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PORTUGAL: An Introduction to Real Estate

Contributors:
Fernando Costal Carinhas
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Chambers Practice Area Overview 2019 - Real Estate

2018 has confirmed the best expectations for the real estate market. The number of transactions and the amounts involved in those transactions contributed to amazing year-end results in this market and kept both real estate investors and practitioners very busy throughout the year.

From an economic perspective, Portugal continued to grow steadily in 2018. By the end of the year, Portugal was rated as “stable” to “positive” by the main rating agencies. This generally positive economic environment, the decrease in long-term unemployment, the growing capacity for investment and the arrival of new investors in different segments of the economy have created an optimistic outlook for 2019.

Along with a stable economy, Portugal has exceptional natural beauty, a warm Mediterranean climate and modern infrastructures (highways, public transport, shopping centres, etc.). It also has developed and safe cities, which have become even more pleasant to live in and visit in recent years. This is because of the renewal brought about by the enormous investment in urban regeneration, and the creation of favourable legal and tax frameworks that incentivise foreigners to visit and invest in Portugal.

From a country historically associated with the discovery of new territories, Portugal itself has become a discovery, providing modern explorers with the perfect place to re-locate their homes and businesses, or just to relax in international-standard tourism developments.

It is a fact that foreign investment has kept its leading role in this market, with an increasing number of foreign private and institutional investors selecting the Portuguese real estate market to develop their investment projects. And this leading role is expected to persist in 2019, with international players already alert to new areas of investment.

The residential sector has continued to be the most active segment of the real estate market. However, even though new residential projects were completed in 2018 and new properties were released onto the market, demand was still higher than supply. This is partly a consequence of the developers and the construction sector being reactive to demand and to the evolution of the real estate market. However, it is also a consequence of the exponentially rapid growth in demand for new premium properties. The gap between demand and supply is expected to decrease in 2019 with many new projects close to being completed and released to the market, and other new projects already approved and ready to begin construction.

With the market evolving to an equilibrium between supply and demand, the average price of non-prime properties is expected to correct itself in 2019. One other issue that may contribute to the adjustment of average prices of non-prime properties is the release to the market of OREO assets formerly in the portfolios of banks and other financial and insurance institutions' portfolios, which were sold during 2018.

The sales of several OREO (“Other Real Estate Owned”) and NPL (“Non-Performing Loans”) portfolios began in 2018. Thousands of these properties were sold, mainly to international investors, bringing an additional boost to the real estate market in 2018. In 2019, the number of these transactions and the number of properties traded is expected to increase so we believe this will become one of the most active areas for real estate transactions during 2019.

As we have been saying, Portugal and specifically the Portuguese real estate market is welcoming a significant amount of foreign investment. But it is not only foreign investment that is arriving in Portugal. Portugal has been identified as a “must go” destination by tourists from all around the world. It appears that our visitors and the tourism and travel experts and operators recognise the great quality Portugal offers because, year after year, Portugal has been winning international awards for tourism. At the end of 2018, the World Travel Awards Grand Final Gala Ceremony took place in Lisbon and, for the second consecutive year, Portugal was named the World's Leading Destination. Moreover, Lisbon was named both the World's Leading City Break Destination and the World's Leading City Destination, among a total of 16 awards for Portugal and Portuguese players.

This very positive context has not been ignored by investors. New projects opened their doors to the public in 2018 and others are currently being developed throughout Portugal in 2019.

Portugal is not only seen as an excellent destination for holiday and recreational activities. With the current economic context, the decrease in the unemployment rate and the arrival of new areas of business, office spaces are also increasingly in demand. This specific segment was indeed active in 2018, with historical numbers of spaces being traded or occupied. The demand for new office spaces continues and there is a lack of these properties available in the market, which is not expected to change in 2019. Despite the fact that there are projects in progress in Lisbon and Oporto, the release of these properties to the market is not expected to occur before 2020 and, therefore, this segment is not expected to end this year with exceptional numbers. Nonetheless, it is a segment that will keep real estate investors busy and will still maintain traction as new models of offices and new spaces for co-working are developed, meeting the increasing demand for hybrid spaces where creativity and entrepreneurship work together to create a perfect environment for new areas of business and start-ups to thrive.

Another segment that is benefiting from the positive economic context (citizens with better financial conditions and a steady flow of tourists) is the retail area, which was also very active in 2018. Apart from the good results in terms of occupation, the area is being challenged to modify its offer: consumers are turning their attention back to high street shops and the market is answering with the opening of trendy new street shops, and shopping centres are becoming multipurpose spaces with a diversified offering of services and activities. In 2019, this segment will remain active with new international brand flagship stores expected to open in Lisbon and Oporto, and with shopping centres adapting their offer to the consumers’ demand.

Apart from the good 2018 results and the bright outlook for 2019 in the traditional areas of real estate, there are new investment niches such as student accommodation (which is already well established, with some projects already open), senior accommodation, residential projects for lease at controlled rents (in the context of recently approved tax incentives for this type of investment) which are expected to keep real estate players occupied in 2019.

The relevance of the real estate and tourism segments to the structured growth of the Portuguese economy keeps these segments permanently on the political agenda. New laws have been enacted to try to limit alleged abuses in the letting segment, while others have recently been passed and enacted, such as the legislation on Real Estate Management and Investment Companies (a form close to the well-known REITs), which will certainly create new opportunities for real estate investment and attract new investors.

BY: Tiago Mendonça de Castro (Partner) and Fernando Costal Carinhas (Senior associate)