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The Sun Shone on the Real Estate Sector in 2018, but Some See Clouds on the Horizon

9 December 2018

2018 is expected to post growth reaching 20%, but some clouds are gathering on the horizon.

Two thousand and eighteen has been a good year for the Portuguese real estate sector as investment reached levels not seen since the just before the financial crisis erupted a decade ago. However, some clouds are gathering on the horizon. The euphoria that dominated the real estate market in the last three years could take a hit next year, affected by tightening supply in the residential and corporate market and the Portuguese government’s attempts to contain the market for local tourist accommodations (which has already been partially constrained in Lisbon). Measures further restricting the concession of mortgage loans are also expected, together will legislative elections that will be held next October. Nevertheless, real estate consultants are still demonstrating high levels of confidence and optimism.

The number of real estate transactions, which exceeded 226,000 in 2017, will grow by a total of between 15 and 20% this year, according to estimates by Luís Lima, the president of the Portuguese Association of Realtors and Real Estate Agents (APEMIP). Total investments, which reached €24 billion last year, will also be higher, leveraged both in the increase of sales and the increase in real estate prices, largely powered by the residential sector.

Investment in income yielding assets (offices, shopping centres, warehouses and hotels) will exceed three billion euros, 50% above 2017 and more than double the pre-crisis value, consultants say.

“The numbers are impressive, showing dynamism due to the quality of the assets and to the fact that Portugal is on investors’ radars because of the tourism boom and a benign environment,” says Eric Van Leuven, Cushman’s general director. Francisco Horta and Costa also showed enthusiasm regarding 2018: “It has been the best year in CBRE’s 30 years of operation in Portugal.”

Reis Campos, the president of the Association of Civil Construction and Public Works Industries (AICCOPN), stated that “the construction and real estate sectors consolidated in 2018.” According to Mr Campos’s estimates, “production in the construction sector will grow by 3.5%”, a measure of the progress in the residential area (up by 7%). As it turns out, in the last 12 months “22,000 new homes have entered the market, and another 50,000 are in the approval phase.” These numbers are still far from the 114,000 reached in 2001, but that will support growth in the sector next year, Mr Campos believes, pointing to a 4% increase in construction and public works activity.

Fear and caution

In  Portugal. The saying goes that caution and chicken soup never hurt anyone and Luis Lima is embracing the adage for 2019. The president of APEMIP believes that 2019 must be faced with “caution.” Portugal is fashionable, local and international investors are still interested in buying real estate, and interest rates are low enough to deter traditional savings – all of which are favourable to the real estate market. However, Mr Lima lists potential troubles, estimating the market growth will fail to reach double digits next year, adding that “reaching 10% will be difficult.”

“It will be an election year, and hopefully no additional measures will be taken that could penalise foreign investment; the State Budget did not include proposals to boost housing (referring to the lack of incentives for affordable housing and rentals); the IMI surcharge will be increased – which may deter foreign investment; restrictions on local accommodations in three parishes of Lisbon; controls on bank loans; and the warnings by the governor of the Bank of Portugal regarding the existence of a real estate bubble can jolt the market,” he warned. Mr Lima concluded: “I am somewhat apprehensive of what may happen in 2019.”

Real estate consultants, however, are more optimistic. Pedro Lencastre, the general director of JLL, argues that “the projections for 2019 are good and the dynamics are excellent. It will be a fantastic year. ” As Mr Van Leuven added that, “there is a large amount of money to invest” at the international level, and Portugal still has “continuing latent demand.” Regarding the residential sector, Francisco Horta e Costa, the general director of CBRE, emphasised a focus on projects outside the central zones of Lisbon, such as Alta de Lisboa, Miraflores and the area between Santa Apolónia and Parque das Nações. In his opinion, “prices will not go down in 2019, because supply will still be constrained,” stressing that “a large-scale increase in supply is needed for the middle class.”

Luis Lima is very critical of the lack of supply: “I do not see anyone acting on the supply side.” Mr Lima estimates that 20 to 30,000 homes will be made available over the next two years, while the country needs 50 to 70,000. The president of APEMIP admits momentum is strong in the luxury housing sector, but the market needs “local buyers, homes for the middle class and student residences.” Pedro Lencastre thinks, in turn, that the demand for offices will be a major factor in the market in 2019, stating that “we will increasingly have companies like Amazon and Cisco wanting to come here, while companies that are already here will want to change facilities.” According to Francisco Horta e Costa, [the corporate sector] “was not a market we thought much about five years ago, and now the level of absorption reached 200,000 square meters in Lisbon and 80,000 in Porto, which is unprecedented.”

Money without borders

Despite some uncertainty, industry players recognise that Portugal is in fashion and that there will be opportunities while international investors continue to bet on the country. All those investors want is that the climate of confidence continues, that there is fiscal stability and that legislative measures support investment, which will consequently boost other economic activities and create jobs, they argue.

Augusto Homem de Mello at Louvre Properties recalled that measures have already been taken that can negatively impact investment, such as protections for tenants, through a pre-emptive decree. He added that the revision of the urban rents law and the reduction in the VAT rate to 6% for rehabilitation boosted the sector. “[Current measures] are a step back, putting up impediments to investment, creating instability and uncertainty in the market,” he said. The brakes on local accommodation also have consequences. Urban rehabilitation in the city centres may fall off, and the prices of buildings in those areas could drop.

On the other hand, foreign nationals are still interested in living in Portugal, and Brexit could be a new opportunity. Luís Lima stressed that the sector “does not depend on golden visas to attract foreign investment,” and that “the program has been moribund for two years 90% of the market has disappeared.” That said, “ending the program is an outrage,” since it could also help mitigate the effects of Brexit.

Original Story: Dinheiro Vivo – Sónia Santos Pereira

Photo: Fábio Poço / Global Imagens

 

Translation: Richard Turner