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Portugal has been catching the headlines in recent months. 2018 saw the Portuguese real estate market set a record in terms of investment volume, reaching a staggering €3.6 billion and representing a 50% increase on the previous year. This positive momentum is set to continue. In a yearly survey conducted by PWC and the Urban Land Institute, which looks at investors’ preferred investment destinations for the year ahead, Lisbon was voted the top European destination, overtaking Berlin. The country’s high quality of life, relatively cheap property and impressive returns explain Portugal’s climb up the various league tables. Furthermore, on January 10th of 2019 the government finally approved the creation of Real Estate Investment Trusts (REITs), allowing small and medium-sized investors into the real estate market. This new investment product – Sociedades de Investimento e Gestão Imobiliária (SIGI) – will boost the Portuguese real estate market by increasing the amount of capital available, thus driving property prices higher. The introduction of REITs comes just a few months after the major rating agencies upgraded Portugal’s credit rating back to investment grade, giving full eligibility to a wider investor base. In this latest edition of Europe Watch, we highlight Portugal’s investment draw.
Portugal suffered heavily during the global financial crisis (GFC) and ensuing Eurozone debt crisis: the economy contracted, wages fell, unemployment jumped – and the country had to accept a humiliating international bailout. However, business confidence has since rebounded, with production and exports taking off and economic growth in 2017 at its highest level in a decade. Estimates for the coming year point towards continued growth, albeit the pace of activity is likely to decelerate gradually as economic and financial headwinds are felt. Indeed, the expected slowdown in the global economy is one of the main risks facing Portugal in the future, particularly because of its impact on exports, which has been one of the major growth engines in recent years. Public debt, whilst slowly reducing, also remains a risk for the future. However, the combination of sustained domestic demand and consumer spending growth as well as a notable improvement of the budget deficit, should contribute to continued confidence in the Portuguese economy in the short term.
Euro Stoxx 50
ECB Policy Rate
10-yr. German Bond
Data points through end of January 2019. Change represents month-over-month change.
ECONOMIC INDICATORS FOR PORTUGAL, 2007-2020 (FORECAST)
Source: Oxford Economics
Maria Wiklund Karine Woodford
GROWTH FUELLED BY HIGH DEMAND FROM INTERNATIONAL CORPORATES LOOKING TO EXPAND
Following almost two decades of high building volumes, falling rents and persistently high vacancy, the Portuguese market turned a corner after the GFC as new construction declined, helping to establish more solid market dynamics. Today, demand for office space is strong, particularly from international corporates looking to expand or to relocate their service centres and business process outsourcing activities to the country. Supply is increasingly scarce, however, which has resulted in tenants competing for space and to a growing number of large occupiers agreeing pre-lets – a trend not seen in many years. With vacancy dropping and take-up increasing, rents are on the rise. On the investment side, office activity recorded sharp growth during 2018, with some key acquisitions of buildings for redevelopment purposes by foreign institutional players.
PORTUGAL TRANSACTION VOLUMES PER SECTOR €BN, 2007-2018
TOURISM SPURS FURTHER GROWTH IN RETAIL
The retail sector witnessed strong performance during 2018, supported by a growing tourism influx, economic growth and increase in private consumption. Going forward, consumer spending growth across the country is forecast to be in line with the EU average. Whilst high street retail should continue to attract a growing number of consumers, the refurbishment/expansion of several shopping centres should also help encourage a more significant increase in footfall. Investment activity was buoyant during the year, with 19 shopping centres changing hands. Even though large transactions have targeted shopping centres in the last few years, there are no plans for new developments in the foreseeable future. Instead, the focus will be on redeveloping/repositioning existing schemes to improve their overall retail offering. As such, the performance of good quality Portuguese shopping centres is expected to be solid over the next couple of years, with yield compression and modest rental growth driving capital values.
FORECAST TOTAL ANNUAL RETURNS
WIDER DIVERSITY OF CAPITAL AT PLAY
As Lisbon takes top spot on the future cities to invest leader board, it is fair to say that the Portuguese real estate market continues to offer interesting investment opportunities, with solid valuation prospects. Portugal’s growing exposure at the international level and schemes that encourage foreign investment have attracted the attention of a diverse range of international investors. Whilst at the previous peak, the market was mainly Portuguese property funds and German funds who were looking for the same type of product, we are now seeing the market displaying a much wider diversity of capital: of origin, risk profile and asset classes targeted. There are hedge funds and more opportunistic players as well as core players coming to the market, and with the advent of REITS, we can expect to see Portugal continue to attract new investment.
PORTUGAL BUYER COMPOSITION OF TOTAL INVESTMENTS, 2009-2018
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