Thought leadership from our experts

Real estate investment in Portugal: back to the busy days of 2007

Miguel Marques dos Santos, Garrigues, Portugal

In the last two years, real estate investment in Portugal has changed in a very significant way, affecting both commercial and residential real estate investment.

After an abrupt fall, in which commercial investment came from a high of around €1.4 billion in 2007 to a minimum of around €100 million in 2012, 2013 was a year of clear recovery, with investment figures surpassing €300 million, and 2014 estimates (still provisional) indicate investment amounts of between €800 and €1 billion. International investors have valued very positively the good indicators in the Portuguese economy (reduction of public deficit, positive external balance of payments, impressive recovery in exports, reduction in the sovereign bond interest rates, end of recession, lowering of unemployment, etc.) and are once again seeing Portugal as one of the potential destinations of their investment plans. At the beginning, in 2013, they were essentially less institutional investors, who were willing to take a higher risk (particularly European Family Offices and investors from economies with booming growth rates, like Brazil and China), but during the year of 2014 we've witnessed several important transactions involving more traditional investors, namely American and European institutional investors, which are always more conservative players. If the course followed over the past two years is maintained (with improved public accounts and improved external image of the country), international investors will continue to have a positive opinion about the country, which will ensure the continuity of the growth seen throughout 2013 and 2014.

Along with this clear growth path in commercial real estate, 2013 and 2014 a1so brought good news in terms of residential real estate, with the appearance of a new investment market in the residential area: the individual foreign investment market in residential real estate. Portugal was able to create a new market from scratch, based on a very well structured Golden Visa program, which has been developing and continues to enjoy excellent growth potential. In 2013 total investment has been around €280 million and in 2014 it has increased to €700 million. The forecasts show that in the coming years it is reasonable to suggest that a sustained investment turnover of around €700 million per year is achievable. This new market will enable Portugal to almost double its annual foreign real estate investment turnover (to an annual commercial real estate investment turnover of around €800 million, we will add now a residential real estate investment turnover of around €700m per year), which well illustrates the potential of this new market.

But this investment growth was not only a consequence of the positive indicators of the Portuguese economy and of the valuation of these indicators by foreign investors (along with the Golden Visa Program), but was also a result of the important structural reforms undertaken by the Government now in office.

The urban lease law and the licensing regime for renovation projects were the subject of extensive reforms in 2013, which, while still in their infancy, are already recognized as being able to change the rental and urban renovation landscape. This is already clearly visible in cities such as Lisbon and Oporto, where investors, national and international, but particularly the latter, are returning to invest in renovation projects, partly for rental.

The urban lease law reform, in particular, has been, without any doubt, one of the most relevant structural reforms achieved by the country in recent years. The positive effect of the reform on the economy (city renovation, more employment, more tourism, etc.) will certainly be very significant.

The reform has, in a balanced way, broken with the paradigm of the past, with eternal contracts and frozen rents, reintroducing the basic legal principle of the lease relation between landlord and tenant, that is to say, the lease contract is a temporary contract, which should not award quasi ownership rights to the tenant (has it happened until the reform).

The results of the reform, are already clear and evident: the activity of acquiring residential property to rent has returned to be seen as normal commercial activity by small investors, the number of houses for rent has grown in a consistent and sustained way, the market has normalized, with the end of old contracts and the reduction of rents in new contracts, which means greater access to the rental market, both for families and companies.

And the good news is that the growth trend of 2013 and 2014 seems to be also guaranteed for 2015. The reason for this not only lies in the hopefully continuity of the positive evolution of the Portuguese economy, together with the Golden Visa Program and the structural reforms that were implemented, but also in the new legislation foreseen to be enacted in 2015: the Proposal for the State Budget for 2015 includes a legislative authorization allowing the Government to create new legislation for the implementation of the Portuguese REIT's (to be called SIPI's), which, from what may be concluded from the text of the legislative authorization, will follow a model similar to the Spanish SOCIMI´s (including a favourable tax regime). The creation of the Portuguese REIT's will also enhance growth in real estate investment, creating new opportunities both for investors and for the other players in the real estate market.