Prime zones in particular are proving dynamic, with the opening of numerous shops and restaurants.”

Shopping centres, especially at the premium end, are also experiencing substantial momentum, with prime assets enjoying high footfall and increasing sales. And they are remaining alert to the growing threat from online shopping, as centres adapt to shifting consumer patterns by upgrading or offering enhanced cultural and leisure “experiences,” as seen with the modernisation and reform of the food courts in CascaiShopping and Amoreiras Shopping Center.

After an active 2017, in which the retail sector attracted 35 percent of the total invested in Portugal’s real estate market, transaction volumes appear set to be similarly robust through 2018. In January, U.S, private equity behemoth Blackstone Group agreed to sell three shopping centres around Lisbon to Groupe Auchan. The sale of a fourth to Spain’s Merlin Properties Socimi is reported to be worth as much as €450 million, approximately double what Blackstone paid . Meanwhile, Paris-based AXA Investment Managers-Real Assets acquired Lisbon mall Dolce Vita Tejo in January for €230 million. Previous owners Baupost and the Eurofund Group paid €170 million for it two years earlier.

Busy in the office
The office sector was the second most actively traded, with 31 percent of the total investment volume. Office demand is strengthening and becoming more diversified.

“Take-up in 2017 increased 14 percent year-on-year, driven by the improving business environment,” notes Empis. “Strong demand from multinational companies for back-office services and call centres was one of the major trends, along with the financial, and consultants & lawyers sectors.”

However, the lack of supply of new and quality office buildings – with developers focusing on the residential market as the economic recovery gathered pace – is a critical issue that is beginning to restrain business activity. With available supply significantly reduced, the vacancy rate has shrunk from 13.2 percent in 2013 to 8.6 percent. All areas in Lisbon also saw increases in prime unit rents of between fifty cents and one euro per square meter per month. Porto is experiencing similar trends.

“The great challenge for 2018 will be to find spaces that meet companies’ current requirements, in particular large spaces with large areas per floor, modern designs, good quality technological infrastructures and locations well-served by public transport,” says Empis. “With the market facing supply limitations, there is an urgent need for more development of new office buildings.”

While Portugal’s retail and office markets are attracting most interest, other sectors are seeing a surge in activity. For instance, the industrial/logistics segment more than quadrupled its share of investment to 17 percent last year. This included the biggest transaction of 2017: the Logicor portfolio sale to China Investment Corporation for €260 million.

Buoyant tourism supports hotels
The hotel sector is also expected to maintain its growing dynamism through 2018, fuelled by a buoyant tourism market that saw a 16.6 percent increase in revenues in 2017 to reach a record €3 billion. Performance indicators improved alongside this, with RevPar experiencing double-digit growth.

Despite 12 new hotels opening in Lisbon in 2017, and another 25 units expected before the end of 2019, demand in the capital is still rising faster than supply. It’s a similar story in Porto, where six new hotels opened last year, and another 10 are in the pipeline for the next two years.

“National management companies continue to dominate this market,” says Empis. “However, with such growing popularity, Portugal is becoming a destination focus for large international operators – as evidenced by the entrance of new players such as Iberostar in Lisbon, and luxury Asian operators Oberoi and Anantara, which have chosen Portugal to launch their European expansion plans.”

The investment market has seen an uptick in activity too. Nine hotels were traded during 2017, with a sum of 900 rooms and a total value of €110 million. Yet while demand for hotels or hospitality projects is strong, scarce supply means the few available opportunities are considerably inflated, which is restricting the potential number of deals.

Residential keeps moving
Portugal’s residential market continues to exceed expectations, helped by a significant increase in domestic demand due to a general improvement in living conditions, and easier access to and affordability of bank loans. The favourable conditions have led to an 83 percent increase in the number of sold units in Lisbon in the last three years. And while the residential price index has been climbing steadily from its 2013 lows, Lisbon is still considerably more affordable than other European capitals.

Lisbon’s historic centre is especially attractive to investors looking for opportunities to invest in short-term rental. Demand remains high for prime zones (with values in the main areas increasing on average 10 percent to 20 percent), but has also expanded to new build and refurbishment projects in less central areas of the city.

“While national buyers seek these new zones for price reasons, international buyers are attracted to the alternative lifestyle these zones offer,” says Empis. “For example, the Beato zone is establishing itself as a startup hub and as a cradle for alternative businesses, which is the new focus of several residential developers, where new projects are emerging.”

The combination of strong market demand, plus a solid pipeline of residential projects, including some large-scale developments, is set to make 2018 another active year for the residential sector.

“Overall, high levels of demand will persist across the traditional real estate sectors,” says Empis. “But in addition, alternative sectors such as student and senior housing, hospitals and co-living are attracting increasing interest. The outlook for Portuguese real estate therefore is bright.”

Click to read more about EMEA’s positive fundamentals.


Maria Empis

Head of Research at JLL Portugal

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