Our pan-European diversified investment strategy is based on the specific countries’ market fundamentals and the dynamics of local markets.
Portugal – Economic Outlook
Since it joined the European Community (the EU’s predecessor) in 1986, Portugal has considerably diversified its economy. Portugal grew at a faster pace than the euro zone from 2016 to 2019, but the current public health crisis has resulted in contraction in real GDP in 2020.
The long-lasting impact that the coronavirus will have on tourism represents a downside risk and will prevent a sharp recovery in 2021. European policy measures will limit the risk of a banking or sovereign debt crisis.
Portugal has a remarkably high quality of engineering talent at a competitive cost; an extremely high level of English language proficiency (compared to Spain, France, Italy); and a preference for launching products globally from day one.
On the macro-economic side, the Portuguese economy is suffering a strong impact from the pandemic crisis. According to Oxford Economics, GDP should contract by 9.0% in 2020 followed by a rebound to 6.5% in 2021. Exports will register the highest drop, estimated at 21.2% in 2020. Private consumption and investment were set to decrease by 7.9% and 4.8% respectively by year-end.
Nevertheless, employment proved to be resilient to the crisis, due to a large extent to the furlough programme implemented by the government. According to Oxford Economics, unemployment should gradually rise to 8.0% in 2021, recovering in 2022 to 6.7%.
Investment should also recover on decreasing uncertainty. Delays in implementing a vaccine and a possible prolonged health crisis pose downside risks to the outlook. FocusEconomics Consensus Forecast panellists see GDP growing 5.5% in 2021, which is down 0.1 percentage points from previous forecasts. For 2022, the panel sees it climbing 3.4%.
Our approach to the Portuguese property sector in 2021
Residential Development Projects
Portugal is undergoing some changes. Many British citizens who eschew Brexit are relocating there, thanks to beaches and start-up-friendly taxes. Non-EU residents are able to get a golden visa.
Chinese buyers have been particularly interested in the golden visa opportunity that Portugal offers, giving access to the EU, and the country is the fifth biggest destination for Chinese real estate purchasers. Making up 80% of purchasers under this scheme, they have typically bought managed apartments in Lisbon as pure investments. Russian buyers, on the other hand, have tended to look to Cascais and Estoril. Lots of millennials are also moving to Lisbon, which has a thriving start-up scene, and tech entrepreneurs can get a start-up visa.
Lisbon, and Portugal more generally, is emerging on the European and global stage as an increasingly fast-moving ecosystem that will benefit from its continued EU membership, international outlook, welcoming culture, and can-do work ethic. Portugal remains a highly sought-after location, from both the investment side and the personal side as a country to relocate and live. Good weather, solid infrastructure, safety, a high-level health system, an internationally recognised education system, and a below European average cost of living will certainly enhance the attractiveness of Portugal as a place to live in a post-pandemic environment where remote working will probably become a new norm for many of us.
In 2021, investment strategies will favour sectors with defensive characteristics, which benefit from macro factors such as demographic shifts. The living sectors, including multifamily, senior living and even student housing fall into this PRS (private rental scheme) category. An ageing population, and the increase in demand for rental during times of economic uncertainty, will support the fundamentals. The pandemic had a heavier impact on the PRS sector with students postponing their plans to study abroad. Nevertheless, studying has countercyclical characteristics with admissions rising in recessionary environments.
Residential has already become a core segment of investment strategies. Its share has increased by one-third this year and in some markets, it captured between a quarter and one third of the activity in 2020. In 2021, investor demand is expected to further intensify, but finding income-producing investments will be challenging. In some cases, forward funding new developments may be the only way to get exposure in the sector.
Intense competition has been pushing yields down rapidly in 2020, with prime yields at record low levels (European average at 3.4%). We believe that prices can rise further, especially in markets where rental housing supply lags demand, like in Lisbon. In the short-term, rental growth may be muted, in line with inflation, but income streams from residential are characterised by stability and resilience.
In Lisbon, supply proved to be scarce, a situation that was clearly evidenced by numerous houses sold off-plan, which became a widespread practice. This imbalance between supply and demand has resulted in significant price increases, in some cases up 50%, across the country, since 2013. There has been double-digit percentage growth in new construction over the past three years, with 14 400 new homes completed in 2019. Despite this dynamic, the number of housing completions is still far from the high levels of the previous property cycle (2000-2009), when an average of 84 000 units/year were completed, according to real estate company CBRE.
These are some of the reasons why we decided to invest in prime residential development projects in Lisbon.
Projects like LX Living clearly confirm the high level of demand for well-located and efficiently designed products. The scarcity of good quality products enabled us to sell more than 60% of the apartments off-plan, before construction began.
The quality of the projects, combined with the track-record, experience, and local presence of RE Capital, allowed us to raise bank financing for development projects, even during the challenging pandemic period.
The issue of affordability remains a key concern in all our residential investment decision making processes, hence our move to invest in the Marvila projects, where the main targeted end-buyers will be locals. A strong emphasis has been placed on efficient layouts in order to model apartment prices below market levels, at an attractive overall ticket price.