Development Investment: Lack of supply, not demand the problem

 In Development, News, Real Estate

Portugal is still an attractive investment destination for overseas investors in all four key investment assets — residential, offices, hotels, and logistics, because of and despite the Covid-19 pandemic, and now the war in Ukraine.

Viewed as a safe and secure destination, sought after by overseas home buyers and a bolt hole for investment groups such as pension fund managers, Gonçalo Ponces, Head of Development at real estate consultants Jones Lang LaSalle, told movers and shakers in the Portuguese property development sector that the problem is not a “lack of capital liquidity, but rather a lack of new product” in the market to satisfy a demand which has remained stable and sustainable since the boom years of 2018 and 2019.

Speaking at the well-attended III Real Estate Development Conference in Portugal (COPI), organised by the Portuguese Association of Real Estate Developers and Investors (APPII) and the magazine Vida Imobiliária and held at Monsanto Secret Spot in Lisbon on Thursday (30 June), Gonçalo Pontes highlighted three key points: Portugal as an International Investment Destination, Portugal’s Decade of Transition 2012-2022, and Real Estate Development and Opportunities.

“Portugal is a consolidated and truly global destination, and this is because we are considered an exceptional tourism destination”, he said, pointing out that Portugal has internationally recognised academic institutions (5 made the Financial Times Best Masters of Business list in 2022), while Portugal is increasingly a market that is a very solid destination for expatriates and investors alike. Further evidence of this — a plaudit that can be added to dozens of international awards since 2017 – is that according to the magazine Monocle and its 15th Quality of Life ranking, Portugal came in 3rd place in the world, after Copenhagen and Zurich.

Ponces explained that the main factors for Portugal’s attractiveness in terms of both investor and public perceptions are security, the climate, lifestyle quality, and a highly qualified generation associated with the human resources market which is “relatively competitive compared to other European regions”.

“It’s fair to say that Portugal offers the whole package in terms of being a tourism destination, the employment market, and as an investment destination, and is being seen as such by the rest of the world”.

As to Portugal’s Decade of Transition, many investment and wealth attraction measures had been implemented by various governments, resulting in Portugal being in a much stronger situation than it had been 10 years ago.

These include legislative alterations to the NRAU (New Urban Rental Law) which is now fairer and more balanced in terms of landlord contracts), the improvement to the Non-Habitual Residents Scheme (NHR), the Authorisation for Residency for Investment (ARI), more popularly called the Portugal Golden Visa, and the overall investment and development in the tourism market.

“The tourism sector enjoyed an extraordinary boom from this time, with the creation of tax benefits which had contributed to the dynamism and renovation of city centre areas which had been fundamental”, Ponce adds.

In fact, the investment situation in Portugal from 2012 to 2022 has been noting short of extraordinary, with overseas investment reaching a peak in 2018 and 2019, increasing 14-fold in the commercial real estate segment in these two years compared to 2012.

“We are increasingly a sustainable and dynamic market and this can be seen in the estimates for 2022, with investments of €2.5Bn-€2.7Bn in commercial real estate”, explained the JLL property expert.

In 2012, as Portugal was still in the depths of the Great Recession, 46% of investment in Portugal came overseas, today, however, that figure has shot up to 85%.

“This shows how attractive we are as an investment destination, and the demand for and diversity of assets we have in which to invest,” he added.

Residential Market

This residential segment, which today is highly dependant on real estate development (new build) is Portugal’s weak point at present, with the number of units absorbed by pre-existing products (second-hand) in the market far more expressive when compared to new products, owing to an absence of sufficient new stock in the market.

Over the past three years there have been around 165,682 overall transactions (properties bought and sold) from both national and international buyers per annum; in 2016 it was only 127,106. Yet in terms of construction, the new build market has flatlined since 2011.

Ponce says the number of new build homes has simply not kept pace with demand, with few significant housing development projects built over the past 20 years. In the 2000-2010 property cycle there were nearly 80,000 new build projects. In the 2011-2022 property cycle this had trailed to a measly 13,000. “This provides us with a great opportunity”, affirms Ponces.

Two reasons for this are the price of construction materials and lack of skilled manpower, but the government has, say sector leaders, made it impossible to create new build projects at affordable prices for Portugal’s lower-middle and middle classes.

This is because of high property taxes, VAT, and the sheer time it takes to get planning permission from city halls and local councils (anything up to 3 years, and even more in some cases). This, in turn, makes it impossible for developers which normally plan aead by up to 10 years, to keep to their original costings and budgets, thereby scaring off investors in this particular residential housing segment.

Speaking to one dynamic and talented developer at the conference’s interval lunch, she told Essential Business: “we’ve moved investment to the South of France (St. Tropez) where local councils are much quicker when it comes to planning permission. I know of cases where developers actually preferred to pay the fines for not having delivered a project on time and to budget because of the disorganisation, time, and red tape involved at some ‘câmaras’ in Portugal.

Logistics, Offices and Hotels

In terms of the four commercial real estate segments: residential, logistics, offices, and hotels — residential and logistics (warehousing) needs to urgently produce new stock in the market to meet demand. Logistics, says Gonçalo Ponces, is a “relatively small market in Portugal” but there is a “huge appetite” from both international investors and operators in commercial logistics real estate take-up.

“Providing new products is essential in both of these segments, while the offices and hotels segments are seeing a phase of great transition (particularly offices) because of the demands of both occupiers and investors, which leads us to a rethink in terms of the stock and the conditions it offered three years ago. Today this stock will require an upgrade”, says the JLL expert.

Ponces says that in all of these areas where product is scarce, demand is being intensely felt in Portugal.

“If we look at the key drivers of Golden Visas, Tax Incentives (NHR), Tax Incentives for Rehabilitation, Attractive Credit Rates and Low Interest, the last which today has become less certain, the increase in both national and international demand in tourism developments, overseas relocater and second homes, and lifestyle quality – all of which have helped to provide a strong dynamic of demand – Portugal now suffers from a property product offer which is very limited,” he says.

Regarding performance indicators for real estate development transactions, in 2016 there was a turnover of €46 million transacted, with an average area of 2,300 m2 (average value of €4 million per deal) and international investment representing around 18%.

By 2021, the situation had changed — and this was at the tail end of the pandemic — with €142 million transacted (16,000 m2 of average area per deal), which means that investors want a much more ample area than in 2016 and carrying an average price tag of €35 million, with overseas investors representing three-quarters of the real estate development investment market, in a panorama “radically different from the one which we had”.

By way of example, Gonçalo Ponces provided three case studies: Encosta da Tapada, a mixed-use development with 20,000 m2 of GCA, which is one of the largest new real estate developments in Lisbon covering a 14 hectare site and involving an investment of €300 million. It will feature 87,000 m2 of housing, 22,000 m2 of offices, 11,000 m2 of retail, 900 parking spaces and 550 residential apartments. It is expected to take up to 8-10 years to complete.

A second case study is Metropolis (2019). This mixed use project has 80,000 m2 of GBA, and is projected to take 5-7 years to complete. This project in Lisbon’s Campo Grande combines housing, offices, and commercial spaces on Lisbon’s main axis. It promises to regenerate the entire area which in the past hosted the old Sporting Clube de Portugal football stadium which had been demolished 15 years ago.

The third is Bonjardim (2019), also a mixed-use project in Portugal’s second city Porto, with 93 apartments, 16 shops (55m2-1800m2), a central square with a supermarket, cafés, services shops, restaurants and a garden for cultural activities and relaxation.

“Projects like these involving substantial capital shows the mark of confidence investors have in the Portuguese market.

And looking at the overall investment in real estate development in Portugal, in 2016 it was €200 million (150 km2) of which less than 50% came from overseas investors. That figure has shot up to an incredible €375 million in 2021, a year in which the world was still affected by the pandemic.