PORTUGAL: An Introduction to Real Estate
During 2023, we witnessed the presence of several drivers of uncertainty that have threatened to cause an unexpected deceleration in the Portuguese real estate sector’s performance. While the high levels of inflation recorded in the second half of 2022 began to decrease in early 2023 and have since maintained a downward trend, interest rates and yields, on the other hand, continued to rise. This, coupled with a loss of purchasing power that has primarily hit the Portuguese middle class and some scepticism regarding a possible turnaround from what appeared to be a climate of economic recession, has cast a shadow over the market’s performance. Nevertheless, this sentiment has gradually faded, and the Portuguese real estate sector has demonstrated its resilience despite the uncertainty in the economic scenario.
Market Overview
The signs of caution projected by the real estate sector at the end of 2022 proved accurate and have impacted market performance, resulting in a slight contraction in the first quarter of the year. The increase in financing costs, partly explained by rising interest rates, along with sceptical sentiment about economic growth and shifts in property fundamental expectations, has influenced investors in delaying their investment decisions. Despite this slowdown, there is another aspect to be considered. Optimism from the European institutions, driven by the injection of EU funds within the European economy, combined with an upward trend in exportation and a robust performance in the tourism sector have contributed to reversing the recessionary climate and strengthening the Portuguese economy.
The investment market has proven resilient, led this time by the hospitality sector, followed by the retail sector, which have piqued the interest of both domestic and cross-border investors. This notwithstanding, global investment numbers have been significantly reduced if compared to the trend of the past years. The residential market, characterised by a structural undersupply and excessive demand (particularly, in Lisbon and Oporto), has seen a decrease in home sales, particularly within the middle-class segment. This decrease can be explained by the continued rise in housing prices, increased interest rates and shortage of housing supply. The prime buildings segment, however, remained insensitive towards the adverse economic conditions, due to the characteristics of its target audience (with no need or with easy access to finance).
To address the current housing crisis, the Portuguese government approved the “Mais Habitação” programme. This includes a set of legislative measures intended, among other things, to power house supply, curb speculation around housing prices and support vulnerable households. Although the programme has been the object of significant debate, with very negative opinion from real estate sector players (especially as regards changes in the lease law and in the short-term rental regime), it will in any case provide new investment opportunities for both investors and developers in the Portuguese real estate market. The interest in the development of real estate assets has remained, mostly focused on residential and hospitality projects.
Investors seeking diversification outside the traditional ways of housing investment have shifted their focus to new housing development models. The “build-to-rent” schemes have gained momentum due to the increase in demand for rental housing and offices, providing at the same time, from the developer’s standpoint, a source of predictable and stable income derived from the lease. Digital economy properties, including data centres and cell towers, have emerged as an investment sector target as they gradually consolidate as the backbone of the new world order in the digital economy.
“They Are Here to Stay”: ESG Metrics and the Rising of Proptech
It is safe to say that ESG is gradually becoming a core principle incorporated in the decision-making process when the time to invest arrives, despite many firms still lacking the internal controls required to comply with all environmental, social and governance parameters. Concerns about operational efficiency and environmental sustainability have prompted many developers to invest in green and energy-efficient solutions, after listening to the demands of consumers, who are increasingly self-conscious about the environmental and social impact of a service or product.
Developers are increasingly striving to attain environmental certifications such as LEED or BREEAM with the goal of diminishing energy and water consumption, enhancing indoor air quality, mitigating the ecological footprint associated with construction materials and waste, and, overall, reducing costs. This mindset not only reflects a corporate’s commitment to minimising environmental impact but also to promoting a culture of well-being and talent retention.
The emergence of new real estate technologies, such as generative AI tools or DLT/blockchain-based technology, has not yet been considered by real estate operators at the pace it should in order to jump towards modernisation and gain competitive advantages. However, real estate market players are looking more to these aspects and integrating them in their internal processes.
Real Estate Outlook in 2024
One of the biggest challenges for the real estate market in 2024 will undoubtedly be the increase in housing supply for the middle class, allowing for a more balanced rental market and a cooling down of transaction prices. Housing prices have soared in the last few years due to the lack of housing supply, excessive demand and difficulties in accessing finance, mainly due to the loss of purchasing power and the rising in interest rates, and both public entities and private investors are aligned in the objective of increasing supply.
As for the investment market, a difficult first half of 2024 is expected, but investors and other market players believe the second half will be much brighter, as inflation continues to decrease, which sooner or later will have an impact on interest rates.
Furthermore, sustainability, innovation and technology are expected to shape the behaviour of real estate operators in 2024, as they continually strive to meet consumer demands. Buyers are anticipated to favour properties embracing sustainability and energy efficiency. Projects incorporating green practices gain prominence, appealing to an environmentally conscious audience. Environmental certification and green technologies are vital in order to meet consumer expectations. The shift reflects a growing concern for eco-friendly choices in real estate.
Finally, we also anticipate an advancement in the integration of digital solutions, such as virtual tours, artificial intelligence, and online platforms for real estate transactions. This transformative shift is expected to enhance the overall customer experience, assuring a more efficient, transparent and unbureaucratic journey for all parties during the transaction.