Since the beginning of this century, the Real Estate market in Portugal has experienced many external shocks and has undergone many trends over the years.
In this article, we hope to contextualise the impact of COVID-19 on the market relative to the past external shocks and, finally, analyse what effect it will have on the trends of the future. Ultimately, we hope to inform the reader about the industry's future outlook in Portugal and its underlying opportunities.
Historical Analysis
As mentioned in previous articles, Real Estate has always been perceived as a safe market to invest in. However, it is important to understand that Real Estate is a cyclical market, being characterized by ups and downs throughout its history. In fact, Paul Roger, Head Trader and Founder of Foxy Trades LLC once said that we should “[t]ry to invest in the right phase of the cycle. This is not speculating, but trying to generally understand what will happen with the real estate prices in the following five years”.
To try and better understand these cycles, we analysed the past 15 years of real estate as follows:
Before 2008
Until 2008, the Portuguese real estate market was observing constant growth. It was seen as a relatively safe investment, and there was a definite belief that the market would continue to grow in the years to come.
2008 - 2014
In 2008, however, the world faced one of the largest financial crises it had ever seen. It started in the USA with the subprime crisis and hit Europe the hardest in 2010 with the European Debt Crisis. Portugal was one of the most affected countries in Europe, having to resort to external help from the IMF in 2011. This led house prices to hit an all-time low as, among many other factors, households were unable to pay their mortgage and banks, to minimise their losses, sold these houses at a discount rate.
2014 - 2020
In 2014, Portugal started to observe signs of recovery from the crises and real estate prices began to rise. However, the rise in prices had many more reasons behind it than a recovering economy.
Firstly, Portugal started to appear in international travel magazines and websites as a "must-visit destination", winning an astounding amount of "Tourism Oscar's". Coupled with the newfound trendiness of AirBnB, property owners were led to transform their long term rentals into short term vacation homes. The arrival of Airbnb meant that the long term rental market suffered a massive loss in supply. This shift was also fueled by the fact that the short term market was reasonably recent in Portugal. There was little to no regulation, meaning there were no entry barriers in the market and taxes on income were residual.
Secondly, this tourism boom led to an increase in FDI, as many foreigners would choose Portugal to own a second property. Moreover, foreign citizens' tax rate was much lower than in other countries, making owning property in Portugal even more appealing. Furthermore, Golden Visas also contributed positively to the rise of prices as a non-EU citizen would only have to invest €500,000 on a property to access the Schengen area.
Lastly, due to the lack of supply and high demand in the rental market, rents skyrocketed and renters found it more beneficial to buy a house than to rent one:
Interest rates were unprecedentedly low, and banks encouraged mortgage loans.
The impact of the Covid-19 pandemic on Real Estate
How the Covid-19 pandemic impacted the Portuguese Real Estate Market
As we have seen, in the past, adverse external shocks have had an immediate to short-term impact on Real Estate asset prices and minimal influence on transaction activity. The industry has historically lagged the broader economy by six months in terms of experiencing the effects.
Before the pandemic:
Balance sheets, liquidity and capital availability were healthy.
Companies could manage their debt maturities to longer positions.
COVID-19 changed everything, trade activities and businesses were shut down, which led the industry being impacted much sooner.
In the short term, the industry is concerned with preserving value and liquidity, keeping tenants safe, and complying with all the governmental agency requirements.
In the longer term, specific sectors such as office and industrial will probably be impacted by changes in where people work and changes in the supply chain.
Ultimately, transaction volumes are expected to decrease in the short-term but should pick up during recovery and later phases in a post-vaccine world.
Residential market in Portugal: Outlook and Opportunities
The trends that are shaping the living sector in Portugal go far beyond the new coronavirus outbreak. Some of the impacts on the residential property market have evolved for years. They are only being accelerated in the pandemic's aftermath.
More significant changes in the way people live create massive development opportunities such as:
1. Private Rented Sector Growth (PRS)
There is a lack of affordable housing, mainly in Lisbon and Porto, with supply failing to meet demand. The younger generations are the most highly impacted as house price growth outpaces wage inflation.
A surge in supply is already being observed. Several units allocated to the short-term tourism market and under-construction projects, targeting the sales market, are being transferred to the PRS. Demand is expected to climb, driven by the economic downturn and consequent rise in unemployment, which will constrain housing accessibility even further.
2. Moving to suburbs
Although the adoption of this trend will depend mainly on types of jobs, analysts believe that when the pandemic ends, this trend will stand somewhere in the middle between the pre-covid and covid-era.
People will spend more time at home, and, therefore, housing preferences will change. Their offices' location will not drive this change in workers' lives: It will be the quality of life they can achieve.
This shift in preferences is why an increase in the demand for the outer parts of cities, namely Lisbon and Porto, is eminent.
3. Office at home
People will spend more time at home. Therefore, there's a need for office space, allowing developers to reconsider their design guidelines to include common working spaces in PRS projects.
4. Sustainable Projects
Households are becoming more energy and water efficiency conscious while reducing costs and preserving the environment. Therefore, projects with well-being and energy certifications will have value-added.
5. ''Hotelification''
The "hotelification" of real estate means that more properties will provide hotel-inspired concierge-style services. These services will most likely be available through apps, supplying housekeeping, laundry, groceries delivery, pet care, amongst other house services.
6. Diversification of living concepts
The requirements for housing are changing because:
Family dynamics and patterns are shifting, with a rise in single households and alternative family setups
Housing must address affordability, efficiency, well-being and community sense.
It is crucial to rethink housing through life stages beyond younger people. The average life expectancy increase was already driving the senior living asset class's growth before the pandemic. The need for a safer and more specialised offer, which is currently undersupplied, is a massive opportunity.
Conclusion
We are pretty confident to conclude that the Real Estate Industry in Portugal will also survive this recent shock. It will remain continually evolving as soon as the pandemic is under control. Housing is a basic need, and the market fundamentals remain relatively healthy and stable. There are many challenges ahead for every single industry in the Portuguese economy. Still, we continue to see a high level of interest from both Real Estate investors and developers. Our economy will survive. The Real Estate industry will probably be one of the first industries to rise once again.
Authors:Francisco Marques e Gonçalo Rodrigues
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