Has it only been a decade? It seems like it was much further in the past, but in a few month’s time, it will be ten years since our country started putting the Eurozone debt crisis in the rearview mirror. It was May 2014 which marked the formal expiration of the financial assistance program provided by the European Union and International Monetary Fund.
Since then we have focused on fiscal stability, with both the outgoing centre-right and incoming centre-left governments prioritising fiscal deficit reduction, contributing to Portugal's gradual economic recovery. The parties and people in power, as well as the many sectors behind them, often sang from different hymn sheets, but the collective goal was arguably the same - recovery.
It’s somewhat symbolic then perhaps, that 2024 will be a sector-defining year for commercial property in Portugal. What was once a market filled with trepidation, is now one that, if carefully navigated, provides opportunities for performance and growth.
The year 2023 is expected to close with a total business volume in commercial real estate of around 1.4 billion euros. A substantial amount, even if it does reflect the slowdown trend felt across Europe due to rising interest rates, inflation, and the macroeconomic and geopolitical context, with two wars unfolding in Europe and the Middle East. As it has been the case many times throughout history, sometimes it pays to be the westernmost country in Europe.
In 2022 our average GDP growth rate was 6.8%, a 35-year high, compared to Europe’s average of 3.4%. This year's growth was trimmed for everyone, but Portugal still outperformed most countries in Europe, with over 2% growth whilst the average for Europe has been under 1%.
The country's resilient economy, coupled with solid and continuous tourism growth, the expansion of business centres, high occupancy levels, and investment in infrastructure, generates a favourable investment climate that is expected to persist in the coming years. Furthermore, opportunities for smaller-scale transactions are increasing for family offices and private investors who do not rely on bank financing, as rising interest rates make real estate funds more cautious.
Although Portugal’s commercial property sector may face some short-term challenges due to the current situation, the long-term prospects remain positive for transactions to return to the level of the 3 billion euros recorded in 2022 and the pre-pandemic period, where the average investment volume exceeded 3 billion euros.
Which properties offer the best opportunities for investors?
In 2023, retail and hospitality were the segments that captured the largest share of investment - each accounting for 35% of the total projected transaction volume - and everything indicates that they will continue to be the stars of commercial real estate in 2024. Along with industrial & logistics, these sectors show dynamism and strong performance. Our investors are targeting opportunities with yields ranging from 6% to 8%, which compared to other European countries is very competitive.
Tourism will continue to be one of Portugal’s most dynamic sectors. Even by October 2023, pre-covid totals had been surpassed significantly. From January to October 2023 total revenue reached €5.4 billion, up 20.8% on the same period in 2019. Accommodation revenue was up too by 22.1%.
But it's not just tourists who are captivated by the charms of this country and expanding the number of hotel units. According to platforms like Flatio and Nomadlist, Portugal is one of the favourite destinations for digital nomads, as well as the preferred country for the growing number of workation enthusiasts - a trend that is gaining momentum in companies that flexibilities their work models, based on the idea that their employees can work remotely for a certain period while travelling the world.
To accommodate these new trends, new hospitality concepts are emerging in Portugal, translating into new opportunities for investors. These will be more relaxed, sustainable spaces with co-working areas, primarily located north of Ericeira and south of Lisbon, i.e., outside major urban centres and near beach and leisure areas.
Retail will also remain one of the most attractive segments for investors, and supermarkets, maintaining their expansion trajectory throughout the country, especially in secondary cities, will remain one of the most profitable assets.
In the industrial & logistics sector, there are also good investment opportunities, with data centres on the rise and last-mile logistics centres being driven by e-commerce growth.
What guarantees a good return on commercial properties?
Portugal's economic stability and prospects for sustained growth in the coming years, combined with high levels of employability in recent years, have boosted business confidence. Commercial real estate properties, therefore, exhibit good occupancy levels (which are expected to remain stable in most sectors) and good performance by their tenants, sustaining rent increases, especially in the best assets.
On the other hand, assets with good sustainability and ESG (Environmental, Social, and Governance) performance make them more resilient to market fluctuations and offer lower risk to investors. Sustainability and ESG are attracting increasing interest from occupants, selecting properties with a sustainable footprint, good energy efficiency, and, if possible, certifications.
This trend is growing worldwide, and Portugal is no exception. According to a study by Cushman & Wakefield, the number of certifications in commercial real estate in our country has increased exponentially since 2020, and last year alone, 30 projects were certified with BREEAM and LEED, with another 40 projects in the process of WELL certification. In total, the number of commercially certified properties in the national territory with BREEAM is 76 and with LEED is 32.
It is not surprising, therefore, that Portugal is a consolidated destination for global commercial real estate investment, with very good prospects for the coming year. At Athena Advisers alone, we have many deals in the pipeline with international investors that are expected to materialise in 2024 in the hospitality, distribution (supermarkets), logistics, and education (schools) sectors.
For those looking to diversify their investments by adding commercial properties to their portfolios, there is another advantage to add to all those mentioned: they are properties that require very little management or maintenance (hassle-free).