This investment opportunity, combined with tourism which accounts for 17% of Portugal's economy, and the hotel industry, which witnessed record investments of €900 million in 2022, makes investing in the hotel business in Portugal a smart strategy. Even without considering the Golden Visa program, investing in the hotel industry remains a lucrative opportunity.
Portugal was ranked the Best Tourist Destination in Europe by the World Travel Awards in 2022, making it the fifth time the country had won this recognition in the past six years.
According to the National Statistics Institute, Portugal's tourism sector experienced remarkable revenue growth in 2022, surpassing €5 billion, representing a significant increase of 115% compared to the previous year and a 16.5% rise compared to 2019. What's interesting is that the data shows that foreign visitors not only outnumbered domestic tourists but also had longer stays.
The demand for commercial real estate, particularly hotels, is poised to remain strong in the post-pandemic era. The tourism industry is rebounding and presents promising opportunities for investment in the hotel sector.
Where to Invest in Hotels in Portugal
Lisbon, Porto, and Other Crowd Favorites
According to the Horwath HTL Portugal Hotels and Chains Report 2022, Portugal has more than 70 hotel projects with 3,600 accommodation units in the pipeline. And most of these developments are concentrated in and around Lisbon and Porto, reflecting the dynamic growth of the hospitality sector in these popular cities.
"Currently, around €720 million of hotel transactions are in the pipeline, in different negotiation stages, which are expected to be concluded by the end of this year", said Gonçalo Garcia, head of hospitality at Cushman & Wakefield Portugal.
JLL Real Estate Market in Portugal 2022/2023 Report states that the luxury segment of the hotel industry, including 5-star hotels, is experiencing significant growth, representing almost a quarter of the new hotel openings. Additionally, international guests play a vital role, accounting for 40% of the demand for hotel rooms.
This shows that concerns regarding oversaturation in the market may be exaggerated. The traditional approach of investing in a hotel, particularly in popular cities like Lisbon and other major urban centers, remains a promising and worthwhile investment opportunity even considering the signs of saturation and therefore limited investment opportunities. The northern region of Portugal will see 25 hotel openings in 2023 compared to 17 units in Lisbon throughout the year.
In 2022, Algarve had the highest number of overnight stays, followed by the Lisbon Metropolitan Area in the second spot and the Northern region of Portugal in third place.
In other words, you can also look beyond Lisbon and Porto and check out hotel investment options in Algarve and Alentejo.
While Madeira has also long been a popular destination for tourists seeking idyllic tropical getaways, complete with pristine white-sand beaches, abundant sunshine, and excellent surfing opportunities, it appears that the market has reached a point of saturation. With a staggering 49 hotels and over 7,500 rooms already in operation, the limited growth in the coming year is evident. And in 2023, Madeira only expects to welcome three new hotels with just 294 additional rooms, signifying a considerably lower expansion rate.
Sustainable Options Close to Nature
According to Goncalo Garcia, “new trends in demand are also being felt in the national landscape, with the demand for units with more surrounding space and in close contact with nature.”
This emphasis on sustainable development and holidays in pristine natural surroundings is evident from the fact that the Azores is likely to see six new hotel openings in 2023, a 100% jump compared to the previous years.
The Azores may be a smart investment choice because it is leveraging its location, biodiversity, emphasis on sustainable development, and unconventional attractions to boost tourism that can continue for a long time.
Another factor that can work to the Azores’ advantage is its accessibility from the USA compared to holiday hotspots in mainland Portugal or even Madeira. The past few years have seen a significant rise in the number of Americans moving to Portugal.
“The American community is growing as it never has before…Americans are moving to Portugal and living in Portugal”, Mariana Carp, a partner and tax adviser at ILYA, a tax advisory firm based in Lisbon says.
As buying a home is no longer an easy route to permanent residence, wealthy Americans may explore commercial investments in the Azores to leverage their D2 visa and generate good returns during their stay there.
How To Invest in the Hotel Business in Portugal
One option would be for the investor to purchase a small hotel in Portugal and either participate in its management or outsource it to professionals. However, while it's a straightforward route, it is also a risky option that may be best suited for skilled entrepreneurs prepared to take on the challenges of such ventures.
Apart from obvious risks, this route will make it unlikely for the investor to qualify for a Golden Visa under the existing and proposed programs.
Buying a small hotel in Portugal can be risky, and outright purchasing a luxury hotel may exceed your budget. However, a smart and affordable way to invest in the country's hotel business is to consider buying a share in a luxury or boutique hotel project.
To qualify under the existing Golden Visa program, you have two options. First, invest €350,000 in a hotel reconstruction or renovation project. Alternatively, you can invest €500,000 in a new project. These investments offer a compelling opportunity to enter the hotel industry while benefiting from the program.
The proposed changes emphasize explicitly the importance of preserving and maintaining cultural heritage. In other words, a boutique hotel highlighting the rich cultural heritage of the Azores or Algarve could possibly meet the approval criteria that will be set by the authorities in the future.
Other benefits of buying a share in a luxury hotel include
- Rental income that you can choose to receive either upfront or at periodic intervals,
- Guaranteed buyback after five or six years to secure your capital, and
- Free stay in the hotel or any other hotel in the chain for one to two weeks every year.
The Big Question — ROI or Return on Investment
Metrics like Average Daily Rate (average revenue earned per day) and RevPAR (Revenue per Available Room) vary from one project to another. However, numbers for regions like Lisbon and Porto bolster the argument for investing in a hotel in Portugal.
- ADR in Lisbon has risen from €126 in 2019 to €149 in 2022. ADR in Porto was €120 in 2022 compared to €118 in 2019.
- RevPAR of €98 and €71 for Lisbon and Porto, double what it was in 2021.
What makes these numbers truly impressive is that occupancy levels in 2022 were lower than in 2019, indicating that hotels in Portugal are already generating more revenue and better returns for investors when the occupancy recovery is yet to occur.
Regarding the rental yield or average annual return on real estate investment, the JLL Report shows prime yields on hotel investments in Lisbon range between 5.15% to 5.65%. Porto is a better option with yields between 6% and 6.5%, while the highest yield in Algarve is an impressive 6.75%.
Combined with enticing features such as guaranteed buyback and upfront payment of rental income, investing in hotels in Portugal emerges as a compelling financial choice beyond just Golden Visa investors or D2 visa aspirants.
Whether you're a savvy investor aiming to diversify your portfolio with foreign commercial real estate or a high-net-worth individual in Portugal eager to capitalize on the post-pandemic surge in the sector, this investment option holds excellent potential for all.
Should you focus on big brands in the luxury hospitality space and restrict yourself to the biggest cities or should you explore the potential of offbeat yet sustainable properties in the Azores? The sensible strategy would be to empower yourself with the assistance of professionals specializing in the complex space of investment and migration so that you enjoy custom-designed investment strategies suited to your short-term and long-term investment goals.